What is inflation? What are trends in inflation & their impact on the Indian economy and individual income?
I'm glad someone asked this question, and that someone is intrigued about it being used just about everywhere, from politicians to businessmen to your local vegetable sellers (yes your sabzi waale bhaiyya!) on the streets. Allow me to answer your questions brick-by brick. 1. What is Inflation? Imagine you had Rs. 7 in 2003. You could've purchased a 300 ml Pepsi from the store and gone home happy (excluding the Rs. 2 that shopkeepers charge for refrigerating it). Fast forward 10 years and you would have to shell out R. 12 to purchase the same 300ml Pepsi bottle. What happened? Consider the annual inflation rate to be 5%. Now, if Rs. 100 can buy you a pint in 2014, it would cost you Rs. 105 in 2015. Quite literally, the beast of inflation reduces the purchasing power of your money. 2. What are the trends in inflation? Just like any other indicator, there are fluctuations, and therefore, trends in the CPI (or WPI). Generally, an inflation rate of 1-3% is considered to be healthy, although that would depend upon the nature of the economy. the resources it has it's disposal, the political climate engulfing the economy and a gazillion other reasons that need to be accounted for here. 3. What is the impact of inflation on the Indian economy and the Indian individual? This is a fascinating question, one that has a plethora of answers, some of them completely antagonistic to one another, depending upon the person's domain. There is a reason why India's central bank, the Reserve Bank of India (RBI) is autonomous, aloof from the outreached hands of the Central Government. There is a two-pronged approach towards controlling the economy, namely, the Fiscal Policy and the Monetary Policy. Fiscal Policy: Fiscal policy is the means by which a government adjusts its spending levels and tax rates to monitor and influence a nation's economy. The tax and expenditure programs levied and undertaken by the government are the drivers of the fiscal policy. Monetary Policy: The Monetary Policy is governed by the nation's central bank (in this instance, the RBI) to control the money supply in the economy to maintain price stability and attain high economic growth. The central bank achieves this by controlling the interest rates. Regards