Inflation: Inflation is a rise in the general level of prices of goods & services and consequent deterioration in the value

of money over a period of time. CAUSES OF INFLATION A) MONETARY FACTORS 1. Expansion of Money Supply: This is the basic factor, which causes inflation. Due to increase in expansion of money supply, there is increase in demand of luxurious commodities. Credit facilities allotted by bank are also the result of inflation. Deficit financing also contribute to the growth of inflation .2. Increase in Disposable Income: when the disposable income of people increases, demand for real goods and services increases, causing a rise in price leading inflation. 3. Increase in Consumer spending: as the income of the consumers rises, they spend more due to expenditure consumption or demonstration effect, which raises the aggregate demand causing inflation. 4. Development and Non-Development Expenditure: The expenditure for the development of huge plants and projects will increase the demand for factors of production resulting in inflation. On the other way, the expenditure for the non-development like defense expenditure will create shortages of consumption goods resulting inflation. 5. Indirect Taxes: Due to high indirect taxes, sellers increase the price of their products to recover the tax from the consumers, which indirectly leads to inflation. 6. Demand for Foreign Commodities: When the demand for the foreign commodities increases, the supply for the home commodities decreases which leads to increasing the price. B) NON-MONETARY FACTORS: 1. Rising Population: As population of the economy increases, demand for better goods increases, which causes inflation so, rising population is the foremost non-monetary factor resulting inflation .2. Natural Calamities: Due to the occurrence of natural calamities like floods, famines, bad weather, etc results in crop failure, which leads to rising price. 3. Speculation and Black Money: Speculation, hoarding and black money also causes inflation, as such unearned money is spend lavishly by people, creating unnecessary demand for goods and services. 4. Unfair Practices by Monopoly Houses: The monopoly houses prefer to restrict outputs of their products and raise their prices to enjoy excess profits leading to inflation.

5. Bottlenecks and Shortages: Bottlenecks i.e. blockages and shortages of various kinds destruct the process of the economic development. As a result of shortages, price rise. C) STRUCTURAL FACTORS: 1. Capital Shortage: This is due to a very low rate of capital formation in a poor country where vicious circle of poverty exists. 2. Infrastructural Bottlenecks: Power shortages, inefficient transport, underutilization of capacities and resources, care obstruction to the economic growth of the country, which leads to the price rise and finally inflation. 3. Limited Efficient Entrepreneurs: Entrepreneurs do not possess spirit to undertake risky projects. Investments are generally made in trade and unproductive assets like land, gold etc. Hence when supply of money is increased, output of real goods and services does not increase which leads to inflation. 4. Lack of Foreign Capital: The unfavorable terms of trade and deficit in balance of payments have further increased the problem of rising prices. 5. Imperfections of the Market :Immobility of factors, rigid prices, ignorance of market conditions etc all these does not allow the resources to utilize properly so rising prices due to increase in supply and without increase in real output. Measures to control Inflation: 1) MONETARY MEASURES: Monetary policy is taken by the Reserve Bank of India to control the supply of money in the economy. Following are the measures: 1. Raising the Bank Rate: To control inflation the central bank increases the bank rate. With this the cost of borrowing of commercial banks from central bank will increase so the commercial banks will charge higher rate of interest on loans. This discourages borrowings and thereby helps to reduce the money in circulation. 2. Open Market Operations: During inflation, the central bank sells the bills and securities. These cash reserves of commercial banks will decrease as they pay central bank for purchasing these securities. Thus the loan able funds with commercial banks decrease which leads to credit contraction. 3. Cash Reserve Ratio: The commercial banks have to keep certain percentage of their deposits with the central bank in the form of cash reserve. During inflation, the central bank increases this cash reserve ratio this will reduce the lending capacity of the banks. 4. Regulation of Consumer Credit: For purchase of durable consumer goods on installment basis rules regarding payments are fixed. During inflation and initial payment is increased and the number of installments are reduced. These results in credit contraction and fall in prices.

(2) FISCAL MEASURES: Fiscal measures are taken by the Government to control the inflation. Following are the measures: 1. Taxation: The rates of direct and indirect taxes may be raised and new taxes may be imposed. This policy will reduce the disposable income in the hands of the people and their expenditure. 2. Public Expenditure: During inflation, the government should reduce its expenditure. This would reduce the income in the hands of some people. Hence the effective demand would decrease. 3. Public Borrowing: The government may resort to voluntary and compulsory borrowing. This policy reduces the income in the hands of some people. Hence the effective demand would decrease. 4. Over Valuation of Domestic Currency: Over valuation of domestic currency makes exports costlier and there is a fall in the volume of exports. Imports also become cheaper and there is an increase in money supply causing a fall in prices. 5. Inducement to Save: The government should induce savings through incentives. This will reduce the supply of money and purchasing power of the people causing a fall in prices.6. Public debt management the public debt should be handled in such a way that there is no increase in the supply of money. Hence the surplus in the budget should be used to repay the public debts. (3) Price control and rationing: Price control must be introduced in respect of essential commodities. Also rationing should be introduced for equitable distribution of essential commodities. The supply of essential goods can be undertaken through public distribution system to keep the prices in check.