KEY CAUSES OF INFLATION IN INDIA

INTRODUCTION: The global economy has been shaking due to a lot of economic issues indeed these days. In a bid to tackle economic issues, concerned economic agents must make sure they know the precise causes which is a momentous process. Some of the key problems or challenges being faced in the global economy are as under: 1. High debt, low growth situations in Europe and the U.S. 2. Can the U.S economy create any jobs in the next month (Sep 2011)? Because the Obama administration had failed to create even a single job in the month of Aug 2011.

Coming to India, even India has some serious issues to deal with. In India, the following are the main economic questions, as per me: 1. Should the RBI capitalize the plight situations of Europe and the U.S.?

2. Rising economic inflation, is it really hurting economic activities in the India economy? The economic inflation has been a centre of attention here in the Indian economy. The inflation rates have reached at uncomfortable levels at the moment. Here, arises a major economic question, how does this monetary situation, inflation, is experienced? As per me, Inflation means its causes.After scrutinizing the present economic conditions in the economy, it is awfully understandable that the following factors are the vital ones to cause inflation as far as my knowledge goes: The following are the major & real causes of economic inflation in India: 1. Population on the rise; 2. High economic growth; 3. Lack of agricultural output; 4. Weak INR; & 5. 5. Cost of output heading to north. Well, the above list has been backed up by some minor causes which are very inter-linked to the above major causes which are as under:

1. Weak Infrastructure and transportation, 2. Climatic conditions, 3. Usage of out-dated technology, 4. Lack of supply of factors of production, etc IN-DEPTH EXPLANATION AS FOLLOWS: Population on the rise The Indian population in the FY 2010 rose at unpalatable rate and still the number is moving to north and making the total number a disturbing one. The number is on the rise and there has been a no sign of halt. Some authentic info is as under to back the aforementioned statements pertaining to population. 1. In the year 2001, the Indian population was around 1.01billion. 2. In the year 2010-Apr-1, the Indian population was around 1.21billion. In case the population is augmenting and so is the case with the supply of essential commodities proportionately at palatable prices, then that is called as growth. Issues arise only when the supply of essential commodities fail to meet the needed demand at agreeable prices. That is what exactly has been happening in India. Population is a key factor for many economic reasons but it is distracting when it is more than sufficient and is uncontrolled. It is increasing every day as birth rates have gone up and death rates have gone down. Since economic producers are unable to meet the demand comfortably, they do not have any options other than increasing the prices of all concerned economic goods and services and that results in economic inflation. Thus, an increasing trend in population would lead to inflation.

High economic growth (EG) Would high economic growth lead to inflation? Technically speaking, yes but not always (meaning it is banked on economic and non-economic factors), economic growth would lead to inflation. My perspective is, imbalance or balance (33.3% each sector) contributions by the economic sectors towards the GDP, with or

without an increasing trend of a nations population, & or increasing buying capacity leading to demand for foreign goods because the nation failing to produce all the basic or essential goods and or comfort / luxurious products in the country, would lead to inflation. A British economist called, David Henderson, also believes that economic growth would lead to inflation. In a bid to trust the first line of this paragraph about the British economist, please visit this link:http://everydayecon.wordpress.com/2007/07/20/inflation-and-economic-growth/ India is the 10th largest economy on this planet behind Japan, Germany, Brazil, China and the USA, etc. The economic growth has been heading to north each and every financial year in India, normally, projecting more than a 6% a year. Economic growth is what every productive person wishes for. But an imbalance in the contributions made by the economic sectors in the economy also give a feasible room for inflation. Even if there exists a balance in contribution, that is, 33.3% by each sector, inflation factor would still emerge or rise (if existing) in the economy as no economy on this planet can, strictly speaking, produce all the essential or basic goods and other types of commodities and services in its own economy. That is what has been happening with the Indian economy, too. The following explicit example is a key one to explain how: Let us consider an assumption that there has been a 10% growth in the Indian economy in the FY 2011 with the following contributions made by all the economic sectors: ECONOMIC SECTORS Primary sector Secondary sector Tertiary sector CONTRIBUTION TO GDP 33% 30% 37%

Under the above situation, there is still a scope for inflation in the Indian economy since the Indian economy is reliant on foreign trade to meet some of the basic goods and services which mean a fall in the INR value would lead to rise in the value of foreign goods prices making them as inflated goods. But the truth is the above table is awfully close to an unrealistic situation as such types of contributions are not doable, in reality. When we take into account the sectoral contributions, we find out that agriculture sectors share in the GDP is less than 18% in the previous fiscal year (2009-2010). Although, the Indian economy is able to augment its GDP, it does not mean all the basic goods such as oil, vegetables, etc are produced in the economy, which is just one of the things to be done, meaning in case enough such products are made, other factors such transportation costs, infrastructure, natural calamities, etc also play a key role in determining their prices before they are sold in markets. Thus, we learn from this article that, India in order to meet its basic requirements, it buys some basic goods which is a result of an increase in buying capacity of the economy due

to the augmentation in the GDP value, from overseas at inflated prices, sometimes, and as the INRs value is subject to change, inflated products are also bought in to the economy for meeting endogenous demand. Hence proved, economic growth would lead to inflation in any economy. Lack of agricultural output Poor performance in the agricultural and its allied activities continue to be a big worry for the Indian economy, too. This sector has been a worrying one, because it has been failing to meet the total domestic demand and or failing to generate anticipated GDP contributions. The share of this sector towards the GDP is a meager one, which has been normally under 15% for the past few financial years. Well, sometimes many economists, advisers, etc recommend investing in more money, efforts, energy, etc into the agriculture sector when there is a forecast on inflation in the FY, is a good notion. But even after supplying economic loans and other facilities to farmers, the predicament of unagreeable aggregate output continues to stay active in India every year. And thus, with the population on the rise, the producers are left with only one option, which is to hike the final prices of the essential commodities, which are in short supplies. And this is what exactly been again happening in the economy these days, too. Here, arises one key question: why on earth the slowdown is on and on in the agricultural production? The following are the scientific reasons for that: 1. Climate change. 2. Usage of old tech and methods are on or underway. 3. Lack of reliance on new tech. 4. Lack economic planning and executions made by farmers and other concerned in the agriculture field, too. 5. Lack of finance, etc. There is a need to bolster the agricultural productivity in a bid to make surefood inflation is well under the control of the concerned governments. Please note: food inflation is an integral part of the general inflation.

Weak INR Weak Indian Rupee is another cause for inflation here in India. She, imports more than exports, owing to a lot of monetary reasons which also contribute towards a fall in the value of the INR. The national currency plays a vital role in determining the final value of goods and services that have been imported. Since most currencies in the globe are subject to twist, the INR is also not spared. Thus, at the international market, in case the value of INR slides, the final costs would be higher indeed. In India, around 676 commodities are chosen to calculate inflation figures on Thursdays. Please visit this site, for a complete info:

http://wikitoday.org/2011/news/inflation-uncovered/. Since, India is not independent entirely, it has to import some essential commodities to make sure the economic and non economic activities run properly in the economy. Thus, the INR is a key thing which also determines the final prices of goods and services imported.

The buying capacity of INR is sliding at the foreign market and thus, the final prices have been increasing which mean inflated goods. The INR has fallen more than a 10% this financial year, 2011, against the greenback. How exactly the fall in the INRs value affects the final prices in India? This can explained with the aid of the following explicit example: Let us assume, the current value of the dollar in terms of the INR is 45. The cost of 1barrel of crude oil is 2 dollars. Then, suppose, India decides to buy 1 barrel of the oil, then India pays 90 rupees. Assume on the next day, the INR falls by a 15% due to some economic reasons (embodying other sorts of reasons), under such an economic state, 1 dollars value in the INR would stand at 51.75 which mean more rupees to be spent to buy the same amount of oil. Thus, the final price of 1 barrel of oil imported would be at 103.50 rupees. This, this hike adds up the final general level of prices leading to inflation. Causes for fall in the INR value are as under: 1. Investors pull out their investments from the economy to invest in other economies due to economic and non-economic reasons. By such economic activity of investors, it leads to a fall in the demand for INR, which ultimately results in the fall of the INRs value, too. 2. Political disturbances in the country also reduce the demand for the INR. 3. Other economic issues such as a high rate of inflation also bring down the value of the INR. 4. Stability and insurance of returns on investments assured in other parts of the global economy. 5. Deliberate depreciation by the central bank, etc.

Cost of output heading to north As the cost of production of food stuff such as: wheat, rice, onion, lemon, sugar, milk, cookies, etc and non food stuff like pencils, pens, books, etc have been moving forward and forward, the final prices of those goods are also higher. Well, take the following reasons seriously as they are going to show the impact of a change in the factors of productions costs on the end goods and services: 1. 1. Population is increasing all the time; the demand for the land is also rising. And thus, the cost of rent or land is always in the increasing sector and continues to move up, only, in that sector. Therefore, the land being the primary factor plays a crucial role in the fixation of the final prices of any manufactured product. Here, the population is again a major factor.

1. 2. Cost of labor is also stepping up every time and so as are the final prices of commodities and services, related. This is the impact of higher transfer earnings. Producers would always wish to keep their important factor, workers, in the production for a longer period of time. And in a bid to do so, the producers also have to satisfy the basic demands of them which are in the form of money. And such costs are also incurred in the cost of production.

1. 3. The rise in profit margins makes final costs more.

1. 4. Increase in the cost of marketing has risen due to a stiff competition in the economy these days.

1. Increase in the borrowing costs also contribute to a rise in the final prices. In India, the RBI has increased its key rates for a 12th time in just a period of 18 months, lately. This is done to tame the economic inflation. At the moment, the RBIs repo rate stands at 8.25%. But the borrowing costs are higher these days here. Banks lending rates are at more than 8% per annum. Thus, the credit facility is costlier and this again has made producers to halt production to some extent, cut production to some extent, etc and thus, the supply factor is also shaken to an unimaginable extent, indeed. Thus, the economic actions of the RBI have made it possible to hike the final prices as well.

CONCLUSION: After scrutinizing the authentic causes of the economic inflation in India, it is quite understandable that the causes are not beyond the control or out of reach. That is, taming of inflation factor is attainable only if the following variables are corrected: 1. Population needs to be managed. 2. Investors confidence needs to be boosted. 3. Economic/profitable employment of all factors and variables need to be done persistently.