Explain the reasons for inflation in India.

Inflation is the continuous rise in general price level for the overall goods and services in the economy. Inflation reflects a decrease in the purchasing power per unit of money – a loss of real value in the medium of exchange and unit of account within the economy. Inflation affects economies in various positive and negative ways. The negative effects of inflation include an increase in the opportunity cost of holding money, uncertainty over future inflation which may depress investment and savings, and if inflation were rapid enough, shortages of goods as consumers begin hoarding out of concern that prices will increase in the future. Positive effects include dropping unemployment due to nominal wage rigidity. Inflation is used to increase the economic terminology.

Reasons for inflation

• Rise in the money supply of economy

When the money supply increases continuously, then in comparison to the production of goods and services, this will lead to run the currency behind specific items. Then the price level for commodities rises, which will increase the overall demand level than supply level. This will generate the price level in the economy.

• Slow growth in industrial and agricultural sector.

Agricultural and industrial growth in our country has been much below what the targets are being set. Over the four decades period, food grains output has augmented, and that is of 3.2 percent per annum. But there are years of crop breakdown due to droughts. In the years of scarcity of food grains not only the prices of food articles improved, but the general price level also rose.

• High level of government expenditure.

Government expenditure in India during the recent years has been increasing very fast. The disturbances are, the quantity of non-development expenditure increased rapidly, being about 40 percent of total government expenditure. Non-development expenditure does not generate real goods; it only increases purchasing power and hence leads to inflation.