Why Inflation is Rising and GDP is Falling
Inflation is a situation where demand exceeds supply resulting in prices going up. Till this mismatch is corrected the prices remain high.The variation in prices upwards or downwards depends on the rise and fall in individual commodities.When inflation continues for a significantly long time it means that the government is not able to take effective correction steps to curb inflation.
By its very nature when inflation sets in, it lasts for anywhere between 2 to three years and more. That is the time, corrective steps take to show results. Most of the steps to control inflation consist of productive asset creation for increasing supply of goods and services. These need to be planned, executed and become productive to start showing results.
Till such time supply side may be sought to be improved by resorting to imports. While this drains the country of foreign exchange it does help in arresting the upward price spiral to a certain extant.
We are however observing in India a phenomenon which is worrying. While inflation is now ongoing since last more than three years, there does not seem to be positive effect of the corrective steps taken, if any, on the price front. Prices continue going up and what is very interesting, supplies seem to be adequate. So why is the inflation not coming down.
It indicates there is some other reason keeping the high prices afloat. It is the increase in purchasing power of the economically weaker sections of our society. This is resulting in the demand for basic items like food go up significantly. These sections are now demanding their rightful share of protein foods like lentils and meat and meat products.This is resulting in their prices shooting up.
Further it is observed that the poverty alleviation programs are pumping in significant sums of money amongst the poorer sections of the society.This money eventually flows into the markets where the earlier unfulfilled needs now get converted into affordable demands. Also the middle class and upwards are being paid handsome salaries which is creating its own set of demands. All in all there is now too much money chasing relatively too few goods and services. This is a very good recipe for both inflation and prices to go up.
Inflation is a good indicator that the economy needs increased investments for creating productive assets. Whether it is done by local or foreign players should not matter much. Investments are money source proof. However what is disturbing is that the GDP figures are coming down Today for the first time in a decade it has fallen below 5% in the Q4 of FY2012-13. From a high of 9.2% only two years back it is a significant fall.
What does it indicate. It indicates that the inflation is now eroding the purchasing power of the masses. They are now directing their purchasing to only essentials like food and milk and children's education. This is thus resuting in skewed inflation in food items while demand elsewhere is getting suppressed. This peraps expliains why while inflation is overall not coming down the GDP is progressively going down.
This is a wake up call for the country's planners. It is also a challenge for all concened with good governance. How long will this state of affairs continue.
Like it on Facebook, Tweet it or share this article on other bookmarking websites.