Inflation Rate in India

Managing inflation is a critical part of India’s economic strategy to maintain price stability, support economic growth, and protect the purchasing power of its citizens. In this blog, we will talk about the inflation rate in India, factors that lead to fluctuations in the inflation rate, and the measures to control the inflation rate.

What is Inflation?

Inflation is the general increase in prices and fall in the purchasing value of money over time. In other words, inflation means that your money can buy less than it could before.

Understand Inflation Through an Example

You typically spend Rs.10,000 on your fixed monthly groceries, such as food, clothes, etc., but this year, you can clearly see that the prices of these products went up, and for the same set of groceries, you now need to spend Rs. 11,000 instead of Rs.10,000. This increased expenditure represents inflation.

It means your money becomes worth less because you can buy fewer things with it. In other words, it erodes the value of your money, and you need more of it to purchase the same things you could buy for less in the past.

What is the Current Inflation Rate in India in 2023?

As per the Ministry of Statistics and Programme Implementation (MOSPI), the current inflation rate in India is 5.69% (December 2023).

This means that the prices of goods and services in India have increased by 5.02% since 2022.

Here is a snapshot of the inflation rate in India for the last 10 years, as measured by the Consumer Price Index (CPI).

How is Inflation Measured in India?

The CPI is a critical measure of inflation in India used by the government and the Reserve Bank of India (RBI). CPI tracks the prices of a basket of goods and services consumed by urban and rural households. 

Inflation Rate Formula 

Inflation is calculated using the formula:

Example: Inflation Rate Calculation 

Let’s assume we have CPI data for two consecutive months, July 2023 and August 2023, and we want to calculate the inflation rate for August.

Month: July 2023

Current CPI (July 2023): 155.5

Previous CPI (June 2023): 153.0

Month: August 2023

Current CPI (August 2023): 158.2

Previous CPI (July 2023): 155.5

Now, let’s calculate the inflation rate for August 2023 using the formula:

Inflation Rate = [(158.2 – 155.5) / 155.5] x 100

= (2.7 / 155.5) x 100

Inflation Rate for July ≈ 1.74%

In this example, the inflation rate for August 2023, compared to July 2023, is approximately 1.74% higher. This indicates that, on average, prices increased by about 1.74% during August 2023 compared to July 2023.

What Factors Affect Inflation in India?

Many domestic and international factors contribute to India’s inflation, including –

1. Demand-Pull Inflation: Demand-pull inflation occurs when the demand for goods and services exceeds supply. Factors like increased consumer spending, government spending, or a booming economy lead to demand-pull inflation.
2. Cost-Push Inflation: An increase in production costs leads to Cost-Push inflation. The contributing factors include:
   • Increasing Wages: Higher wages without a corresponding increase in productivity can lead to increased production costs.
   • Increased  Prices of Raw Materials: A rise in the cost of raw materials, such as oil or metals, can lead to cost-push inflation.
3. Structural Factors: Structural factors include –
   • Supply-side constraints like infrastructure bottlenecks
   • Inefficiencies in the distribution system, 
   • Other structural issues that can lead to increased costs.
4. Monetary Factors: An excessive money supply growth, more than actual output growth. 
5. Global Factors: Some of the global factors that can lead to inflation in India include – 
   • Increase in prices of globally traded commodities, such as oil, metals, and agricultural products.
   • Increased prices of imported goods
   • Depreciation of the Indian rupee against other currencies
   • Events like natural disasters, wars, or pandemics.
   • International wars, sanctions, or other geopolitical tensions.
6. Agricultural Price Shocks: Given the significant role of agriculture in the Indian economy, factors like monsoon failures, pest attacks, or global price changes for agricultural commodities can lead to sharp price rises.
7. Fiscal Deficit: A high fiscal deficit can lead to inflation when the government spends more than it earns.
8. Black Money: The presence of unaccounted money or “black money” in the economy can lead to higher demand and, thus, inflation.
9. Government Policies: Policies related to taxation, subsidies, and minimum support prices for agricultural products.

What is the Impact of Inflation on the Indian Economy?

Inflation can have many negative impacts on the Indian economy, including:

• Reduced Purchasing Power: When inflation is high, people’s money can buy less, leading to a decline in living standards.
• increased Uncertainty: High inflation can make it difficult for businesses to plan for the future and lead to delayed investment decisions.
• Reduced Competitiveness: High inflation can make Indian goods and services more expensive in the global market, reducing competitiveness.
• Higher Interest Rates: RBI may increase rates to curb inflation, affecting borrowing costs.
• Currency Depreciation: High inflation can weaken the rupee, making imports costlier.
• increased Cost of Living: Leading to potential wage-price spirals.

What is the Reserve Bank of India Doing to Control Inflation?

The Reserve Bank of India (RBI) is the central bank of India and is responsible for managing the country’s monetary policy. The RBI uses several tools to control inflation, including:

• Interest Rates: The RBI can raise or lower interest rates to influence the amount of money that is in circulation. Higher interest rates make it more expensive to borrow money, which can lead to a decline in spending and inflation.
• Open Market Operations: The RBI can buy or sell government bonds in the open market to influence the money supply. Buying bonds injects money into the economy while selling bonds withdraws money from the economy.
• Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR): The CRR is the percentage of deposits banks must keep with the RBI. The SLR is the percentage of deposits banks must invest in government bonds. The RBI can increase or decrease the CRR and SLR to influence the amount of money banks have available.

What can Individuals Do to Protect Themselves from Inflation?

There are several things that individuals can do to protect themselves from inflation, such as:

• Invest in assets that tend to appreciate during inflation, such as stocks and real estate.
• invest in inflation-indexed bonds, which are government bonds that pay interest adjusted for inflation.
• Save more, so they have more money to spend on essential goods and services if prices rise.
• Negotiate for higher wages and salaries to keep up with the rising cost of living.

Conclusion

Inflation is a complex issue with several causes and effects. The RBI is taking steps to control inflation, but individuals can also take steps to protect themselves from its negative impacts.