A COMPARATIVE STUDY OF THE IMPACT OF INFLATION AND DEFLATION IN THE INDIAN ECONOMY

A
COMPARATIVE
STUDY
OF
THE
IMPACT
OF
INFLATION
AND
DEFLATION
IN
THE
INDIAN
ECONOMY

ImranHusain

ABSTRACT

ThisstudyfocusesmainlyontheimpactofinflationanddeflationinIndia.Inflationistherateofincreasesinpricesoveragivenperiodoftime,e.g.,oneyear Inflation istypicallyawidermeasure,suchastheoverallincreaseinpricesortheincreasesinthecostoflivinginacountry Butitcanalsobemorenarrowlycalculated—for specificgoods,suchasfood,orforservices,suchasahaircut,forexample.Whateverthecontext,inflationrepresentshowmuchmoreexpensivetherelevantsetof goodsorserviceshasbecomeoveracertainperiod,mostcommonlyayear Deflationisgenerallyadeclineinthepricesofgoodsandservices.Deflationwilltakeplace naturallyifandwhenthemoneysupplyofaneconomyislimited.Deflationinaneconomyindicatesdeterioratingconditionsorsituations.

As a result, the rate of inflation is increasing. Inflation is a sustained rise in overall price levels. Moderate inflation is associated with economic growth and the developmentofacountry,whilehighinflationcansignalanoverheatedeconomy Deflationisnormallylinkedwithsignificantunemploymentandlowproductivity levelsofgoodsandservices.Theterm"deflation"isoftenmistakenwith"disinflation."Whiledeflationreferstoadecreaseinthepricesofgoodsandservicesinan economy,disinflationiswheninflationincreasesataslowerrate.

KEYWORDS:Inflation,Deflation,Economy,Unemployment,Productivity,GoodsandServices.

INTRODUCTION

Inflation refers to a rapid increase in the general price level. Its effects cause a declineinpurchasingpowerandthevalueofmoney Inotherwords,theimpact of inflation is that it reduces the purchasing power of households due to an increase in prices.The impact of inflation is felt across different sectors of the economy,whicharefavourabletosomeandunfavourabletoothers.Itoccursasa resultofamismatchbetweenthesupplyanddemandformoney,changesinproductionanddistributioncosts,oranincreaseinproducttaxes.InflationismeasuredbytheConsumerPriceIndexinIndia.

Thetermdeflationreferstoageneralfallinthepricesofcommodities.Although itmayappeartobebeneficial,itisnotgoodfortheeconomy Deflationiscommonlylinkedtoeconomicslowdowns,loworpoorproductivity,andjoblosses. Inflationlowersthevalueofmoneyorlowersthepurchasingpowerofmoney, whiledeflationraisesit.Thisencouragesconsumerstosavemoneynowinorder to buy products later, when they are cheaper And as a result of this economic behaviour, growth slows down even more. Deflation reduces production of goodsandservicesduetoareductionindemandfromconsumers.Areductionin theproductionofgoodsandservicesleadstoreducedinvestments,areductionin thesalariesofemployees,andalsoincreasesunemployment.Alltheseleadtoa massivereductionintheeconomicgrowthofthenation.

OBJECTIVEOFSTUDY

Thestudyisbasedonthefollowingobjectives:

Ÿ Tostudythetypesandcausesofinflationanddeflation.

Ÿ Tocomparativestudyoftheimpactofinflationanddeflation.

Ÿ Tostudythevariouscontroltechniquesofinflationanddeflation.

ReviewofLiterature

Ÿ Researchpaper'Impacts&AspectsofInflation:AStudyonIndianEconomy' analysis by Rahul Soni and Vikas Kumar Chouhan.According to this study, inflation has a direct effect on how much money households have to spend or save, which in turn hurts both spending and saving or investing.

Ÿ Inflation and Economic Growth in India –An Empirical Analysis by PrasannaVSalian1, Gopakumar K2.According to this study, the inflation-growthnexusinIndiahasbeensystematicallyanalyzed.Theimportantconclusionisthatanyincreaseininflationfromthepreviousperiod negativelyaffectsgrowth.

ResearchMethodology

Ÿ Thisresearchpaperisconceptualanddescriptive.Itissocialresearchand researchbasedonsecondarydatafortheproperfindingandanalysis.Secondary data is collected from news papers, periodicals, books, journals, andwebsites.

TypesofInflation-

Followingarethefourmaintypesofinflation:

Ÿ Creepinginflationisasituationwhereinflationinaneconomyincreases gradually Itisoneofthemildesttypesofinflationandisrequiredtomain-

tainastableeconomy

Ÿ Walking inflation, also known as trotting inflation, is a situation when thepricesriseupto10%.Walkinginflationgivesacautionarysignalfor theoccurrenceofgallopinginflation.

Ÿ Gallopinginflationreferstothestateoftheeconomywhenthepricesof goodsandservicesincreaseatarapidrateof10%ormore.

Ÿ Hyperinflation: Hyperinflation is experienced by an economy when pricesskyrocketmorethan50%inamonth.Theprimarycauseofsuchsituationsistheriseofthemoneysupplyinaneconomythatisnotsupported byGDPgrowth.

CausesofInflation

Factorsincreasingdemand:

Ÿ Increaseinpublicexpenditure;increaseinexports

Ÿ reductionintaxation

Ÿ Blackmoney

Factorsdecreasingsupply:

Ÿ Shortageoffactorsofproduction:rawmaterial;man

Ÿ Hoardingbytradersandconsumers;naturalcauses(floods,earthquakes);

Ÿ Increaseinthecostofproduction.

Impactofinflation

Theeffectofinflationontheeconomycanbestatedasfollows:

Ÿ Theeffectofinflationisnotdistributedevenlyintheeconomy Thereare chancesforhiddencostsfordifferentgoodsandservicesintheeconomy

Ÿ Sudden inflation rates are harmful to an overall economy They lead to market instability and thereby make it difficult for companies or businessestoplanabudgetforthelongterm.

PositiveImpact

StimulatesEconomicGrowth:-Inflationkeptatamodestlevelfosterseconomic growthbyincreasingfirms'profitmarginsinthenearrun,encouragingthemto boostoutputandsupply.NoDeficiencyinDemand:Itsignifiesthatthereisno demand shortage in the economy, which raises profitability expectations and encouragesbusinessestoinvestandexpandproductioncapacity

Ÿ IncreasedProfitsforProducers

Ÿ Increasedemploymentandearnings

Ÿ Shareholdersincomeincreases.

Ÿ Borrowers'Advantages

Ÿ Governments'taxrevenueimproves

NegativeImpact

DeterioratesStandardofLiving:People'squalityoflifeisloweredwhentheirdiscretionaryincomeisreduced.Createsshortagesofgoods,Inflationarypressures mayleadtoshortagesofproductsifpeoplebeginstockpilinginanticipationof futurepriceincreases.

Ÿ Real-Incomefallsforgroupswithfixedincome.

Ÿ IncomeDistributionInequalityRises

Ÿ Lenderswillsustainlosses.

Ÿ Therupeemaydepreciate.

Copyright©2023,IERJ.Thisopen-accessarticleispublishedunderthetermsoftheCreativeCommonsAttribution-NonCommercial4.0InternationalLicensewhichpermitsShare(copyandredistributethematerialinany mediumorformat)andAdapt(remix,transform,andbuilduponthematerial)undertheAttribution-NonCommercialterms.

ResearchScholar,DepartmentofCommerce,DeenDayalUpadhyayaGorakhpurUniversity,Gorakhpur,UP

TypesandCausesofDeflation

Deflationcanbeparticularlyharmfultoborrowers,whomaybeforcedtorepay theirdebtsinmoneythatisworthmorethanthemoneytheyborrowed,aswellas tofinancialmarketparticipantswhoinvestinorspeculateontheprospectofrisingprices.

Types of deflation: There is bad deflation, which is when demand for a good aggregateorservicefallsfasterthanaggregatesupply Thenthereisgooddeflation; deflation is considered good when aggregate supply grows faster than aggregatedemand.

Therearefivemaincausesofdeflation.

Ÿ Decreaseinaggregatedemandorlowconfidence

Ÿ Increasedproductivity

Ÿ Technologicaladvances

Ÿ decreaseinthesupplyofcurrency

Ÿ Monetarypolicy

Impactofdeflation

Deflationmayhavethefollowingimpacts:

ReductioninBusinessRevenues

Inaneconomywithdeflation,businesseshavetocutthepricesoftheirgoodsand servicesbyalottostayinbusiness.Asreductionsinpricestakeplace,revenues begintodrop.

LoweredWagesandLayoffs

When revenues begin to drop, businesses need to find means to reduce their expenses to meet objectives. One way is by reducing wages and cutting jobs. Thisadverselyaffectstheeconomyasconsumerswillnowhavelesstospend.

Ÿ LowGrowth:Highunemploymentandlowlevelsofmakinggoodsand servicesareusuallysignsofdeflation.

Ÿ Reducesconsumerspending:Whenpricesarefalling,peoplearemore likelytopostponepurchasesbecausetheywillbecheaperlater

Ÿ Increase the real value of debt: Deflation increases the real value of moneyanddebt.

Thereisalsoonepositiveeffectofdeflation:

Ÿ Greater Export Competitiveness: If most other economies are suffering frominflation,apositiveeffectofdeflationcouldbeincreasedexportcompetitiveness.Exportswillbeprofitableasthecostofproductsandservices falls.

Comparativestudyoftheimpactofinflationanddeflation-

TABLE 1:GREENINITIATIVESINTHEAREAOFWATERMANAGEMENT

FiscalMeasures-

Ÿ Cutsinexpenditure

Ÿ Increaseintaxes

Ÿ Increaseinsavings

Ÿ Surplusbudget

Ÿ Publicdebt

OtherMeasures-

Ÿ Raiseproduction

Ÿ Rationalwagepolicy

Ÿ Pricecontrol

Ÿ Rationing

ControlofDeflation

Weknowwhatcausesdeflation,buthowcanitbecontrolled?Deflationismore difficult to control than inflation due to some of the limitations that monetary authoritiesruninto.Somewaystocontroldeflationare:

Ÿ Changestomonetarypolicy

Ÿ decreaseinterestrates

Ÿ Unconventionalmonetarypolicy

Fiscalpolicyiswhenthegovernmentchangesitsspendinghabitsandtaxratesto influencetheeconomy Whenthereisariskofdeflationoritisalreadyhappening,thegovernmentcanlowertaxestokeepmoremoneyinthecitizen'spockets. Theycanalsoincreasetheirspendingbyissuingstimuluspaymentsoroffering incentive programmes to encourage people and businesses to start spending againandmovetheeconomyforward.

Conclusion-

Inflationmaybeduetothesupplyofmoneyincreasingitsdemand.Otherfactors, likeadecreaseinproductionorhighexpendituresonconsumableitems,etc.,can cause inflation if not matched with their demand. There are different types of inflation: hyperinflation, creeping inflation, cost-push inflation, demand-pull inflation,stagflation,etc.Itisthesteadyriseofpricesforgoodsandservicesover aperiodoftimeandhasmoreeffects.Asinflationerodesthevalueofmoney,it encourages consumers to spend and stock up on items that are slower to lose value. It decreases the cost of debt and lessens unemployment. Deflation has beenaroundforaslongasinflationhas,butitdoesnotoccurasoften.Inflationis anincreaseinthegeneralpricelevel,whereasdeflationisadecreaseinthegeneral price level. If we think of inflation and deflation in terms of percentages, inflationwouldbeapositivepercentagewhiledeflationwouldbeanegativepercentage.

RFERENCES

1. MichaelD.Bordo,JohnLandonLane,&AngelaRedish,GoodversusBadDeflation: LessonsfromtheGoldStandardEra,NationBureauofEconomicResearch,February, 2004.

2. https://www.nber.org/system/files/working_papers/w10329/w10329.pdf

3. https://en.wikipedia.org/wiki/Inflation

4. https://economictimes.indiatimes.com/definition/Inflation

5. https://www.imf.org/en/Publications/fandd/issues/Series/Back-to-Basics/Inflation

6. https://prepp.in/news/e-492-impact-of-inflation-indian-economy-notes.

7. https://prepp.in/news/e-492-deflation-indian-economy-notes.

8. Rattan J. Bhatia Inflation, Deflation, and Economic Development, INTERNATIONALMONETARYFUNDSTAFFPAPERS

ControlofInflation

Ÿ Inflation can be controlled by a monetary policy, which is one common method of managing inflation. A policy aims to reduce the supply of money within an economy by lowering the prices of bonds and raising interestrates.

Ÿ TheRBIcanpurchaseorsellgovernmentsecuritiesfromortothepublic. Tocontrolinflation,theRBIsellssecuritiesinthemoneymarket,which sucksoutexcessliquidityfromthemarket.Astheamountofliquidcash decreases,demandgoesdown.Thispartofmonetarypolicyiscalledthe openmarketoperation.

MonetaryMeasures-

Ÿ CreditControl

Ÿ De-monetizationofcurrency

Ÿ issueofnewcurrency