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Inflation as a monetary phenomenon: -
Inflation is always and everywhere a monetary phenomenon, in the sense that it is and can only be caused by a faster growth in the amount of money than the rate of increase in production.
The quantity theory of money states that prices change in proportion to the money supply, which supports the idea that inflation is a monetary phenomenon. The value of transactions carried out in an economy (considered as nominal GDP) is equal to the quantity of money circulating in that economy, according to a mathematical identity1 (understood as the amount of money in an economy multiplied by the number of times this changes hands; i.e., the velocity of money). If we assume that the velocity of money is constant, the inflation rate in an economy with no economic growth equals the rate of money growth. When a result, as the money supply expands, more money will be pursuing the same products, causing prices to rise. Similarly, if the rate of economic development and the quantity of money are both constant, prices should remain constant.
In this regard, an examination of monetary policy efficacy, especially how it impacts monetary aggregates, is critical. The monetary base expands when a central bank provides liquidity to the banking system, either through long-term loans or by directly acquiring some of its assets. However, there is no automatic increase in the money supply. Traditionally, banks would use the liquidity provided by central banks to expand the supply of credit, and variations in the money supply would follow those in the monetary base, resulting in an increase in consumption and investment and, as a result, a rise in prices.
Growth and Inflation in Indian Economy:-
The International Monetary Fund (IMF) said India’s economy is gradually recovering after it was hit by two Covid waves, but it cautioned the authorities against inflationary pressures. The agency recommended slow reduction in monetary policy support as recovery gains ground.
The IMF said while the impact of Covid-19 on investment and human capital could prolong the recovery and affect medium-term growth, the recovery could also be faster than expected because of the pace of vaccination and economic reforms.
In its annual report on India under Article IV, the IMF’s executive board said the economic outlook remains clouded because of pandemic-related uncertainties contributing to both downside and upside risks.
“The second wave resulted in another sharp fall in activity, albeit smaller and shorter and recently high frequency indicators suggest an ongoing recovery,”.
It warned that a persistent negative impact of Covid-19 on investment, human capital, and other growth drivers could prolong the recovery and impact medium-term growth. While India benefits from favourable demographics, disruption to access to education and training due to the pandemic could weigh on improvements in human capital.
However, “faster vaccination and better therapeutics could help contain the spread and limit the impact of the pandemic”.
Additionally, successful implementation of the announced wide-ranging structural reforms could increase India’s growth potential. It agreed that maintaining an accommodative monetary policy remains appropriate.
“Looking ahead, a well-communicated plan for a gradual reduction in monetary policy support as the recovery strengthens would foster orderly market transitions”. The Fund said despite policy support, bank credit growth has remained subdued even as large corporates have benefited from easier conditions in capital markets.
The IMF projected India’s economic growth at 9.5 per cent for the current financial year and the headline consumer price inflation-based inflation at 5.6 per cent amid elevated price pressures.
Inflationary pressures have been elevated, yet the rate of price rise eased to 5.6 per cent in July, returning to within the Reserve Bank of India’s (RBI’s) target, driven by softer food prices and base effects. Since then, the headline inflation rate fell to 5.3 per cent in August and 4.3 per cent in September, according to official data.
The Fund said the contraction in economic activity, lower revenue, and pandemic-related support measures are estimated to have led to a widening of the Centre’s fiscal deficit to 8.6 per cent of gross domestic product in 2020-21. The general deficit of both the Centre and the states stood at 12.8 per cent that year.
India Inflation Rate (2011-2021)
India inflation rate for 2020 was 6.62%, a 2.9% increase from 2019.
India inflation rate for 2019 was 3.72%, a 0.22% decline from 2018.
India inflation rate for 2018 was 3.95%, a 0.62% increase from 2017.
India inflation rate for 2017 was 3.33%, a 1.62% decline from 2016.
India Economic Growth (2011-2021)
India economic growth for 2020 was $2,622.98B, a 8.62% decline from 2019.
India economic growth for 2019 was $2,870.50B, a 6.27% increase from 2018.
India economic growth for 2018 was $2,701.11B, a 1.87% increase from 2017.
India economic growth for 2017 was $2,651.47B, a 15.54% increase from 2016.
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