Inflation means the rise in prices of goods and services over time. When inflation happens, the value of money decreases. This means people can buy fewer things with the same amount of money. In India, inflation directly affects daily life as it changes the cost of food, fuel, rent, transportation, and other basic needs.
Examples; Imagine you used to buy a kilo of rice for ₹50 last year, but now the same kilo costs ₹60. Similarly, a bus fare that was ₹20 has gone up to ₹25. Your monthly grocery bill and fuel expenses have also increased compared to before, but your salary has not gone up as much. This means you need to spend more money for the same things, and your savings don’t stretch as far as they used to. In simple terms this effect is called Inflation.
Causes of Inflation
The main cause of inflation is the imbalance between demand and supply. When people have more money to spend but goods are limited, prices go up. Sometimes, inflation is also caused by higher production costs like an increase in fuel or raw material prices. Global events, such as wars or supply chain disruptions, can also push inflation higher by making imports costlier.
There are three main types of inflation – demand-pull, cost-push and built-in inflation.
Demand-pull inflation occurs when the demand for products is greater than the available supply. Reasons include rising incomes, increased government spending, or booming exports, which lead to more people having money to spend than there are goods available.
Cost-push inflation happens when the cost of inputs, such as crude oil or electricity, increases and businesses pass this rise on to consumers. Common causes are higher prices for raw materials (like oil, food grains), increased wages, and higher taxes. Supply shocks, such as weather events that reduce food production, can make prices rise across the board. When a country prints more currency, there’s more money chasing the same number of goods, causing general price increases. Easy loans and low-interest rates can result in more spending, pushing prices up further.
Built-In or Expectation-Led Inflation occurs when structural issues such as poor infrastructure, storage, and distribution problems in agriculture can limit supply and push prices higher. Currency devaluation increases the price of imports, driving up overall inflation. Global price volatility—especially in oil and essential commodities—affects domestic inflation directly.
In India, inflation is commonly driven by food and fuel price changes, supply disruptions due to weather events, and shifts in global commodity prices, along with fluctuations in currency value and ongoing economic growth.
A moderate level of inflation is considered good because it encourages people to spend and invest. But when inflation becomes too high, it reduces the real income of people, especially middle- and lower-income families. Their purchasing power declines, savings lose value, and cost of living goes up. On the other hand, very low inflation or deflation can slow economic growth by discouraging investment.
In recent years, India has faced inflation challenges due to global oil prices, uneven rainfall, and rising food costs. Managing inflation is crucial for economic stability. A balanced approach combining effective monetary policy, good supply management, and strong governance can help India maintain steady growth and protect the financial well-being of its citizens.
Controlling Inflation
Inflation can be controlled through a mix of monetary, fiscal, and supply-side measures. The Reserve Bank of India (RBI) and the central government both play key roles in controlling inflation in the country.
Monetary Policy
The RBI can increase the repo rate (the rate at which it lends to commercial banks). A higher repo rate makes bank loans costlier, reducing public spending and demand, thus helping to cool down price rises.
Increasing the Cash Reserve Ratio (CRR) means banks keep more money with RBI and loan out less, reducing money in circulation and lowering inflation.
Open Market Operations (OMO) are used by selling government securities, which pulls money out of the financial system and restricts liquidity.
The reverse repo rate can be raised to encourage banks to park excess funds with the RBI, also reducing money circulation.
Fiscal Policy Measures
The government can cut its expenditure or increase taxes. Lower government spending reduces demand for goods and services, helping to control inflationary pressure.
Increasing direct and indirect taxes limits disposable incomes, which further reduces overall demand.
Borrowing from the public (public debt) and using a surplus budget (spending less than earned in taxes) also help combat inflation.
Supply-Side and Administrative Measures
Improving transportation, storage, and delivery systems ensures products are easily available and keeps prices in check.
Releasing government buffer stocks of essential food grains increases supply in the market and helps reduce food inflation quickly.
Banning or regulating exports of essential goods like onions or pulses during shortages increases domestic supply and contains prices.
Reducing import duties and encouraging imports when local prices are high can help bridge supply gaps and control inflation.
Other approaches
Promoting local manufacturing and agricultural production decreases dependency on imports and helps stabilize prices for consumers.
Encouraging savings among the public (for example, with attractive interest rates on deposits) lowers consumption, which reduces demand pressure.
Conclusion
Inflation in India, when maintained at a moderate level, is generally considered good and beneficial for economic growth. Moderate inflation encourages spending and investment since people and businesses expect prices to rise gradually, which can stimulate production and job creation. It also helps borrowers by reducing the real value of debt over time. Central banks, including India’s Reserve Bank of India (RBI), usually target an inflation rate around 4% as optimal for balanced growth.
However, very high inflation is harmful because it erodes people’s purchasing power, particularly affecting low- and middle-income families by making everyday goods and services expensive. It can create uncertainty, discourage savings, and distort pricing mechanisms in the economy. Conversely, deflation (falling prices) or very low inflation can slow economic activity by encouraging people to postpone spending, which can hurt growth.
Hence, controlled inflation is good for India as it supports economic development, but unchecked or excessively high inflation causes economic and social problems. The key is to maintain inflation within a healthy range to protect the overall financial well-being of citizens and the stability of the economy.