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Wednesday, 25 May 2011

Define Inflation and what are the causes of Inflation in India or Pakistan and suggest Measures to remove it



According to Gardner Ackely " A Persistent and appreciable rise in the general level of prices is called inflation."

CAUSES OF INFLATION :-
There are so many causes of inflation in the less developing countries like India and Pakistan.

1. DEMAND PULL INFLATION :-
It is generated when aggregate demand increases then the supply. Following are the causes of demand pull inflation in India and Pakistan.

i ). High Monetary Expansion :-
The supply of money expanding quickly every year but the supply of goods and services is not increasing according to that rate. Due to this prices are rising.

ii ). Foreign Remittances :-
These are sent by those people who are working abroad. Those families who are living in India or Pakistan there purchasing power increasing day by day. In other words their demand is increasing in India or Pakistan.

iii ) Foreign Aid :-
The volume of foreign aid is also increasing with the passage of time. According to Finance Minister every year we receive million dollars aid. So when this aid is used inside the country it increases the demand.

iv ). Consumption Habits :-
In India or Pakistan urban population particularly feels proud spending money on those items which are commonly used in the advanced countries. So there is a demonstration effect also in India or Pakistan.

v ). Construction of Houses :-
Since 1970, the people are spending their savings on the purchase and construction of houses. So this expenditure has also contributed inflation.

vi ). Nationalization of Industries :-
After the nationalization of industries in India and Pakistan, the investors class is hesitating to do the investment due to the fear of nationalization. Now they are using their resources in speculation and in hoarding.

vii ). Increase in Wages :-
The rise in wages, salaries and pensions have increased the purchasing power of the people. Wages and prices chase each other.

viii ). Increase in Population :-
The rate of population growth in India or Pakistan and other less developing countries 3% due to this aggregate demand is increasing day by day.

2. COST PUSH INFLATION :-
In India or Pakistan it has also occurred in the following ways :

i ). Increase in Indirect Taxation :-
The government increasing the taxes on goods every year. The indirect taxes have also increased the rate of inflation.

ii ). Rising Prices of Imported Goods :-
Different commodities are imported whose prices are rising in the world market. So these commodities also bring inflation with them.

MEASURES TO REMOVE INFLATION

1. Restriction on the Import of Luxury Items :-
The import of luxury items must be restricted. It will protect us from international inflation and it will be favorable for the balance of payment.

2. Cut on Expenditure :-
There should be a drastic cut on the non-productive expenditure.

3. Denationalization :-
Nationalized industries should be denationalized and private sector should be allowed to play its role more efficiently.

4. Change in Taxation System :-
The taxation system should be revised in order to encourage the private sector. Tax holidays should be given to expand the industrial sector.

5. Sick Industries Problem :-
Sick industries should be handed over to private sector and their production and profit can be restored.

6. Market Economy :-
Market economy should be allowed to function and there should be no fixation of price.

7. Check on Unplanned Cities :-
The unplanned and unregulated growth of cities should be checked.

8. Effective Administration :-
The administration should be made effective and clean to increase the out put of the country.

9. Discipline :-
Discipline should be restored in factories and offices to improve the out put of country.

10. Coordination Between Monetary and Fiscal Policy :-
Government should coordinate the monetary and fiscal policy in such a manner that it should check the rate of inflation.


EFFECTS OF INFLATION

1. When prices rises businessman and entrepreneurs are greatly filled.

2. When prices are rising investment expands.

3. Debtor obtain greater advantage while creditor suffers a loss.

4. During inflation farmers reap greater profit.

5. People who receive fixed income also suffer heavily.

6. Inflation also creates social unrest and unemployment in the country.

7. The tax payers feel easy to pay tax in case of inflation.

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