Define inflation and what are the causes of inflation in less developing countries 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.
DEMAND PULL INFLATION :-
It is generated when the aggregate demand increases than the supply. Following are the cause of demand pull inflation in less developing countries.
1. High Monetary Expansion :-
The supply of money is expanding quickly every year but the supply of goods and services is not increasing according to that ratio. Due to this prices are rising.
2. Foreign Remittances :-
These are sent by the overseas or who are working in abroad. Those families who are receiving in their country their purchasing power is increasing day by day. In other words their demand is increasing.
3. Foreign Aid :-
The volume of foreign aid is also increasing with a passage of time. Almost every year we receive million dollars aid when this aid is used inside the country, it increases the demand.
4. Consumption Habits :-
in less developing countries urban particularly feels proud in spending money on those items which are commonly used in the advanced countries. So there is a demonstration effect also in less developing countries.
5. 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.
6. Nationalization Of Industries :-
After the nationalization of industries in less developing countries. 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.
7. Increase In Wages :-
The rise in wages, salaries and pensions has increased the purchasing power of the people. Wages and prices chase each other.
8. Increase In Population :-
The rate of population growth in less developing countries is very high due to this aggregate demand is increasing day by day.
9. Black Money :-
It is generated through tax evasion monopoly hoarding and smuggling. This money increases the demand and price of expensive goods. So it is also the main cause of inflation.
10. Deficit Financing :-
Every year the expenditure of the Govt. exceeds than the revenue. To meet the development and none development expenditure Govt. borrows the money from inside and outside of the country. It increased the general level of prices.
COST PUSH INFLATION
11. Increase In Indirect Taxation :-
The Govt. is increasing the taxes on goods every year. The indirect taxes have also increased the rate of inflation.
12. 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.
13. Devaluation Of Rupee :-
It is an important factor in increasing the general level of prices. Most of developing countries have devalued their currency many times in terms of dollar. Devaluation has increased the cost of the product and the prices of the imported goods. While the value of exports has fallen.
14. Sales Tax :-
in less developing countries have imposed the sales tax on the large number of goods like oil, gas, electricity, telephone etc. It has also contributed the rate of inflation.
MEASURES TO REMOVE INFLATION
1. Restriction On The Import Of Luxury Item :-
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 nonproductive expenditure.
3. Denationalization :-
Nationalized industries should be denationalized and private sector should be allowed to play its role more effectively.
4. Changes 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 prices.
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 clear to increase the out put of the country.
9. Discipline :-
Discipline should be restored in factories and offices to improve the out put of the country.
10. Co-Ordination Between Monetary and Fiscal Policy :-
Govt. should coordinate the monetary and fiscal policy in such a manner that it should check the rate of inflation.
11. Special Bazar :-
Govt. has established the Sunday Bazars in every city to provide the basic necessities of life at lower price. These can be improved further in small towns and villages.
12. Reduction In Interest Rate :-
To increase the credit facility to private sector govt. should reduce the bank rate. It will reduce the cost and price of production. Due to the fall in price aggregate demand will also increase.