Factors of Inflationary Rise in Prices in India

The following points highlight the three main types of factors of inflationary rise in prices in India. The factors are: 1. Demand-Pull Factors 2. Cost-Push Factors 3. Other Factors. 

Factor # 1. Demand-Pull Factors:

The demand-pull factors which are responsible for high rate of inflation include:

(i) High Rate of Growth of Population:

In India population increasing at a very high rate is putting a lot of pressure on the aggregate demand and on the price level of the country. As population is increasing every year by 15 to 16 million this additional size of population is increasing the aggregate demand for foodstuffs and other essential commodities continuously leading to an inflationary rise in prices.

(ii) Mounting Government Expenditure:

The expenditure of both the Central and State Governments has been increasing at a very steady rate. Total Government expenditure has increased from mere Rs 740 crore in 1950-51 to Rs 50,000 crore in 1989-90. In 1990-91 development expenditure has reached the level of Rs 80,000 crore while the non-development expenditure has also reached the level of Rs 65,000 crore.

Again in 1991-92 total expenditure of the Government rose to Rs 2,00,000 crore and then it further rose to Rs 2,34,647 crore and Rs 2,58,477 crore in 1992-93 and 1993-94 respectively. It has been increasing significantly from Rs 2,22,056 crore in 1990-91 to Rs 2,98,084 crore in 1999-2000 and then finally to Rs 6,80,521 crore (RE) in 2007-2008.

The 2008-2009 Budget has set the total expenditure of the Central Government to Rs 7,50,884 crore. Such a huge and continuous Government expenditures are passing into the income stream and is responsible for a high rate demand-pull inflation.

(iii) Deficit Financing:

By adopting the method of deficit financing the enlarging the extent of deficit financing from f 330 crore during the First Plan to Rs 7,000 crore during the Seventh Plan the Government has added fuel to the name of inflationary rise in prices. Moreover, during the last four years since 1990, the extent of deficit financing has been exceeding Rs 10,000 crore annually.

This amount only shows the budgetary deficit and the fiscal deficit was much higher. With this the total money supply with the public has increased from Rs 7,320 crore in 1970-71 to Rs 1,45,000 crore in 1993-94. In December 2007, total money supply (M₃) further rose to Rs 37,027 billion.

(iv) Black Money:

Huge accumulation of black money in the hands of tax evaders and black marketers has added another problem of created inflation through extensive hoarding and speculation in essential commodities.

Factor # 2. Cost-Push Factors:

The cost-push factors which have been also responsible for inflationary rise in prices include:

(i) Fluctuations in the Production:

Huge fluctuations in the production of food grains form a record production of 108 million tonnes in 1970-71 to 97 million tonnes in the next two years and again from a record production of 132 million tonnes in 1978-79 to 110 million tonnes in 1979-80 and then reaching all time record of 216.1 million tonnes in 2006-2007 have resulted a continuous rise in the prices of food grains in the country.

Moreover, factors like frequent power break downs, strikes, lockouts, transportation bottlenecks etc. are also responsible for lower rate of production in the manufacturing sector. All these have led to a serious inflationary rise in prices.

(ii) Increased Taxation:

With the imposition of fresh dose of commodity taxes in every budget, prices are also increasing at a rapid rate.

(iii) Administered Prices:

Continuous increase in the administered prices of goods and services produced by the public sector also resulted upward spiral in the price level of the country. Regular increase in railway freights and fares, higher administered prices of wheat, rice, sugar, steel and coal are also responsible for inflationary rise in prices in the country.

(iv) Oil Price Hike:

Due to sharp hike in the global prices of crude oil since 1973 and again 130 per cent increase in the prices of oil products by the OPEC in 1980 and again the introduction of gulf-surcharge in 1990-91 has resulted in serious inflationary rise in the prices of the country along with global inflation.

Factor # 3. Other Factors:

The other factors which are responsible for inflationary rise in prices include—failure of the public distribution system, inability of the government to formulate a rational price policy, rampant black marketing and hoarding of essential commodities, stringent import control etc.

Moreover, factors like Devaluation of July 1991 and continuous fiscal deficit are also partially responsible for the high inflationary rise in prices in 1991- 92.

However as a result of the various initiatives taken by the Government in 1991-92, the inflation rate began to recede from September 1991 and then gradually came down to 6.8 per cent in January 1993.

But again due to pre-budgetary hike in prices and rise in fiscal deficit, the rate of inflation further rose to 10.2 per cent by the end of March 1994 and then it reached the highest level of 12.2 per cent at the end of January 1995 and finally it came down to 6.68 per cent by the week ended January 28, 2008.

Factors Responsible behind current Inflation (2006-07 to 2007-08) and Thereafter:

The point to point inflation as on May 9, 2008 jumped to a 48-month high 7.61 per cent and then to 11.42 per cent as on June 14, 2008. Broadly seven commodity group were the major contributors to inflation. These seven commodity groups include—edible oils, food articles, mineral oils, chemicals, cement, metals and machineries.

Overall contribution of these seven groups increased from 75 per cent in 2006-07 to 92 per cent in 2007-08′. Commodity composition of main drivers of inflation has very much affected by global commodity price rise (mostly in mineral oils, edible oils and food items), domestic shortfalls (mostly in edible oils and food) and a buoyant demand (mostly in machinery, chemicals and cement).

There are also spill over effects arising mostly due to inter-linkages of commodities. Finally, as a result of the increase in the prices of petroleum goods in June 2008 by the Government of India, the price level has crossed the double digit level of 11.42 per cent.