The persistent rise in the average price of goods and services, or inflation, has become a major global economic concern. In November 2024, India’s retail inflation rate jumped to 6.21%, a 14-month high, from 5.5% in August 2024.Higher food inflation, which was 10.87% in November compared to 9.24% in October, is the primary cause of the inflation rate. Its effects reverberate throughout economies, impacting governments, corporations, and people. Navigating this global challenge calls for robust economic policies and cautious policy changes for rising economies like India.
Far- Reaching Effects of Inflation
Both developed and emerging economies are impacted by inflation globally, however the severity of its effects can differ. Supply chain disruptions, labor shortages, and rising energy prices are the main causes of inflation in industrialized nations like the US and the EU. These issues are frequently made worse by geopolitical conflicts like the conflict between Russia and Ukraine and tensions in West Asia. In response, central banks in these areas have raised interest rates in an effort to reduce demand and manage inflation. Recessions may result from these policies, though, as they slow economic growth.
Inflation can have much more detrimental effects in poorer nations. For necessities like food and electricity, many nations depend on imports. These countries have increased import bills as a result of rising global prices, which puts pressure on their balance of payments and depletes their foreign exchange reserves. In areas where poverty is pervasive and income levels are low, inflation reduces purchasing power, further impoverishing millions of people. The global supply
chain becomes unstable due to inflation. Rising input costs could result in higher manufacturing prices and a shortage of supply for businesses, particularly small and medium-sized enterprises (SMEs). This could therefore further impede international investment and trade flows.
India’s Economic Climate
One of the economies with the greatest rates of growth in the world, India, is also experiencing inflationary pressures, but in a different way. Rising energy prices, disruptions in the global supply chain, and domestic causes like food price inflation have all contributed to the nation’s inflation. Furthermore, the Indian economy is highly reliant on imported oil, and every rise in the price of oil globally intensifies inflationary pressures at home. The Reserve Bank of India (RBI)
specifies its target retail inflation at 4% with a two percentile point tolerance leeway on either side. Food and fuel, which are essential to the majority of India’s population’s life, frequently experience higher rates of inflation.
High food costs can swiftly spark social unrest and discontent in a country where about 60% of the workforce works in the agricultural or unorganized sectors. The effect on India’s external sector is a further worry. Foreign investment may be discouraged while the world economy struggles with inflation, particularly if wealthy nations continue to hike interest rates. Reduced capital inflows into India could result from this, which would strain the Indian currency and raise
the cost of external debt.
The Road Ahead
India needs to use a multifaceted strategy to combat inflation. To lessen dependency on imports, the nation should first concentrate on strengthening its own supply networks. This might be accomplished through infrastructure investment, increased agricultural output, and the promotion of homegrown industry through programs like “Make in India.”
Second, careful financial management is crucial. In order to protect the most vulnerable groups, the government must make sure that fiscal stimulus plans do not make inflation worse while continuing to prioritize important areas like healthcare, education, and rural development.
Furthermore, enhancing financial inclusion and fortifying the financial industry can lessen the impact of price increases on marginalized people. Lastly, India should lessen its reliance on the erratic international commodities markets and keep expanding its trade partners.
Way Forward
In conclusion India has particular dangers due to its intricate economic structure, but it also has the means to combat inflationary pressures. India’s resilience will rely on its capacity to quickly and strategically adjust to the changing difficulties of inflation as long as there are global economic uncertainty.
Author: Ms. Anadhi Sharma, Bachelor in Political Science, Hindu College, University of Delhi
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