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Growth Vs Inflation Essay

1177 words - 5 pages

Growth v/s Inflation

The Indian economy started on its journey of 2008 riding on sentiments of high growth of more than 9% and a low inflation of less than 4% till it was woken up/(thrown of its path) by the of the storm in the global economy in the form of escalating crude oil prices due to speculations in futures market and a deepening realization of the impact of the sub-prime crisis. Since then inflation level has breached all levels in the last decade. Inflation touched 12.1% for the week ended 12th September 2008. The RBI has revised its growth estimates for the year from an optimistic 9% to 8% now.

Agriculture and allied activities was the lone savior for the economy during the ...view middle of the document...

As a result the banks and financial institutions have been forced to increase the interest rates. The AAA 1 year yield has risen from 8.95% in January 2008 to more than 10.5% now. No reduction in fiscal expenditures has been undertaken so far in order to control inflation under control as it might seriously hinder the economic growth by preventing infrastructure growth. [pic]

But in this stopgap effort to control inflation through monitory measures the government has forgotten that one of the major reasons for this high inflation is inadequate capacity which has been unable to match the growing demands of its people.

For example-

The Indian steel industry has responded to the government's concerns on steel price rise. Moderating prices in spite of substantial increases in input costs and yet maintaining margins to generate resources for further investments, is going to be a tough challenge for the steel players.

The rise in interest rates, the spike in input costs and drying up of funding options has led to a dip in prices, drop in profit margins and slowdown in development of construction projects. The slowdown in demand has had its impact with sales and profit margins registering lower double digit growth.

Increase in input costs has forced the country’s biggest commercial vehicle companies to hike the price of their products.

Thus the dual increase in costs on account of increase in the interest costs and the input costs is further making the projects infeasible and forcing the industry to postpone the projects thus leading to supply constraints, hampering the investment climate and in turn the National Income or this cost is being passed on by the manufacturers to the consumers in the form of higher prices leading to further burdening of consumers already facing the mar on account of higher interest rates.

The immediate action that is required right now to prevent the economy from running into a phase of high inflation and slow growth is to allow the rupee to appreciate against the dollar rather than building the foreign exchange reserves trying to peg the rupee against the dollar. Buying foreign exchange in the market by RBI leads to increase in the money supply and thus inflation. Though the RBI has a way to control this money supply increase caused by buying of foreign exchange by issue of MSS bonds, it is a very costly measure as the RBI has to bear huge...

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