Inflation

What exactly is inflation?
Inflation is one of the several indexes used to judge a country's economy. Inflation provides or indicates how weak a country's economy is.

Why is it necessary?
Just as Gross Domestic Product (GDP) is used to indicate the progress of a country's economy, the inflation index is used to show the weakness or instability of a country's economy.

What is the current situation?
At the end of the week preceding the publication of this post, inflation in India is around 11.9% which is a huge figure. For an ideal growth-oriented economy, the GDP is above 7-8% and inflation is around 3-4%. SO, what does this 11.89 % indicate? It pretty much means that the country's economy is unstable at present. There are several reasons for the rise in inflation, most of which are not in the hands of the Indian government. The reasons include rise in crude oil prices, crash of global markets, etc.

11.89% is the highest in 13 years according to various sources. Last time it happened was in 1995-96 during which India was in a position of political turmoil with 3 Prime Ministers in 6 months (Deve Gowda, IK Gujral and AB Vajpayee). The inflation was around 20% (the highest in the history of Independent India) during the dark days of Emergency imposed by Indira Gandhi (1975-77). These incidents show that inflation also depends on the political stability of a country. And in such cases, it is possible for the government to control the rising inflation.

What are the effects of inflation?
Inflation leads to the increase of prices of the essential commodities like vegetables, grains, cement, books, etc because of which the middle class people are heavily affected. Rich class people can afford the increased prices and the people below the poverty line stop buying the higher-cost commodities and adjust with the lower cost ones. But the middle-class people cannot stop buying the goods (their pride wont allow them to). So, they are forced to dish out more money from their pockets.

What can the government do?
More often than not, the governments have few choices left. The only major thing any government can do is to give subsidies, decrease the price of the commodities and pay for the losses to the traders. It is generally the case where some traders take this as an opportunity and divert the available goods to black markets and create a pseudo shortage because of which the prices shoot up. The government should also make sure that this doesn't happen.