Effects of inflation on the Indian economy

According to the official data released by the statistics ministry, the annual inflation rate in India edged down to 7.04% in May 2022 from an 8-year high of 7.79% in the previous month. This is still almost twice the RBI's target. In fact, this is the 30th time in a row that Consumer Price Index or CPI inflation in India crossed RBI’s medium term target of 4%.

Rising inflation has not only been a cause of concern for India but also for other major economies like the United States of America and the United Kingdom. The inflation rate in the USA surged to 8.6% in May 2022 which is the highest rise since December 1981. This is also a warning sign for India.

Rising inflation means you have to pay more for acquiring the same goods and services be it your normal bread and butter or stocks.

But are you aware that inflation could have a negative as well as a positive impact on the economy? Let us find out about the effects of inflation on the Indian economy.

What is Inflation?

Inflation is an economic phenomenon that describes an overall rise in the prices of goods and services in the economy. Inflation is the rate of change in the prices of certain goods and services over a period of time. It indicates an increase in the cost of living coupled with the loss of purchasing power of the consumers. This means, that now you will have to pay more to acquire the same quantity of goods and services as their prices increase due to inflation.

Effects of Inflation on the Indian Economy

Persistent inflation can have detrimental effects on the economy. In fact, rapid inflation can lead to financial crises in the country.

Inflation affects every industrial sector including but not limited to automobiles, pharmaceuticals, real estate, cosmetics and tourism. 

Is Inflation Beneficial for the Economy?

YES. Sometimes inflation can be beneficial for the economy but when it is mild. 

Rising inflation leads to improved growth in GDP. Having said that, very high inflation can severely impact purchasing power, but certain threshold inflation acts as an incentive to producers and businesses.

Thus, inflation despite having certain downside risks is essential for growth, provided it is within the acceptable limits.

Conclusion

While inflation lowers the purchasing power of the consumers and decreases the value of savings along with depreciating the currency value, the economy can still benefit from mild inflation.

For investors, commodity stocks such as gold, copper, iron, steel, etc. can prove to be beneficial investments during high inflation. You may consider keeping commodity stocks under your radar during such times. However, it is not advisable to invest in commodity stocks during an upcycle, only short term traders can take a plunge and take advantage of high volumes and volatility to enter and exit at appropriate levels.

Disclaimer – The above content is only for educational purposes and it is not to be considered as stock recommendation or advice.