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.