What leads to price rise in India?

Price rise and inflation have become very common terms today. Every now and then, we keep hearing these terms, be it in the radio, news channels or in the newspaper headlines. But what do they actually mean? And why do they occur? Is it always right to criticise the government for price rise or inflation?

  Inflation is the term used to denote the percentage increase of prices of different goods, commodities and services with respect to a relevant base year. It is also known as price rise in the general language of the people. Inflation is a serious cause of concern as it affects both the population and economy of a country. And India being a developing nation, inflation or price rise has a severe impact on it. This article highlights some factors that lead to price rise.

 Many factors are responsible for price rise in India. The first and foremost is the demand factor. India has an ever-growing population and hence it has an ever-increasing demand of goods and services. The production and availability of these goods in India is insufficient to meet the required demands of the population and hence there is a shortage of supply, which increases the prices of the goods, which can only be procured by people who pay a greater price than the normal market price of those goods.

 The second factor of price rise is the black-marketing of goods. This is a practice in which the essential goods are brought in bulk volumes at regular market prices and then hoarded (or stored) in storehouses or godowns, which leads to a shortage and limited availability of these goods in the market. When the availability of these essential goods become almost scarce, the hoarded or stored goods are taken out and sold at higher prices than normal rates because these goods are generally very crucial items (crops, LPG cylinders etc) which play a major role in the lives of the common people and they need to get them at any cost for their survival. As a result of this evil practice, the people are forced to buy goods at a higher rate, leading to price rise.

Price rise of onions is a major cause of concern. (Courtesy: Google Images)


 Another factor is the increase in price of petroleum. This factor is in fact, largely responsible for price rise of goods. In India, many goods are transported from one producing area to other areas or states. Road transport is mainly Image
preferred to other modes of transport. Trucks which are used for the transportation purpose use diesel, and when there is an increase in the price of diesel, transportation charges increase for the transporters. As a result, they increase the delivery charges of the buyers, who in turn compensate their high cost prices by selling the procured goods in the market at higher rates. This also happens in cases of goods transported by airlines. The same scenario takes place when there is an increase in the price of Aviation Turbine Fuel (obtained from petroleum) used by airlines. As a result, the prices of the goods increase to some certain extent.

 Deficit financing is also a factor that can create havoc in the economy of a country. It refers to the practice in which the government spends more money than it receives as revenue. It also refers to the production of more currency notes and coins. Initially it looks like an easy way to boost the economy, but it turns out to be a backlash in the long run. Due to this practice, the money supply increases. More money leads to an increase in the purchasing power of the people, leading to an increase in the aggregate demand. With an increase in demand, the prices of the goods increase. The main problem starts when the increase of demand is sudden and abrupt with respect to the normal demand-supply rate.

 Some external factors are also responsible for inflation in India. Our country imports many goods from foreign countries as there is inadequate production, insufficient supply or lack of availability of such goods in India. These items are brought from the international market according to the international prices set by some standard organisations. When the international prices fluctuate and rise, India has to procure the goods at the increased rates. Subsidy is provided by the government to a certain extent only, and beyond that limit, the government is forced to increase the prices of the imported goods when selling them in the Indian market. Thus, international price rise of imported items also leads to price rise in India.

 In the present scenario, a very relevant example of the above-mentioned factor would be the price rise of petroleum in the global economy due to the present situation prevailing in Iraq. Due to the unrest in Iraq right now, the price of India’s crude oil basket may reach $120 per barrel from its present value which is $111.25 per barrel, translating into an import cost of Rs 6,688 a barrel. This could go up to Rs 7,200 a barrel, if crude touches $120 per barrel mark. In such a situation, India will have to import petroleum at higher rates and hence, it will have to increase the rate of petroleum in India, in spite of providing some certain amount of subsidy to the consumers. If international crude prices go up to $120 per barrel, diesel prices in India may rise up to Rs 5 per litre (as predicted by experts). It will be very wrong on the part of the people to blame the government for increase in oil prices in such a situation. The government cannot stop the price rise. It can keep the oil price intact in India, but that will only lead to a subsidy burden which can have a devastating impact on the government at a later period. This proves to be a catch-22 situation for the Indian Government. And as stated earlier, the increase in the price of petroleum will lead to an increase of prices of various goods like foodgrains, vegetables etc and services like bus fares, railway fares and airline fares.

Iraq War
War in Iraq and Iraq crude exports: Highlights (Courtesy: India Today)


© Barnadhya Rwitam Sharma

Images courtesy: Google or as stated in the caption.

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