INFLATION and its EFFECTS on BUSINESS

ABOUT

The economy of India has been facing inflation ,which has been a major issue since the last few decades. Inflation is, an increase in the prices of goods and services for a particular period of time,within an economy.The increase in the prices of products , i.e goods and services,can be subjected to various reasons, such as huge demand from increasing population, income of the consumers,few international aspects,etc.

INFLATION AND ITS EFFECTS ON BUSINESS

- Companies expect inflation rate to be less. If , there is a rise in inflation,then the companies,experience a rise in the costs.Although,inflation is not mandatorily,defacing for the firms,if they can rise the prices of products to the consumers,which is greater than their cost of the production, which is rising. Businesses should keep an adjusted price at pace with the inflation rate.

- Borrowings/Take up: If there is an increase in inflation,then,the businesses, find it,difficult to get a loan,as the lending banks and financial institutions,find it risky to lend money to firms with weak cash flows,hence the banks,i.e the lenders,increase their rate of interests,to get a cost of market uncertainity along with money's depriciated value. Thus,the borrowing power of the firms,will be less and which will lead to decline in the firm's liquidity and hence,ability of businesses for investing in the growth,reduces.

- Inflation leads to the renewal of wages of employees.This pact, of the rise in the wages of the employees,becomes somewhat,expensive for the businesses.

- Inflation,disrupts,the business planning, and leads to a lower capital investment.

- Cost of investments: If the inflation is high,then the cost of investing,will keep on changing constantly.Thus, the companies,are becoming less interested,in investing,because of an uncertainity,over the future returns.

FACTORS CAUSING INFLATION IN INDIA

The rise in prices of products can be subjected to few factors,namely such as:
Demand Pull and Cost Push
In an economy,there is a tendency to meet the growing demands of people,such that Demand= Supply.

However, if Demand>Supply
Then,this leads to a mismatch,and hence the prices of products goes up in order to restore the balance.
Thus, inflation due to excess of demand over the supply,is demand pull.
Few factors are:

Growing Economy/Govt Expenditure :As population of India has increased from 44 crores to 130 crores from the early 60's to late 2018,consequently,the demands and need of people has also grown exponentially.Hence,in order to meet the growing demands,the government has also increased its expenditure.This has lead to mismatch between demand and supply,and ultimately resulted in inflation.

Rise in Money Supply: There has been a significant increase in money supply in India over few decades.This was done by RBI, after getting govt's nod ,so as to finance various govt activities. Currency,with public was increased,with 12.8 %/year. Narrow money(Currency with public+Demand Deposits) has increased by annual average of 13.27% and Broad money(Narrow money+Time deposits in banks) has increased by 10%.This has increased the purchasing power,hence increased inflation.

Surge in Black Money: Income earned through illegal sources,which is black money is a factor which is a growing issue of concern for the economy,as, it is also contributing towards inflation.People earning black money,spend it on real estate,thus which leads to a hike in prices of houses,etc.

Inflation caused due to increase in the cost of labour,capital or raw materials is cost-push. It consists of various factors that limit the supply or increase the cost of production,thus leading to inflation.Few factors are:

Natural disasters and calamities
In a developing country like India,whenever it is hit by any disaster,inflation increases significantly.For instance,if a particular area is hit by a drought,the availibility of food grains in that area will be less,hence it will lead to increase in the prices.

Increase in Taxes:
In our country,pre-GST,there were many direct and indirect taxes that were imposed by both centre as well as state govt.Such increase in taxes,directly resulted in increase in values.All these factors lead to increase in production cost,thus affecting inflation.

Price of petroleum products:
Our country is mostly dependent upon Gulf countries to meet its demands for petrol.Over the past few years,the international prices of petrol has increased,that has resulted in increase in prices of all the petroleum products and services.

EFFECTS OF INFLATION
1.It erodes the purchasing power of fixed income groups.Since,their salary
remains constant,the rise in prices reduces the purchasing power of such people.
2.Profit incomes of the producers (industry & large scale businessman) is
generally increased during inflation.Rise in prices means more profits.
3.It is not a win situation for creditors under inflation as when they receive
payments (during inflation),they get less purchasing power than they had
lent.Conversely,the debtors gain during inflation.
4.The impact of inflation has different impact on different sections of society.The
fixed income groups,suffer while the businessmen, boom during this period.The
re- distribution takes place because prices of all goods and services does not
increase at same time.

Inflation has widened economic inequalities,consequently govt. of India has taken several steps to curb inflation.Control can be obtained management of supply and demand.

Managing the supply:
Increasing food grain buffer: The govt has taken steps to increase buffer of food grains & other products. For Example:
Food Corporation of India creates a buffer of food grains.Thus,when prices increase,these stocks are used, in order to control inflation.

Improving public distribution systems: Another way of curbing inflation,is improving,public distribution of essential items.All these items are available to people fair price shops.At such shops,items are readily available & at cheap price.Hence,improved PDS,ensures weaker sections of society also get things at cheaper rates.

Managing the demand:
Apart from maintaining the supply,the GOI adopts some fiscal and monetary policy,as follows: Monetory Policy:The GOI through RBI decides the monetary policy instruments like IRR,Repo rate etc.RBI keeps changing monetary policy in order to control money supply in the market.

CONCLUSION

In India,inflation is both inevitable and desirable .Inevitable,in the sense,that it,is undergoing various development projects,infrastructure,schemes,more purchasing power with larger spending .But all such things take time and during this time,the prices will go up, making inflation inevitable. Further,to some degree,inflation is necessary to increase outputs and attract large foreign investments.Hence,govt should,plan inflation in such a way,that it does not hamper weaker sections of society.

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