Major causes leading to inflation are as follows:
Causes
1. Increase in money supply:
Over the last few years the rate of increase in money supply has varied between 15 and 18 per cent, whereas the national output has increased at an annual average rate of only 4 per cent.
Hence the rate of increase in output has not been sufficient to absorb the rising quantity of money in the economy. Inflation is the obvious result.
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2. Deficit financing:
When the government is unable to raise adequate revenue for its expenditure, it resorts to deficit financing. During the sixth and seventh Plans, massive doses of deficit financing had been resorted to. It was Rs. 15,684 crores in the sixth Plan and Rs. 36,000 crores in the seventh Plan.
3. Increase in government expenditure:
Government expenditure in India during the recent years has been rising very fast. What is more disturbing, proportion of non-development expenditure increased rapidly, being about 40 per cent of total government expenditure. Non-development expenditure does not create real goods; it only creates purchasing power and hence leads to inflation.
Not only the above mentioned factors on the Demand side cause inflation, factors on the Supply side also add fuel to the flame of inflation.
4. Inadequate agricultural and industrial growth:
Agricultural and industrial growth in our country has been much below what we had targeted for. Over the four decades period, food grains output has increased and-.i.e. of 3.2 per cent per annum.
But there are years of crop failure due to droughts. In the years of scarcity of food grains not only the prices of food articles increased, the general price level also rose.
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Failure of crops always encouraged big wholesale dealers to indulge in hoarding which accentuated scarcity conditions and pushed up the price level.
Performance of the industrial sector, particularly in the period 1965 to 1985, has not been satisfactory. Over the 15 years period from 1970 to 1985, industrial production increased at a modest rate of 4.7 per cent per annum.
Our industrial structure, developed on the basis of heavy industry-led growth, is not suitable to meet the current demand for consumer goods.
5. Rise in administered prices:
In our economy a large part of the market is regulated by government action. There are a number of important commodities, both agricultural and industrial, for which the price level is administered by the government.
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The government keeps on raising prices from time to time in order to cover up losses in the public sector. This policy leads to cost-push inflation.
The upward revision of administered prices of coal, iron and steel, electricity and fertilisers were made at regular intervals. Once the administered prices are raised, it is a signal for other price to go up.
6. Rising import prices:
Inflation has been a global phenomenon. International inflation gets imported into the country through major imports like fertilisers, edible oil, steel, cement, chemicals, and machinery. Increase in the import price of petroleum has been most spectacular and its contribution to domestic price rise is very high.
7. Rising taxes:
To raise additional financial resources, government is depending more and more on indirect taxes such as excise duties and sales tax. These taxes invariably raise the price level.