21 Jul Why Inflation is Rising in India : Causes, Impact and UPSC Relevance

India’s retail inflation has moved above the Reserve Bank of India’s medium-term target of 4%. The latest increase is mainly driven by rising food prices, costlier fuel and supply-side disruptions. As inflation directly affects economic growth and household expenditure, it has once again become an important policy issue.

Inflation refers to a sustained increase in the general price level of goods and services over time. As prices rise, the purchasing power of money declines. Consequently, consumers can buy fewer goods and services with the same income.

1. Food Inflation

Food prices have increased because of irregular rainfall, heatwaves and disruptions in agricultural supply chains. Vegetables, pulses, milk and edible oils have recorded notable price increases.

2. Rising Crude Oil Prices

India imports a large share of its crude oil requirement. Therefore, any increase in international crude oil prices raises transportation and production costs across the economy.

3. Imported Inflation

A weaker rupee makes imports more expensive. As a result, essential imports such as crude oil, fertilisers and edible oils become costlier.

4. Supply Chain Disruptions

Global conflicts and logistical bottlenecks have disrupted the movement of goods. Consequently, production costs have increased, leading to higher consumer prices.

5. Strong Domestic Demand

Higher consumer demand, particularly in urban areas, has also contributed to price pressures in certain sectors.

Inflation reduces the purchasing power of households. Moreover, it increases the cost of living and affects savings. Businesses also face higher production costs. On the positive side, moderate inflation can encourage investment and support economic growth.

The Reserve Bank of India can increase the repo rate to reduce excess liquidity. Meanwhile, the government may release buffer stocks, reduce import duties and improve supply-chain efficiency to control food prices.

Q1. Consider the following statements:

1. CPI is the inflation measure targeted by the RBI.

2. The RBI aims to maintain inflation at 4% with a tolerance band of ±2%.

3. WPI is compiled by the Reserve Bank of India.

Which of the statements given above are correct?

A. 1 and 2 only

B. 2 and 3 only

C. 1 and 3 only

D. 1, 2 and 3

Answer: A

Explanation: Statements 1 and 2 are correct. WPI is compiled by the Office of the Economic Adviser under the Ministry of Commerce and Industry.

Q2. Which of the following best explains imported inflation?

A. Increase in MSP announced by the government

B. Rise in global crude oil prices leading to higher domestic fuel prices

C. Increase in domestic wages

D. Increase in GST rates

Answer: B

Explanation: Imported inflation occurs when higher international prices increase the cost of imported goods and services.

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Suhani

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