Inflation and economic growth relationship in india

inflation and economic growth relationship in india

Keywords: India, inflation, growth, threshold effects, cross-sectional heterogeneity and . relationship between inflation and economic growth in India. We also. when the inflation rate was double digit. Figures in Table - 3 reveal the relationship between economic growth and inflation. Table WPI, Implicit GDP Deflator. There is great debate over the belief whether inflation promotes economic growth or not. The relationship between inflation and growth is a.

inflation and economic growth relationship in india

The Relationship between Economic Growth and Inflation The relationship between inflation and economic output is very delicate. On the other hand, if there is too much growth in GDP it leads to an increase in inflation, which undermines stock market gains as the money and future profits become less valuable than they are today.

inflation and economic growth relationship in india

Today, most economists agree that a growth rate of 2. Over time, the growth in GDP would lead to inflation, and the rate will keep on rising as inflation engenders inflation. The Rational Expectations Theory suggests that in the times of increasing inflation, households tend to spend more money as they are aware of the fact that the money will be less valuable in the future. Because of more expenditure by the people, there is an increase in GDP in the short run that leads to further increase in the prices of the goods and services.

Also, a very peculiar feature of inflation is that the effects of inflation are nonlinear, i. Most advanced economies have learned these lessons through experience.

inflation and economic growth relationship in india

In s when there was a prolonged period of high inflation in the US, the economy was restored only by going through a painful period of high unemployment and lost production, as prospective capacity remained idle. So what is the ideal inflation level? While some economists insist that advanced economies should aim to have 0 percent inflation i. It can be observed that economic growth rate is inversely related to CPI growth rate.

It can be observed that there is a significant relationship between GD growth rate and inflation growth rate represented by a negative correlation coefficient. The value of adjusted R square is low due to other factors like exchange rate, technological development, natural resource availability, social and political conditions that influence the economic growth. The reason being, a high interest rate will discourage additional borrowings. This shall reduce the amount of money people have in their hands to spend.

Traditional economic theory suggests that as demand falls, prices also fall. Thus, RBI aims to control inflation by increasing interest rates. When economic activities falter, a cut in interest rates is required.

inflation and economic growth relationship in india

This is because companies need to borrow in order to invest in new projects. A fall in interest rates reduces cost, thereby increasing profitability. This encourages borrowing, which in turn, helps fuel the economy.


A high interest rate is detrimental to growth. Companies discontinue expansion or growth plans due to high interest rates. They are forced to cut costs to maintain profits. This passes across the economy including the labor market. A low interest rate can cause a rise in inflation. This is a result of more money in the system.

This leads to an overall price rise as demand increases. But an ET online analysis shows India will probably witness a higher inflation and lower growth scenario. Why inflation could see an upward trajectory The era of oil-price declines seems to be over, at least for the time being. There is an indirect impact also by way of a cascading effect through the transportation segment, which adds another 15 bps or so to the CPI.

Meanwhile, the trajectory of food inflation is not yet clear.

inflation and economic growth relationship in india

Moreover, the baseline assumption now is that monsoon prospects are good. But what if spatial and temporal distribution turns bad? In addition, one must be wary of the statistical phenomenon called the 'base effect.

India could face high inflation, low growth

The low base will cause an upside to inflation, in addition to risks emanating from oil-price shocks and exchange-rate pass through.

Rupee depreciation will play a role The rupee exchange rate is another variable that needs to be considered. Latest data shows the real effective exchange rate of the rupee REER against dollar exchange rate adjusted for inflation is at The implication is rupee overvaluation of at least 1.

When landed costs of imports rise due to rupee depreciation, it brings forth imported inflation, and the quantum depends on the composition of those items in the CPI and wholesale price index WPI basket.