Inflation is defined as an increase in the cost of the majority of the services, goods, and

products we use on a daily basis. Clothing, food, computers, washing machines,

beverages, and so on. Because inflation can be a broad term, it includes general price
increases. The WPI (also known as the Wholesale Price Index) and the CPI are the two
primary indices used to assess inflation (also known as the Consumer Price Index). The
CPI is primarily used to determine price differences between goods and services such
as education, food, and healthcare. And the WPI primarily includes services provided by
larger corporations to smaller corporations. 

When a country experiences inflation, the country's authority—most likely the

central bank—takes all necessary steps to keep the inflation rate within acceptable
bounds, allowing the economy to function normally without experiencing significant
price increases.

Factors Influencing Inflation in India 

1. An increase in the money supply 

An increased money supply is defined by the Federal Reserve as the total amount of
money in circulation, which includes cash, coins, balances, and bank accounts. Inflation
may occur if the money supply expands faster than output. This is especially true in the
case of demand-pull inflation, which occurs when a large number of dollars compete for
a small number of goods. The Federal Reserve will typically use a procedure known as
"Open Market Operations" to increase the amount of money in circulation (OMO).

2. Policies and regulations 

 Furthermore, certain policies may result in cost-push inflation or demand-pull
inflation. When the government provides tax breaks for specific goods, demand may
rise. Costs may rise if supply falls short of demand. Furthermore, strict construction
codes and even rent stability laws may unintentionally raise prices and foster inflation
by passing those costs forward to citizens or artificially decreasing the availability of
housing.

3. The Real Estate Industry 

For example, the housing market has experienced ups and downs over time. If there
is a demand for properties as a result of the economy's progress, home prices will rise.
Demand influences the supporting goods and services in the housing industry. As a
result of the increased demand for housing, demand for building materials such as steel
and lumber, as well as nails and rivets, may rise.

4.Reduced Taxes 

While it is common knowledge that taxes rise over time, governments will
occasionally lower taxes in order to gain public support. People are overjoyed because
they now have more money. However, if the rate of output growth does not match, the
extra money on hand eventually causes inflation. 

5. Actual Scarcity 

It is possible that the production factors are in short supply at times. This has an
effect on the output. As a result, supply is less than demand, causing prices to rise and
inflation to occur.

Steps taken by Indian government 

Advisories are issued to state governments as needed to take strict action against
hoarding and black marketing and to effectively enforce the Essential 
 Commodities Act, 1955, and the Prevention of Black-marketing and Maintenance of
Supplies of Essential Commodities Act, 1980 for commodities in short supply. 

Regular price and availability review meetings are held at the highest levels, including
the Committee of Secretaries, the Inter Ministerial Committee, the Price Stabilization
Fund Management Committee, and other Departmental level review meetings. 

Higher MSPs have been announced in order to encourage production and thus increase
availability of food items, which may help to moderate prices. 

A programme called the Price Stabilization Fund (PSF) is being implemented to control
the price volatility of agricultural commodities such as pulses and onions.

The government approved an increase in pulse buffer stock from 1.5 lakh MT to 20 lakh
MT to enable effective market intervention for retail price moderation. As a result, a
dynamic buffer stock of pulses with a capacity of up to 20 lakh tones has been
constructed. 

Pulses from the buffer are distributed to states/UTs for PDS distribution, the Mid-day
Meal Scheme, and other purposes. The Army and Central Paramilitary Forces require
pulses. 

States and territories have been advised to impose stock limits on onions. States were
asked to indicate their onion requirements so that the necessary quantity could be
imported to improve availability and help moderate prices.

Policies 
Policies that Aid in the Prevention of Inflation 
 The Monetary Policy 

The central bank raises interest rates as part of a "tightening of monetary policy" to
reduce consumer and investment spending. 

Higher interest rates may cause the currency to strengthen, lowering the cost of
importing goods and services while decreasing demand for exports (X) 

Fiscal policy 

Controlling aggregate demand is critical if inflation is to be kept under control. If the

government believes AD is too high, it may decide to "tighten fiscal policy" by reducing
its own spending on public goods and welfare payments. 

It may decide to raise direct taxes, reducing real disposable income. 

As a result, demand and output may fall, threatening jobs and the economy 

Direct controls 

A government may decide to impose direct restrictions on certain wages and prices. 

Public sector pay awards - Annual pay increases in the government sector may be
strictly regulated or even frozen (this means a real wage decrease). 

Some utility costs, such as water rates, are subject to regulatory control; if the
regime for price capping changes, the rate of inflation may change immediately.

History of Inflation in India

After gaining independence in 1947, inflation remained low throughout the 1950s,
averaging less than 2%. 

However, there was a lot of variation; inflation was -12.8% (deflation) in 1952-53 due to
higher agricultural output, but it rose to 13.8% in 1956-57 due to demand pressures and
industrialisation

India engaged in two wars, one with China in 1962 and the other with Pakistan in
1965, which led to the government diverting funds from industrialisation or economic
growth to defence.

Inflation rates increased and hovered around 6% on average in the 1960s. 

Moreover, the 1965 and 1966 twin droughts led to significant food shortages and fueled
food inflation. Prices increased at double-digit rates from 1964 to 1967. But by the
decade's close, inflation began to decline and even became negative in 1969, thanks to
the Green Revolution and a bountiful harvest.
 In terms of inflationary uncertainty, the 1970s were possibly the most turbulent. 

In the 1970s, inflation was 7.5% on average. During the first oil crisis of 1973,
international crude oil prices increased by more than 250 percent in 1974. 

In 1973-74, inflation reached 20% for the first time since independence. Because of the
country's reliance on oil imports, domestic fuel prices have risen, with ramifications for
other consumer goods. The drought of 1979-80 increased inflation rates as crude oil
prices fell.

The 1980s: Money printing 

Due to the government's expansionary fiscal policies and monetization, inflation in the
1980s was much greater, averaging 9.2% each year. 

The fiscal deficit of the central government, or the difference between its receipts and
expenditures, increased from 3.8% of GDP in the 1970s to 6.8% of GDP in the 1980s. And
to close this budgetary imbalance, additional money was printed, which increased
inflation and demand pressures. 

Also, as international trade was substantially liberalised in the 1980s, there were
imbalances in the foreign account with growing current account deficits (more imports
than exports).

In 1991, a severe economic crisis occurred as a result of a balance of payment

problem caused by the negative impact of high fiscal and current account deficits in the
1980s. 

In 1991, the crisis year, inflation was 13.9 percent. To address serious economic
problems, the government implemented a slew of financial, external, and industrial
reforms. 

It resulted in large inflows of foreign capital in the early years, resulting in higher-than-
normal monetary expansion in the economy. Inflation remained high for a few years,
averaging 9.5% between 1992 and 1996. Later, it fell sharply (5.4%) over the next decade
(1996-2005), as structural reforms began to bear fruit. Despite the 2002-03 drought,
the adequate release of surplus food grain stocks kept food prices in check.

The 2000s and beyond - Unwavering perseverance 

Inflation began to rise after 2003, when the economy began to grow at 7% or higher
annual rates. After crude oil prices reached an all-time high of $ 147 per barrel in July
2008, the inflation rate reached double digits in 2009 and 2010. 
Surprisingly, the 2008 global financial crisis had no effect on inflation. Inflation
averaged 10.1% per year between 2008 and 2013, owing to rising global oil and metal
prices. The 2009 drought pushed up food prices, while increased demand for protein-
based products like eggs, fish, and milk (due to rising per-capita income levels) caused
structural protein inflation. To get the economy back on track, the government
announced a series of fiscal stimulus packages in 2008 and 2009, which increased the
fiscal deficit and pushed up prices.

However, since 2014, inflation levels have been lower due to the economic slowdown
and the implementation of demonetization and GST measures. 

In 2020, despite the pandemic, inflation rose to 6.6%. CPI inflation was 6.3% in May
2021, owing to sharp increases in food, transportation, and fuel prices.