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Rising Concerns of Inflation in India Essay Sample

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Rising Concerns of Inflation in India Essay Sample

India is one of the most populated countries in the world where the birth rate has been steadily increasing over the past few decades. With an abundance of manpower, it can be said that there is no lack of workforce in India although the problem may rest on the need for companies that will create jobs to fill in the vacuum of employers. This will accommodate more working opportunities for more workers in India since the unemployment rate in the country has been high in the past few years. The very presence of unemployment compounds the problem of inflation since few families with the barely sufficient income are able to afford the rising costs of basic commodities. Since inflation is a considerable force in the market and in the economy of nations, the rising concerns of inflation in India, a democracy that has always been challenged by market prices, pose serious threats to the welfare of the population especially those living below the poverty line.

The present condition of the education sector in India has been greatly affected by the inflation rates as these rates decrease the chance for students to finance their education until they are able to graduate. Consequently, the current state of education in India has also created lower expectations among the workforce in two ways: one is that a large number of the workers in India were unable to graduate with a college degree, thus creating a decline in the number of workers with specialized and technical skills; and two is that most of those who were able to graduate with college degrees in India seek employment outside of the country. The government of India has also failed to substantially increase its spending on the education sector in the past years so as to secure the education of the students who can contribute to the wealth of human resources in the country, thereby increasing the number of graduates with higher education who can fill the void of market leaders who will steer the economy to a vigorous state (Tilak, 1992, p. 341).

Moreover, external or international factors also influence the Indian economy, especially the inflation rates in the market, such as the rising prices of oil in the global market. Since oil is imported and is priced in dollars per barrel, the decline in the power of the dollar due to the weakening United States market has also significantly contributed to the rising costs of oil. This also prompts for an increase in the prices of commodities in the Indian market primarily because oil is also a basic necessity in the production of a wide range of local goods.

In sum, the population in India is perhaps the most significant contributor to the inflation rates as more and more demands are created each year for several goods and commodities while the supply levels are yet to be refined so that the demands are met. If the conditions for supplies are met in accordance to the level of demands, it can be said that India may be able to lessen the impact of inflation although there are still many other factors which should be addressed.

India’s Agriculture and Outsourcing Sectors

Almost two decades ago, Prabhat Patnaik (1975) noted that “any serious explanation of the current inflation” should attend “essentially on the inflation in agricultural prices (p. 22).” India is one of the vastly agricultural countries in the world and is also one of the many third-world countries struggling to make use of its vast human resource in order to strike down the current trends in inflation. Thus, if Patnaik’s observations in 1975 are still applicable in today’s standards, it can be said that since much of India’s population still relies on the agricultural sector.

Yet it can hardly be said that agriculture alone has been the only modern power of India since there are now outsourcing companies which greatly contribute to the country’s economy. With this concern, India needs in these modern times are not only give a great amount of concern on its agricultural capabilities but also significant efforts to further use its advantage on its manpower sector specifically in the outsourcing industry. While much of the countryside of India heavily relies on agriculture, the more urban regions of the country rely on business trends other than agriculture. Outsourcing is just one of the different trends in the urban market in India’s congested cities.

As Baum, Barkoulas and Caglayan (1999) observes, efforts to curb the inflation rates can be done by focusing on what the nation specializes in, such as an agricultural country fully making use of its agricultural resources in order to drive prices of goods down (p. 901). The questions then are: since India is mainly an agricultural country that has now gained a reputation in the outsourcing industry, will the country be able to address the rising concerns of inflation by hugely relying on these two key elements? How can India cope by using the two factors? Apparently, the answer to these questions is not a strict yes or no as the current economic situation of India, like many other nations, is far more complex than one can begin to think of.

One hindrance to the solution of making much use of the agricultural sector of India in addressing the rising inflation rates is that India is already under the pressures of inflation. The resources involved in investing in agriculture are already facing the harms of inflation. Given these things in mind, it is not enough to simply channel economic resources in the agricultural sector. Rather, the current inflation rates would demand for more of these resources, thereby making the task of funding the agricultural sector a task that needs more financing as compared to what Prabhat Patnaik observed in 1975. Today, the basic utilities that are to be used in the agricultural sector are more costly than two decades ago, which includes but is not limited to the prices of grains and fuel.

On the other hand, one hindrance to the solution of focusing much of the resources of India in the outsourcing industry is the fact that the value of the dollar has been weakening in more recent times. Since most, if not all, of the outsourcing transactions are paid in U.S. Dollars, it is expected that there will be a decline in the quantities of clients and the demand for outsourced goods primarily because of the corresponding increase in the dollar prices of these goods. Although, to a certain extent, one benefit to the present weakening of the dollar is that the Rupee and Dollar exchange rates would increase in favor of the Rupee, it can hardly be said that this will encourage more capital spending on the part of the investors who are also the clients in the outsourcing industry.

Crosby and Otto (2000) suggest that one effect of the higher rate of inflation is that it reduces “the return to holding real money balances” and it “leads individuals to substitute out of money and into the alternative asset, physical capital (p. 237).” It is a known fact that both the agricultural and outsourcing industries of India and any other nation for that matter depend on physical capital. As Rajkumar Ray (2008) reports, the current inflation rate in India “accelerated to 11.63 percent in late June” in 2008 which is “expected to exceed 12 percent soon.”

These things translate to an increase in the input cost for businesses, including the businesses involved in the agriculture and outsourcing sectors as well as potential businesses seeking to establish companies under these sectors. Thus, even though Crosby and Otto may be correct in saying that the tendency of the investors in the market is to resort to physical capital, it is constrained by the fact that the inflation rates in India are soon to hit from bad to worse. Capital spending on both the agriculture and outsourcing industries is most likely to increase in order to meet the normal output in contrast to earlier months and years.

India’s People and the Effects of Inflation

William Easterly and Stanley Fischer (2001) state that “inflation hurts the poor relatively more than the rich” since “the rich are better able to protect themselves against, or benefit from, the effects of inflation than are the poor (p. 161).” Further, Milton Friedman (1991) asserts that in India, there has been a “negligible rate of increase” in real capita per income growth (p. 852).” And since a vast majority of the population in India lives in the state of poverty or just below the poverty line, the effects of inflation in India in June 2008 are most likely to give more burdens on the part of the poor as food prices and the prices of other basic commodities are on the verge of rising. A large number of these individuals in poverty have also contributed to the quantities of people in India who have a negligible growth in their income.

Michael Sarel (1996) further observes that “when inflation is high, it has a negative effect on economic growth” and that such a negative effect is “robust, statistically significant, and very powerful (p. 213).” Thus, following the observations of Sarel (1996), Easterly and Fischer (2001) and Friedman (1991), the poor segment of the population in India is most likely to encounter more difficulties as the inflation rate in the country continues to sweep to higher levels which, according to Ray (2008) have been “the highest since inflation rates in India began to rise.”

Much of the reasons behind these negative expectations on the part of the poor people in India rest on the fact that high inflation rates result to higher prices in basic commodities not only on the part of capital spending for local and foreign investors in the country. Conversely, recent reports show that the “spiraling food and energy costs” largely contributed to the inflation in India, and that the Indian government has considered “banning exports of non-basmati rice” as well as “scrapping import duties on cooking oils and maize” in order to “control prices” (Food Prices Drive India Inflation, 2008).

Daniel Treisman (2000) also suggests that “inflation is also the result of a commitment problem” as well as the result of a “collective action problem” in the sense that “decentralization will not directly affect inflation but will lock in relative inflation rates” regardless of value “by making it hard to change monetary or fiscal policies and institutions (p. 837).” It has also been observed that there has been “a phenomenal concentration of economic power” in India’s urbanized areas, and that “the productive resources” were “highly concentrated in a few hands” (Chattopadhyay, 1994, p. 9). As a result, the poor has been more marginalized than before, which corresponds to the inability of those in India who are in the poverty lines to adjust to the constant inflation of prices inasmuch as the rise in population, which corresponds to a rise in the demands of goods, also contributed to the swelling of food prices.

Figure 1. Population in India from 2000-2008.

Hence, India’s inflation problem tends to be amplified by the fact that the number of its poor population alongside the massive population continue to drive the demand for the basic goods such as food higher, thereby increasing the prices for these goods. The present trends in the global oil market also share a depreciating effect on the capability of the consumers in India to afford the rising prices of commodities. The education sector is also adversely affected by the inflation rates as school commodities and other finances required to attain a decent higher education continue to thwart efforts of both the government and its people to obtain college diplomas which, in the larger scope, is hoped to alleviate the lack of technical skills in India. With these things in mind, the marginalization of the poor is further increased as fewer and fewer people in India are able to obtain good education while more and more commodities are driven to high prices. As a result, inflation greatly afflicts the marginalized sectors while at the same time these sectors also contribute to the many factors that drive inflation rates higher than before.

As far as the wealthy individuals and investing groups are concerned, the inflation rates have also resulted to adjustments in the pricing of the goods that the investing companies produce and adjustments in the lifestyles of the wealthy. Although it has been argued before that the rich are less threatened by the inflation in India (Easterly & Fischer, 2001), and that while there are studies which show that “poverty in rural India has declined substantially in recent decades (Fan, Hazell & Thorat, 2000, p. 1038),” the poor and the rich alike are affected by the rising cost of commodities from basic goods for the poor to luxury items for the wealthy. In the face of higher inflation rates in the months to follow in India, the prospect is that the country will be struggling more in terms of providing adequate affordable food to its constituents as well as ensuring that the business environment will not force investors to abandon their efforts to further spend more capital.

As far as the urban constituencies of India are concerned, a study reveals that one reason why there was a decline in rural poverty in India is the fact that more and more people living in rural areas living in conditions of poverty have flocked to the urban areas (Weiner & Field, 1996, p. 190). In the context of the concentrated resources and centralized economic power in the urban areas of India (Chattopadhyay, 1994), the scale of the effect of inflation in these urban regions becomes more sharp than the rural regions precisely because the cost of living in urban areas are higher than that of the cost of living in distant and rural areas. The cost of transportation in key cities in India and the cost of goods that use oil for distribution and production are greatly affected by the ever-increasing prices of fuel in the global market, thereby risking the welfare of people living in poverty in these urban areas.

Unemployment and Illiteracy in India

The CIA World Factbook reveals that as of May 16, 2008, the current unemployment rate in India is pegged at around 7 percent. Also, there has been a gradual decrease in unemployment in India in previous years, dropping by almost 2 percent from 2004 with an unemployment rate of 10 percent to 2007 with an unemployment rate of 8 percent (Central Intelligence Agency, 2008, p. 293). The recent decline in the unemployment rate in India can be attributed to the fact that more and more businesses which require physical or human capital have been established. This includes outsourcing companies such as call centers and other outsourced goods, primarily information.

As Crosby and Otto (2000) have suggested, one effect of the inflation is that companies tend to shift to physical capital rather than financial capital since financial funding for human resources are not immediately affected by trends in inflation. As a result, more and more individuals were given employment in India, adding up to the total number of workforce which simply require the basic skill of reading, writing and verbally communicating as well as a basic grasp of technological tools especially in the outsourcing business sector.

However, Ila Patel (2000) suggests that, in India, “huge numbers of people have remained unschooled and without access to organized forms of learning,” and that the “absolute number of illiterates has increased from 300 million in 1951 to 332.29 million in 1991 (p. 75). The reason behind this is the fact that India’s population has been constantly increasing over the years, and that while the absolute number of illiterates has increased the percentage of these illiterate population to the overall population is lower in 1991 than in 1951 (Patel, 2000, p. 76).

Since the increase in the absolute number of illiterates stems from the fact that India’s population has greatly increased over the past five decades, the education sector in India is faced with the monumental task, as it has been some five decades ago, to address the huge illiteracy rate in the country. It is a widely accepted fact that the literacy level of individuals greatly affects their chances of landing a job. Conversely, an illiterate person may hardly become employed, especially in the outsourcing industry where India is said to be gaining prominence.

One problem facing the government of India in more recent times is the fact that there is a regional imbalance—that is, some parts of India are more developed than the rest (Datt & Sundharam, 1987, p. 472). This regional imbalance influences the ways in which investors are attracted to invest in India. For example, some of the more developed parts of India have a higher literacy and skill rate in its workforce than, say, those regions that lack access to basic education. In effect, these developed regions become more suitable in the preference of investors, thus further increasing the number of investments in these already developed regions. In the end, the regional imbalances are more and more tilting in favor of these already developed regions and that the underdeveloped areas in India continue to suffer from lack of investments and the sufficient number of skilled and literate workforce.

Since most learning institutions that offer the training needed for most modern jobs in the country can be found in these developed regions, the tendency of the people is to flock towards these areas. As a result, as it has been observed (Fan, Hazell & Thorat, 2000), the poverty level in rural areas has been decreasing and that the poverty level in the urban areas is increasing.  Moreover, as more and more people from rural areas transfer to the urban areas of India, the tendency is to have an increase in the number of people looking for employment. While the supply of the workforce is said to be in abundance, it is not always the case that all of the job seekers will be accommodated due to two important factors: 1) the level of supply of employment opportunities is further characterized by specific qualifications such as literacy level and skill acquisition, and 2) the ratio between the number of job applicants and available employment slots is expected to further increase, with the number of job applicants outpacing the employment slots available.

But assuming that more and more investors will pave the way for more job opportunities for the increasing number of residents in these urban areas, the first factor will certainly create a “ceiling” for the number of possible applicants in certain positions. For instance, in the outsourcing industry of computer software such as Infosys in Bangalore, there will always be the technical qualifications which will regulate the number of possible job applicants which can fill the vacant positions. Thus, even if people from rural areas lacking in technical computer skills flock to urban areas, there is no assurance that they will secure jobs for their own. Unemployment remains a problem even in these developed urban areas in India, especially to those who are illiterate and lack the technical skills.

The continuing oil price hikes in the world oil market further worsens the inflation in the local Indian market. Although India has its own oil reserves which supply 25 percent of its overall oil needs, much of the oil demands of India’s manufacturing and transportation sectors are largely dependent on the foreign oil imported. Thus, the recent oil-price shocks have resulted to devastating effects on the prices of every basic commodity as well as transportation and manufacturing costs. Since “meeting the escalating demand for food and other agricultural products by the ever-increasing population” is one major problem facing India (Dayal, 1994, p. 98), and since oil is a primary commodity in the production of food in India, the oil price hikes have resulted to an increase in the prices of food in India. More generally, the CIA World Factbook reveals that India’s oil consumption in terms of barrels per day has steadily increased in the late twenty-first century, thus translating to the ever-increasing expenditure on oil use where the return of investments are met through corresponding increases in the prices of the goods produced.

Figure 2. India’s oil consumption in barrels per day from 2003-2008

More importantly, the combination of the increasing population in India with the increasing oil consumption and oil prices translates to more inflation, as suggested by a recent report (Ray, 2008). With an increase of 5.5% in the oil consumption rates of India within the next two decades (Future of Oil, 2008) and with a recent report from Goldman Sachs Group Inc indicating that the price of oil in the world market is expected to rise further up to US$200 per barrel (Subrahmaniyan, 2008), it is also expected that the prices of food and other basic commodities in India as well as transportation and manufacturing expenses will significantly rise.

The Inflation rates in India rising up to 12% at the end of the year is highly probable, which means that the business sectors from agriculture to outsourcing will have to expect harsher times ahead. Moreover, the people living in and under the poverty lines will also have to deal with more increases in the daily cost of living. The solution to India’s worsening inflation problem is nevertheless met by an increasing number of investments especially in the outsourcing industry. Even though there is a huge number of illiteracy and unemployment rates in the country, India is still able to compete in the global outsourcing market precisely because India has a considerable number of manpower to attract potential investors.

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1. Figure 1 shows the population in India from 2000-2008 as of June 15, 2008.
2. Figure 2 shows India’s oil consumption in barrels per day from 2003-2008 as of June 15, 2008.

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