All of us must have heard the word ‘inflation’. Some might say it is bad for the economy, some say that it is a necessary evil. To understand it, we must know that it is a general increase in price of goods and services overtime.
Intuitively, it is the decrease in purchasing power of money. Meaning, what a ₹100 note can buy will decrease in the future. This hurts the lower strata of population (‘aam aadmi’) the most.
Inflation leads to uncertainty in the market. This prevents businesses from making major investment decisions. As investments reduce, unemployment rises because of lower productivity. Due to growing unemployment, incomes come down reducing savings. This whole thing leads to lesser financial stability. (Chen , 2019)
Now, suppose inflation rate increases very quickly. For example, the cost of food you consume increases from ₹500 to ₹700 in a week. Then next week it becomes ₹1000 and ₹1500 the week after. Typically, incomes do not increase at such a pace.
In such a scenario, if your income does not match the pace of inflation, you will not be able to afford basic necessities.
As per the World Bank Database, inflation in India is 4.9% which is higher than 2.1% in China. India has always faced a higher rate of inflation as compared to the World. (The World Bank , 2020) This is apparent in the graph 1 below.
Now, there is no fixed optimal rate of inflation which an economy should desire for. Any high, negative or uncertain value of inflation will take its toll. (Chen , 2019) India has faced such high values of inflation in the past. (See graph 1.)
Further, governments try to manage the level of inflation to the best of their ability through policies. Unfortunately, due to other market forces, the government’s desired results vary from actual results.
In the most recent Economic Survey 2019–20, the Ministry of Finance has adopted an interesting way to educate people about inflation through ‘Thalinomics’. (Ministry of Finance, 2020)
In ‘Thalinomics’, to standardise a thali across India, two types of food plates are considered — Veg and Non-veg plates. These plates are constructed based on guidelines from the National Institute of Nutrition.
In the survey, it is assumed that a person eats 2 thalis a day and a family has 5 adults. So, a family eats 10 thalis a day.
The following graph 2. explains the rise in price of Veg and Non-veg thali across India:
Source: Survey calculations, The Economic Survey 2019–20. (Ministry of Finance, 2020)
Note: The blue dashed line represents the linear trend till 2015–16 and thereafter projection. Red dotted vertical line represents 2015–16.
*: April-October, 2019
In a hypothetical scenario, where no government policies are undertaken, a counterfactual estimate (that did not happen)is shown to capture the effect of uncontrolled inflation on thali prices.
In the graph above, the red-dotted vertical line represents the implementation of government schemes (see Table 1. below) that were introduced in the year 2015–16.
The price of a ‘Thali’ had been steadily increasing over time until 2015–16. Afterwards a drop in thali prices can be seen in the graph 2 above.
It is clear that the effect of government schemes has been significant. Otherwise, the counterfactual estimate would have been realized.
To see which government scheme made this possible [click here]