Updated October 6, 2022
There is no doubt over the fact that low inflation and steady GDP growth will provide a good shape to the Economy. Low inflation contributes towards economic stability which encourages saving, investment, economic growth, and helps maintain international competitiveness.
Steady GDP growth provides better health to the economy. As the growth keeps on occurring steadily, it reduces the poverty, increases the living standard, increases the life expectancy etc.
If we keep the period of the pandemic aside, India was one of the fastest-growing economies in the world. But the current economy is worse than it has been in almost 100 years. The severe downturn was caused by the COVID-19 pandemic and subsequent recession in 2020.
The contraction of 31.4% in the second quarter of 2020 was worse than any year during the Great Depression. Although, the average GDP growth of India has been over 7 per cent in the last five years before the pandemic.
Its performance has been quite stable in the last decade after it has recovered from the impacts of the global recession. Similarly, the India Economy has witnessed a gradual transition from a period of high and variable inflation to a more stable and low level of inflation in the last decade.
Impacts of Steady GDP Growth and Low Inflations India Economy
Let’s analyse the impact of steady GDP in conjunction with low inflation over Indian economy under some critical topics
Increasing Income of the Public and reduced Expenditure
Lower inflation rates are directly for the interests of consumers. Lower inflation means lower food prices and lower prices on essential commodities. People do not have to spend more than the mandatory expenditure. Hence the percentage of income saving will be more. Similarly, the steady GDP Growth is quite healthy for the economy. As growth keeps on occurring steadily, public income gets increased. Over a period of time, this extra income accumulates, leading to more chances for spending
Creation of Assets Under Steady GDP growth and Low Inflation
Low Inflation and steady GDP growth help in the creation of assets. Due to Steady GDP growth, firms are more confident and optimistic to invest, this led to an increase in productive capacity and enable stable rates of economic growth. So, steady growth helps in the steady flow of external investments in the form of FDI and FII, which help in providing the required impetus for economic growth. Similarly, when the inflation rate is low, people are left with more money in their hands after spending on essential commodities. The savings money is used for creating assets in form of real estate, gold or automotives. All these factors together help in economic growth.
Increase of Government Expenditure on Social Well-being
Steady GDP growth means more money arrives in the economy. Hence, it provides for better revenue prospects which will assist the government to spend on public services and welfare scheme such as health care and education, Ujjwala Yojana, Pasal Bima Yojana etc. This can enable higher living standards, such as increased life expectancy, higher rates of literacy and a greater understanding of civic and political issues. Similarly, lowering of inflation will enable the general public to spend their incomes, which will boost demand for goods and services. Even, it will enable the poor to enhance their living standards. This keeps the cycle of the economy running.
The steady GDP growth directly helps in the generation of employment. With higher output and positive economic growth, firms tend to employ more workers creating employment. It helps in promoting labour-intensive industries.
Low inflation and low costs of production enable a country to remain competitive – boosting exports and competitiveness in the long-term. So, low and stable inflation has made Indian exports more competitive in the global markets.
Due to Steady GDP growth, firms are more confident and optimistic to invest, this led to an increase in productive capacity and enable stable rates of economic growth. Similarly, sustained low inflation has also proved self-reinforcing. Individuals have been confident that inflation is under long term control which has instilled positive environment for further investment in the Indian economy.
Promoting Industries Development
Low inflation will allow the RBI to reduce the repo rates which provided capital for industrialists at cheaper rates. The industries gain more profits as they do not have to pay more interest on the loan. This will allow a chance to the industries to grow and develop.
Lower inflation and steady GDP growth reflects positively on per capita income
The steady GDP growth and low inflation help to improve the average income of a person. With more capita income, consumers will consume more goods and services and enjoy better standards of living. Hence, economic growth during the twentieth century was a major factor in reducing absolute levels of poverty and enabling a rise in life expectancy.
Narrow Down Fiscal Deficit
Low inflation allows the government to reduce and maintain the fiscal deficit.
However, persistently low inflation has also proved costly in terms of its negative externalities on the Indian economy. There are many circumstances where keeping inflation low will be unsuitable for the economy.
These Negative effects Are on Record
(a) Keeping low inflation for the long term will stagnant the agriculture prices. Although it provides benefit to the consumers, the farmers are heavily bear the brunt of consist of low prices. The farmers have not been able to get due prices for their crops. This has led to declining agricultural incomes in the country.
(b) Persistent low inflation has been seen as a sign of ceasing employment generation. The rising unemployment has many serious costs such as increased inequality, higher govt borrowing and a rise in social problems. This could affect the image of the Indian economy in the future.
(c) Persistently low inflation has limited the scope for monetary policy.
(d) Low inflation means lower demands, which reduces profits of corporates, thereby rallying down the share market.
Hence, high and steady economic growth is certainly desirable. But low inflation is not always good. Therefore, the govt should perhaps aim for low inflation but have a degree of flexibility if this appears unsuitable to the economy. Policymakers must understand the root cause of inflation and plan the economy accordingly.