Scarcity and Inflation in India

Scarcity is a fundamental issue that affects every economy, including India. This brings up two essential questions:

💢How can we increase the availability of resources to meet people’s needs?

💢How do we prioritize which needs to satisfy first?

What is Inflation?

Inflation is the rise in the overall price level of goods and services in an economy over time, leading to a decline in purchasing power. In India, inflation can arise from demand-supply mismatches, production constraints, or changes in the money supply.

Scarcity and Inflation

Reducing scarcity by increasing the supply of goods and services helps control inflation by better meeting demand, which stabilizes or reduces prices.

Role of the M3 Money Supply (Broad Money) in Inflation

The M3 component of money supply (or "broad money") in India includes currency, demand deposits, and time deposits. When M3 grows, it increases the amount of money available in the economy, potentially boosting purchasing power. While this may stimulate growth, an excessive rise in M3 can lead to higher inflation if the increase in money supply outpaces the production of goods and services. In such cases, too much money chasing too few goods results in rising prices, contributing to inflationary pressures.

Should the NDA Government Cut Down on M3 or Allow It to Rise to Tackle Inflation?

To tackle inflation, the government and the Reserve Bank of India (RBI) may limit the growth of M3 by using monetary policy tools such as increasing the Repo Rate or tightening lending practices. By raising interest rates, the RBI can make borrowing more expensive, which reduces the money supply and dampens demand. This approach slows down M3 growth, thereby helping to contain inflation.

On the other hand, during times of economic slowdown, the government may allow M3 to rise to stimulate economic activity. However, it carefully monitors this increase to avoid excessive inflation.

Role of Government Intervention and Monetary Policy in Prioritizing Needs

While monetary policy manages demand, government intervention is crucial to address supply-side scarcity. By implementing policies to increase production, reduce bottlenecks, and discourage hoarding, the government can ensure a steady supply of goods.

Through a coordinated approach—balancing supply growth, managing the money supply, and setting priorities—India can tackle scarcity and inflation, supporting sustainable economic growth. Photo: Telegraph Online