For many years, inflation and hyperinflation have been the primary problems of developing countries. Slowing down the inflation processes is one of the main tasks of governmental policies. Due to this fact, an analysis of the reasons why inflation happens can influence the conditions and quality of life of every person. The paper investigates the negative influence of inflation and hyperinflation on the developing countries in general and on India in particular.
In the majority of countries, the level of inflation is one of the most important macroeconomic indexes that have a direct influence on the credit and exchange rates. An uncontrolled growth of prices can change many social aspects, such as the income of the population, everyday expenses, the quality of life, etc. The ability of the country to control the inflation processes is one of the features of the efficiency of economic policies.
The modern term inflation was first a medical term. The first meaning refers to the increase of currency circulation that did not take consequences into consideration. Later, inflation obtained the meaning of overfilling the channels of circulation with the money supply that is higher than the needs of turnover. This factor causes a decrease of the value of money and, thus, the growth in pricing.
In the second half of the XX century, science developed a multifactor approach to inflation. Thus, inflation was considered to be not only a monetary but also an economic phenomenon because the dynamic of the monetary parameters is also determined by the processes of social reproduction and the economic policies that are performed. The forms of inflation include excessive levels of money supply in comparison to the turnover needs together with the reduction of the value of money. It means that inflation cannot be considered to be a violation of the laws of money circulation.
Regardless of the reasons that were the primary impulses, an increase of prices causes the needs for an increase in the money supply and the expansion of monetary circulation. In the economic structure of the society, no law can be isolated from the other laws. On the contrary, there exists a mutual connection between all of them. The separation of laws can occur only in theoretical analysis. Thus, a separate law can give only an abstract understanding of inflation.
The phenomenon that exists in the real life conditions is a result of the mutual influence of multiple laws and factors. Thus, the dynamics of inflation and hyperinflation are influenced both by monetary and non-monetary factors. The monetary factors include the tempo of growth of the monetary supply, the level of money demand, and the speed of growth of the real sector of the economy.
At the same time, the phenomenon of inflation is influenced not only by the economic factors. In the history of humanity, there exist many examples of inflation being caused by drastic social changes and political conflicts that led to the lack of stability in the entire economic system. The modern inflation is not an abnormality. Very often, it is the result of the solution of the problems that exist in the production and development.
Inflation may also be classified according to the speed of price growth and the scale of the reduction of the value of the national currency. According to this criterion, three types of inflation may be differentiated here: the creeping inflation, in case of which the annual increase in prices is from 5 to 10%; the galloping inflation with the annual increase in prices from 10 to 100%; and the hyperinflation with more than 100% annual increase in prices. The relative stability of economy may be achieved only with the creeping form of inflation that provides a moderate correction of the demand and supply both on the monetary and commodity market. As a result, the national currency is able to conduct all the necessary functions. Thus, this type of inflation does not cause instability in the society unless there is a risk of turning this type of inflation into a more severe form.
Under the conditions of galloping inflation, money is no longer able to perform the function of accumulation. The population of the country may use the other means of accumulation, such as buy the currencies of the other countries, gold, jewelry, works of art, objects of immobility, etc. Under the influence of hyperinflation and super hyperinflation, the national currency is unable to carry out the functions of value and monetary exchange. The period of high inflation causes a significant reduction of growth of the population income and, as a rule, is characterized by strengthening of social and political stress and instability. The lack of balance in the monetary system may cause violations in the work of the entire economic system. There appears a so-called stagflation crisis when a reduction in production is combined with rapid pricing growth.
In the developing countries, galloping inflation and hyperinflation are common. At the same time, the factors, forms, and social and economic consequences of inflation, combined with the approaches to the production and implementation of anti-inflation strategies in particular countries, are caused by the peculiarities of the ways of the country’s development. According to the economic conditions and the factors of inflation, the developing countries may be classified into five groups.
The first group includes the developing countries of Latin America, such as Argentina and Brazil. In these countries, there is a lack of economic balance combined with the deficit of budget. In their internal policy, an indexation of all funds occurs, while in the external economic sphere, there is a systematic reduction of the rate of national currency.
Such countries as Columbia, Ecuador, Venezuela, Iran, Egypt, and Chile belong to the second group. The lack of economic balance also exists as well as deficit financing and credit expansion in the financial policy. Inflation in these countries takes the galloping form; there is also partial indexation.
India, Indonesia, Pakistan, Nigeria, and Thailand are all countries of the third group. They are characterized by a limited economic balance and significant income of foreign currency from export. The inflation is kept in the limits of 5 to 20%. There is also a partial indexation of income implemented. At the same time, a high level of unemployment is common.
Such countries as Singapore, Malaysia, South Korea, the UAE, and Bahrein belong to the fourth group. These states have high levels of economic balance. The inflation is kept in the creeping form at 1 to 5%; a strict control over pricing increases is implemented. The economy is functioning in the conditions of a developed market. The unemployment is kept on a moderate level.
The fifth group includes the former socialistic countries, such as China and Poland. The situation in these countries, including inflation, is caused by the transformation from an administrative system to the market economy. The outer visual balance of the economy could often hide suppressed inflation and, with time, these processes will have to become open.
Nowadays, India tries to control inflation that is the highest in the region. The growth of prices inhibits economic progress, and the country is weakened due to the reduction of the value of the national currency. The problem of inflation is particularly high for the lower classes of the society that, per the World Bank, live for less than two dollars a day. The inflation processes in India reduce the value of toil of the poor classes of the population and increases economic problems.
In February 2016, the rate of inflation was 5.46%. As expected by the government, this rate will be decreased to 5% and will be kept at the same level till March 2017. This rate does not exceed the norms of creeping inflation; however, to achieve this aim, it is necessary to support the production sphere. In February, the volume of industrial production in the country has increased by 2% in the annual expression. At the same time, it was expected that the increase would be only 0,8% as in January the production was shortened by 1,5% and this shortage had been taking place since November.
One of the methods taken by India to counter inflation and corruption is the exchange reform that took place recently. The government suggested changing old banknotes into new ones. As expected, it should help overcome the problem of tax evasion. According to the prognoses, the reform should help legalize up to 4,6 billion rupees. These should help to reduce the budget deficit and the inflation rate.
At the same time, the reform has caused dissatisfaction of the local population as banks are unable to satisfy the exchange needs. Moreover, the old currency is no longer in use, and payments may be made only in hospitals and crematoriums until November 24. At the same time, the cash machines are not adapted to the size of the new banknotes, and those that are already calibrated are unable to satisfy the needs of the population.
In conclusion, inflation and hyperinflation are among the primary problems in the modern society as they have a negative influence on the development of the economy. It can be defined as an increase of currency circulation that is higher than the needs of turnover and causes the reduction of the currency value. This phenomenon is influenced not only by monetary factors but also by the drastic changes in the social and political life of the country that may cause instability of the economy. According to the level of inflation, the developing countries are separated into five groups. India belongs to the third group together with Indonesia, Pakistan, Nigeria, and Thailand. In the country, there is relative economic balance; however, the national currency is unable to carry out the function of accumulation due to the inflation levels. Additionally, due to the problem of inflation, high levels of unemployment became an issue, and the poor classes of the population are forced to live on less than two dollars per day.