Cost Inflation Index has become the every country’s matter of concern in these fluctuating economic conditions. So far India is concerned, the country is constantly experiencing rising prices of services and goods.
As it is well known that inflation shoots up when the demand for services and goods in any economy exceeds the supply capacity. If there is any inflation in any economy, it works as the determinant factor for the economy.
In India, economy is a mixed one, as it has both socialism and capitalism, compelling the economy to face different challenges for its growth model. The recent rise in inflation has invited wide range of criticisms for the UPA government, led by Dr. Monmohan Singh, the world renowned economist, scholar and intellectual converted politician.
Cost Inflation Index calculation method
Many economists have questioned the way of calculating India’s method calculating Cost Inflation Index. They criticize the method to be faulty. In India, the calculation process is being used is Wholesale price Index, whereas many developed countries have the Consumer Price Index calculating method. The challenges being faced by these measuring systems are of two types, between them India adopts Wholesale price Index method, which is considered faulty because it is lesser advanced. The reason of adopting this system is due to the structure and the demography of the country.
Global Trade Factors responsible for India’s inflation
One of the most important factors for India’s inflation is the effects of globally traded commodities and the various efforts taken up by the Reserve Bank of India for weakening rupee against US dollar. This is the well accepted cause for inflation, without having much relation with domestic inflationary relations.
Whenever US dollar soars by a margin of 30 percent, Reserve Bank of India pumps in huge amount of dollars in the economy, making it massively liquid and triggering inflation in the non-traded goods. This prime financial institute of the country subsidizes exports with the weaker rate of dollar exchange. These all are the reasons for the critical Cost Inflation Index policies followed by RBI.
Other Factors Adding Fuel to the Fire
There are many other factors that are responsible for determining impact of Cost Inflation Index in the country. This furthers to help in doing a comparative analysis of the same policies. One of the factors among them is growth and employment generation.
Demand factor also has a great role in the inflationary impact of the country. Importing cheap products that are made of capital intensive and high technological techniques also are the responsible factors for this burning issue.