Topic– Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.
5) Do you think India needs more accurate inflation measurement. Comment.(250 words)
Why this question
Inflation targeting is a vital task in an economy, especially a developing country like India where inflation is not only highly variable but also has major implications for the vast poor sections of the society. In this context it is important to discuss whether India needs to measure inflation more accurately.
Comment- here we have to express our knowledge and understanding of the issue and form an overall opinion thereupon.
Key demand of the question.
The question wants us to express our knowledge and understanding of the inflation measurement in India and bring out why there is a need to make such measurement more accurately.
Structure of the answer
Introduction- write a few introductory lines about the inflation and its measurement in India. E.g Inflation dynamics are complex and depend to a large extent on expectations of inflation. Central banks the world over, including the Reserve Bank of India (RBI), factor in such inflationary expectations when carrying out inflation assessment for purposes of monetary policy formulation.
Discuss why India needs better and more accurate inflation measurement. E.g
- The source of such forecasts—whether from financial analysts, professional forecasters, general public or from businesses and trade unions actively engaged in wage negotiations—is important in credible monetary policy formulation.
- Inflationary expectations, however, are heterogenous across these different groups.
- While the expectations of financial analysts and professional forecasters lie within the central bank’s target range, those of businesses, trade unions and households lie consistently above the upper end of the target range.
- Less affluent households exhibit less than rational forecasts and overestimate inflation outcomes probably because they often face higher inflation than their more affluent counterparts.
- Similarly, businesses and trade unions tend to be more backward-looking than analysts and form their expectations based on the growth rate of wages, which normally exceeds the average inflation rate
Conclusion– based on your discussion, form a fair and a balanced conclusion on the given issue.