GDP of Indian Economy and Its Impact on Inflation

Abstract

Paper focuses on relationship and collision of inflation and population growth with GDP. This paper investigates the impact of Inflation and Population on GDP of India. The change in GDP is taken as dependent variable while Population and Inflation are considered as independent variables. The data have been taken from secondary sources i.e. financial reports of the RBI and World Bank. The period of the study comprehends twenty years as it provides us a sound analytical position for observing GDP, Population and Inflation at the national level of the Indian economy. The analysis has been carried out with the help of correlation, regression analysis, t-test and ANOVA model using SPSS software.

Introduction

I. INTRODUCTION

Financiers   are   probable   to   hear   the   stipulations,   gross domestic product (GDP) and inflation, just about on a daily basis. They often feel that these facts must have reviewed as a  surgeon  would  study  a  patient's  map  before  surgery. National  income  deals  the  money  worth  of  the  flow  of productivity of goods and services formed within a financial system  over  a period,  where Inflation  can  indicate either  a raise  in  the  currency  supply  or  enhancing  in  price  level. Commonly, when there  is  increase  in  inflation  there  is increase   in   prices   too.   If   the   money  supply  has   been augmented, then there is     enlargement     in     price levels (Zaigham  Abbas  Khan  et.al  2013).  Though  inflation has  always  been  a  major  public  concern  and  always  been subject  to heated  political  debate, it  is an  astonishing truth that  since  1950  India  has  experienced  one  of  the  lowest inflation   rates   in   the   world   in   comparison   to   other developing   countries   and   most   of   these   years   it   had consistently maintained  a  steady  control  over  the  inflation rate    by    limiting    it    to    only   a    single    digit    figure. (DR.S.JAMUNA,  2016)  The  biggest  turmoil  of  inflation came in the year 2008 to 2009 when India experienced both the  highest  ever  rate  of  inflation  in  the  country  and  the lowest rate also within span of just few months.

II. CAUSES OF INFLATON

Inflation refers to a rise in prices that causes the purchasing power  of  a  nation  to  fall.  Inflation is  a  normal  economic development as long as the annual percentage remains low; once the percentage rises over  a pre-determined level, it is considered  an  inflation  crisis.  There are  many  causes  for inflation, depending  on a number of factors (S.Jamuna, 2016).

1. Excess  printing  of  money:  Inflation  can  happen when  governments  print  an  excess  of  money  to deal with a crisis. As a result, prices end up rising at  an  extremely  high  speed  to  keep  up  with  the currency surplus. This is called the demand-pull, in which prices are forced upwards because of a high demand.
2. Rise  in  production  costs:  Another  common  cause of  inflation  is  a  rise  in  production  costs,  which leads   to  an   increase   in   the   price   of  the   final product e.g. if raw materials increase in price,    this   leads    to   the   cost    of   production increasing,   this   in   turn   leads   to   the   company increasing prices to maintain steady profits. Rising labour costs can also lead to inflation. As workers demand wage  increases,  companies  usually  chose to pass on those costs to their customers.
3. International  lending  and  national  debts:  Inflation can  also  be  caused  by  international  lending an national  debts.  As  nations  borrow  money,  they have to deal with interests, which in the end cause prices  to  rise  as  a  way  of  keeping  up  with  their debts.  A  deep  drop  of  the  exchange rate  can  also result in inflation, as governments will have to deal with differences in import/export level.
4. Rise  in  tax  and  duties:  Finally,  inflation  can  be caused  by federal taxes put on  consumer  products such   as   cigarettes   or   fuel.   As   the   taxes   rise, suppliers often pass on the burden to the consumer; the   catch,   however,   is   that   once   prices   have increased, they rarely go back, even if the taxes are later reduced. Wars are often cause for inflation, as governments  must  both  recoup  the  money  spent and  repay  the  funds  borrowed  from  the  central bank.     War     often     affects     everything     from international  trading  to  labour   costs  to  product demand, so in the end it always produces a rise in prices.

A. Effect of Inflation

Most effect of inflation are depressing and can hurt economy alike:

1. Inferior  national  saving  (when  there  is  a  lofty  inflation, saving money would mean surveillance your cash diminish in  value relentlessly, so people lean to pay out the cash on something else).
2. Fixed   income   recipients   will   be   hurt   (as   inflation augments,  their  incomes  do  not  rise,  and  as  a  result,  their income will have not as much of value over time).
3. Causes a rise in tax bracket (people will be taxed a higher proportion  if  their  income  increases  following  an  inflation boost).
4. Currency degradation is (which lowers the significance of a  legal  tender,  and  occasionally  become  a  source  of  new currency to be born).
5. Growing prices of imports (if the currency has desecrated, then   its   purchasing   power    in   the   global   market   is lesser.(Zaigham Abbas Khan et.al 2013).

B. GDP and Inflation

 Money has considered as storage of value. When money grasps its worth, people  feel  secure  saving  it.  Inflation declines the utility of money as storage of value, since every unit  of  money  is  value  less  with  the  passing  of  time  and enhance  of  inflation,  so  people  lean  to  pay  out  money  on something  else  that  can  play  the  role  of  “the  storage  of value”.   In   the   meantime,   the   inflation   has   negative connection with national income and at the same time have negative  impact  on  national  savings  because  of  the  lower purchasing power.

C. Effects of Population

Population   increase   put   forth   supplementary   strain   on natural resource utilization. People have to fed, housed, and dressed; as population raises, the requirement for  food and materials  swells.   The  escalating  utilization   of  land  and resources, at some position  go beyond the carrying facility and  causes  the  natural  resources  ineffective  or  exhausted. This could  effect  in  economic hardship.  Specifically every addition  in  population  has  directed  to  more  troubles  than settlement.   Some   of  the  negative   effects   of   population increase include high population growth rates need immense investment  in  Social  infrastructure.  Due  to  the  scarcity  of investment  finances,  social  infrastructure  like  schooling, wellbeing,  transportation  and  accommodation  is  likely  to diminish.  This results in  congestion  and declining value of services. Every year the world population enlarges by about 80  million.  Towards  the  finish  of  2011,  the  total  attains seven billion, having more than twice since 1965. The Gross Domestic Product (GDP) in India expanded 1.80 per cent in the  third  quarter  of  2016  over  the  previous  quarter.  GDP Growth Rate in India averaged 1.67 per cent from 1996 until

2016,  reaching  an  all-time  high  of  5.80  per  cent  in  the second quarter of 2009 and a record low of -1.80 per cent in the first  quarter  of 2009(Trading  Economics,  2016).  It has estimated to rise to 9.3 billion in 2050. The carrying ability of   the   earth   for   humans   has   determined   by   global inhabitants,   economic   means   to   devour   resources,   the technology available and  the selection  of lifestyle.  Correct population   data   is   an   essential   element   of   social   and economic  strategy.   Governments  cannot   distribute  well- organized  services  and  infrastructure  without  facts  of  the national  demographic sketch  –  the mass of the population, where people exist, how aged they are, and the net effect of birth  rates,  death  rates  and  exodus  (Zaigham  Abbas  Khan et.al 2013).

III. LTERATURE REVIEW

Tobin, (1965) in his paper “Money and Economic Growth” regarded  money as a  substitute for  capital, and  shows  that higher  inflation  enhances  investment  and  causes  a  higher level  of output.  National income deals the money worth  of the  flow  of  productivity  of  goods  and  services  formed within a financial system over a period, where Inflation can indicate either a raise in the currency supply or enhancing in price level.  Commonly,  when  there is increase in  inflation there is increase in prices too.

Denison,    E.F.    ,    (1981)in    his    paper    “International Transactions   in   Measures   of   the   Nation’s   Production” analysed that net exports should be deflated by means of an import  price  index,  sets  up  the  term  “Command  GDP”  to portray real GDI in  the United States. This is the identical measure illustrated in the SNA 1993. Denison’s terminology and methodology are afterward used by the National Income and    Product    Accounts    in    the    United    States    when constructing their Command GDP measure.

Judson, Ruth, Orphanides, &Athanasios , (1996)in their paper  “Inflation, Volatility and Growth”found a significant negative inflation-growth effect for a large panel; but when splines   are   introduced   the   relation   turns   out   to   be insignificant for inflation rates below 10%.

Khan,   A.   H.   &Qasim,   M.   A.,   (1996)in   their   paper “Inflation   in   Pakistan   Revisited”   described   that   food inflation to be determined by money supply, value-added in manufacturing  and  wheat  support  price  in  Pakistan.  Non- food  inflation  is  determined  by  money  supply,  real  GDP, import prices and electricity prices. It is scarcely astonishing that changes in the wheat support price have an effect on the food price index, given that wheat products account for  14 per  cent of the index. Nevertheless, this does not routinely entail  that  headline  inflation  is  exaggerated  by  changes  in the value of one particular item. Certainly, Khan and Qasim discover   that   generally  inflation   is  only  determined  by money supply, import prices, and real GDP.

Sarel, (1996) in his paper “Non linearaffects of inflation on economic   growth”   attempted   an   alternative   empirical investigation   of   the   problem   and   also   concludes   that inflation   affects   growth   only  if   it   breaches   a   specific 'threshold' rate of inflation but not otherwise. He concludes that an inflation threshold of about 8 % for a pooled sample of a large number of countries, including India, serves as a good common benchmark for the sample as a whole. Since the common threshold is an estimate from a pooled sample, it may not be exactly suitable for particular country if taken in  isolation. There is, therefore, a need to have yet another empirical assessment of the problem of finding the level at which inflation actually begins to erode economic growth in given economy.

Bruno   &   M   and   W   Easterly,   (1998)   in   their   paper “Inflation Crisis and Long Run Growth”concluded that there was no evidence of a growth-inflation  tradeoff in a sample which  excluded  discrete  high  inflationary  crisis.  On  the other hand, there was ample evidence to show that growth turned  sharply negative when  inflation  crossed  past  a high threshold rate of 40 % per annum. They also argue that the failure    of    investigators    in    detecting    a    meaningful relationship between  inflation and growth  can be attributed to a stylised rapid recovery of output after inflation  which, on  an  average,  renders  the  overall  statistical  relationship insignificant.

Ghosh,  Atish,  &  Steven  Phillips,  (1998)in  their  paper “Inflation, Disinflation, and Growth”found for IMF member countries,  at  low inflation  rates a  positive inflation-growth correlation, and for higher inflation rate a negative inflation- growth relation. Further the negative relation that they find is  non-linear  whereby  the  marginal  effect  is  stronger  at lower inflation rates than at higher ones.

Fischer,S.,Feldstein,M.,   Lucas,   (2000)   in   their   paper “Inflation   and   Welfare”   found   that   Inflation   and   its inconsistency  necessitate  great  real  costs  to  the  market. Numerous studies demonstrate that a 10% inflation rate can create  losses  of  approximately 3%  of  the  real  GNP  in  the course of saving and investment misallocation or the loss of value of real balances.

Khan,    Mohsin,    &Abdelhak,    (2000) in    their    paper “Threshold  Effects  in  the  Relationship  Between  Inflation and Growth” found a significant negative effect of inflation that starts above a certain “threshold” inflation rate level and continues for all higher rates. The threshold inflation rate is found   to  be   1%   for   industrial   countries   and   11%   for developing countries; below these rates the inflation growth effect is positive.

Hall, R. E. & Jones, C. I, (2007)in their paper “The Value of  Life   and   the   Rise   in   Health   Spending”   stated   that expenditure on wellbeing to enlarge life allow individuals to buy  extra  periods  of  utility.  The  marginal  utility  of  life addition  does  not  decrease.  As  a  consequence,  the  best composition  of total expenditure moves toward health, and the health share rise along with income.

Lokeswar  Reddy,  (2012)in  his paper  “Impact  of  Inflation and  GDP  on  Stock  Market  Returns  in  India”emphasized Inflation is a situation in the economy where, there is more money chasing less of goods and services. In other words, it means  there  is  more  supply/availability  of  money  in  the economy  and  there  are  less  of  goods  and  services  to  buy with   that   increased   money.   Thus   goods   and   services command  a  higher  price  than  actual  as  more  people  are willing to pay a higher value to buy the same goods. In this inflationary situation, there is no real growth in the output of the  economy per  se.  It’s  simply more  money  chasing  few goods and services.

Dr.S.Jamuna, (2016)in his paper “Inflation and its impact on  India”  found  that  Inflation  has  always  been  a  major public concern  and  always  been  subject  to heated  political debate,  it  is an  astonishing  truth  that  since 1950  India  has experienced one of the lowest inflation rates in the world in comparison to other developing countries and most of these years  it  had  consistently  maintained  a  steady  control  over the inflation rate by limiting it to only a single digit figure. The  biggest  turmoil  of  inflation  came  in  the  year  2008  to 2009  when  India  experienced  both  the highest ever  rate of inflation in the country and the lowest rate also within span of just few months.

IV. OBJECTIVES

The purpose and objectives of this research is to:

1. To assess the relationship among inflation, population growth and GDP during year 1996-2016.
2. To test  the impact  of inflation  and  population  growth on GDP in Indian Economy.

V.  MODEL OF THE RESEARCH PAPER

Regression Equation is as follows;

a)  GDP = α + β*P                                          (i)

b)  GDP = α + β*I                                          (ii)

Where:

‘P’: Population

‘I’: Inflation Rate

‘α’:   representing   the   coefficient   intercept   term   as constant

‘β’: representing the slope intercept as vibrant due the multiplier value of Population and Inflation in Time.

A. Research Hypothesis

H0A: Population has no significant impact on GDP in Indian Economy.

H1A: Population has a significant impact on GDP in Indian Economy.

H0B:  Inflation has no significant impact on GDP level  in Indian Economy.

H1B:  Inflation has  a  significant  impact  on  GDP  level  in Indian Economy.

B. Research Methdology And Data

For the present  study  descriptive  research  cum  analytical design  is used. The study describes the impact  of inflation and population growth on GDP in the Indian Economy. The period  that  has  been  chosen  for  the  present  study  is  from 1996-1997  to  2015-2016.  For  the research  study,  data  has been  gathered  from  the  financial  reports  of  the  RBI  and World Bank. The period of study comprehends twenty years, as   it   will   provide   us   a   sound   analytical   position   for observing the relationship between GDP, Population growth and Inflation in the Indian economy. The analysis has been carried out with the help of correlation, regression analysis, T-test and ANOVA model using SPSS software

Table 1. Gross Domestic Product Population Growth and Inflation Rate

Source: (World Bank Group, 2016) (Reserve Bank of India, 2016).

A constant growth  rate    was    observed    in    Inflation, Population  growth  and  GDP  during the year  1996-1997 to 2015-2016. It showed that inflation rates were consistently growing  at  3  to  4  per  cent  during  1996-97  to  1999-2000 andin  2000-01,  it  decreased  from  306 to 305  during  1999-2000  to  2000-01.  GDP  increased  at  a  rate  of  10  to15  per cent  during  1996-97  to  2000-01  while  population  growth was increased at a rate of around 2 per cent. During 2014 to 2016,  GDP  rate  fall  down  below  10  per  cent.  Population growth rate was constant around 1.27 per cent. Inflation rate is also increased at a decreasing rate

VI.  ANALYSIS AND INTERPRETATION

After analyzing the available data, the following interpretation has been made    

Table 2.Descriptive statistics

Standard deviation is widely used for measuring dispersion or  variability.  The  mean  of  GDP  is  54413.31and  standard deviation   is   38981.17and   the   mean   of   Population   is 1115.10and the standard deviation is 104.66. This indicates that   deviation   in   GDP   is   greater   than   Population.   In addition, the  mean  of  Inflation  is  453.00and  the  standard deviation is 187.87 (Table 2). Therefore, it is concluded that Inflation is unstable and unpredictable

Table 3.Correlation Between GDP,Population And Inflation

(Significant at 5 percent level of significance)

It is observed that the correlation between  Gross Domestic Product   and   Populations   positive   (i.e.   0.951)   and   is significant at the 5% level  of significance.  The correlation between GDP  and  Inflation  is  positive  (i.e.0.998)  and also considerable. It can be inferred that Population and inflation have positive and significant correlation.

Table 4.Summarized result of the research model

*Significant at 5 Percent level of significance

The  result  of  various  statistical  techniques  shows  in  the above table which were applied on the data of our proposed model  (GDP and  Population,  Inflation).  It  is observed  that the  value  of  R-Square  is  0.903  for  the  first  model  and 0.996 for  the  second  model,  which  shows  that  Population explains 90% and on the other  side Inflation  explains only 99%  on  GDP.  Table  4  also  shows  the  value  of  beta  is positive in both the cases and is larger in case of Population which means that a unit change in  Population  brings about greater positive change in GDP but the impact of Inflation is less.  Most  importantly  the  table  shows  that  the  p-value  is less  in  both  the  cases  of  Population  and  Inflation  which states  that  Population  and  Inflation  both  has  significant impact on the GDP.

On  the  basis  of  the  analysis  made  above  the,  following findings have been made

1. The null hypothesis  H0A is rejected  because  the value of p<.05, which implies that Population has significant  positive  relationship  with  the  GDP  in the  Indian  Economy.  It  means  Population  is  an important  stimulus  for  the  economic  growth  of India.
2. The null hypothesis H0B  is rejected because the value  of  p<.05,  which  implies  that  Inflation  has significant  positive  relationship  with  the  GDP  in the Indian Economy

VII. FINDINGS OF STUDY

The conclusive outcome of  the  research  study  is  that  the Population is found as significantly influential for GDP. It is observed  that  the  value  of  R-Square  is  0.903  for  the  first model  and  0.966  for  the  second  model,  which  shows  that Population  explains  90%  and  on  the  other  side  Inflation explains only 99% on GDP. It means that if there is a good trend of  Population  and  inflation  then  it  will  ultimately results in increasing the GDP and growth of the country. It is, therefore, concluded that Population and inflation possess a significant influential role in the Indian Economy.  The finding of current research study is in conformance with the study done by  Dr.S.Jamuna,  (2016)  which  examined  that there was the biggest turmoil of inflation  came in  the year2008 to 2009 when India experienced both the highest ever rate  of  inflation  in  the  country  and  the  lowest  rate  also within  span  of just  few months.  Therefore,  it  is concluded that Inflation is unstable and unpredictable.

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Copyright

Copyright © 2022 Santosh J. Lagad, Kailash D. Rodge, Madhuri R. Gulave. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.