The that has prevailed for many years and continues to do so is harmful for a poor country like India. Among the many consequences, we mention the major ones under the following heads:
Investment and Saving:
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Investment gels seriously undermined for the following reasons. First, the investment decisions which being of a long-term character and therefore requiring stable prices, can no longer be made on a sound and sure basis. Second, this follows from the first consequence, funds in the private sector get diverted to short-gestation projects which seem to provide quicker returns on investment.
Third, the money value of investment project goes up, necessitating a need for larger money resources to keep the physical contents of the project intact. Fourth, saving too is seriously affected. Thus, the sinews of growth, namely, investment and saving get weakened.
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Inter-sectoral Perms of Trade:
A comparatively larger rise in agricultural goods compared to non-agricultural goods in the first phase of price-rise tilted inter-sectoral terms of trade in favour of the agricultural sector.
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On the face of it, it looks as if this is good, in the sense that it is in part a correction of (he past neglect of agriculture, and is also beneficial to agriculturists because it has raised their incomes. But when we go deep into it, we find that it has not been of much help.
External Payment Positions:
The rise in prices has also adversely affected India’s payments position in several ways. Firstly, with the domestic rate of inflationary rise continuing, our export often got priced out in the world market, resulting in serious shortfalls in foreign exchange earnings. Secondly, the import goods became cheaper as compared to their domestic substitutes.
This results in the increase in demand for import goods. Thirdly, in this situation of rising prices, depreciating exchange and foreign exchange shortages give rise to many malpractices in external transactions.
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Consumption:
The continuing rise in prices affects adversely the consumption of the weaker sections of the population. It happens because the poor are not compensated for the rise in prices. The result is a reduction in the real consumption.
Inequalities:
Rising prices lead to increase in the inequalities of incomes. The incomes of the producers and traders increase. It is so because with every rise in prices, they are able to fetch larger money. As against this, the people with fixed incomes i.e., wage-earners and salaried employees lose. The consequences of large rise in prices are thus very harmful.