With regard to the factors contributing to the rise in the general price-level, one may mention that on the demand side the following factors have operated: rapid growth of population, increase in incomes, rising non-development expenditure of the government and increase in money supply.
On the supply side the factors which have influenced price level are the following: inadequacy of agricultural output, inadequacy of industrial output and high-priced imports.
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1. Rapid Growth of Population:
According to 2001 Census, the population which was 36.1 crores in 1951 has more than doubled to 102.7 crores in 2001. The growth rate at 1.93 per cent, coupled with rising incomes of some sections of population has caused large increases in the demand of goods and services.
2. Increase in Incomes:
Increase in the incomes of a sizeable part of the population added to the demand for goods. The process, unaccompanied by a corresponding increase in consumer goods raised the price level.
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3. Deficit Spending for Development:
Deficit spending increases the money supply in the hands of people and if not accompanied by increase in the supply of consumer goods, it results in raising the price levels.
4. Increase in Money Supply:
An increase which exceeds the genuine expanding needs of the community leads to higher monetization of the needs such as transactions. This is another way of saying that prices are at higher levels. In the nineties, a rapid accumulation of foreign exchange assets had also caused the expansion of money supply.
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5. Inadequate Agricultural Output:
The inadequacy of agricultural output to match the rising demand has been an important factor causing the price level to rise from the supply side. With demand for these goods generally inelastic, even marginal change in output has caused disproportionate increase in prices.
6. Inadequate Industrial Production:
Industrial production, though not unsatisfactory on the whole, has not been adequate particularly in respect of certain essential industrial products like basic consumer goods and important industrial and agricultural inputs.
The decline in the growth rate began in the mid-sixties and persisted till the mid-seventies. The recovery thereafter has, no doubt, pushed up the industrial growth rate, but the demand has been continuously raising causing prices to rise.
7. High-priced Imports:
An important factor, which has contributed substantially in rapidly raising the price level, is the high prices we had to pay for such vital imports such as petroleum, oil and lubricants, fertilisers and chemical products and food grains.
These have raised the cost of many products and since these imports are used in many vital sectors of the economy like transport, agriculture, etc., these have exerted a significant influence on the general price level.