Inflation reduces the value of capital...

Although the Indian-economy is growing fastest among the major world economies, its current growth rate is lower than its peak performance after the global financial crisis of 2008 when the economy received fiscal and monetary policy stimuli by the policy-makers which kicked-off the growth-rate in the following years. However, the inflation–rate also soared to double-digits which the central banks tamed by tightening money-supply and increasing interest rate and the government also curbed its expenditure in the wake. Nonetheless, the previous UPA government continued the stimulus longer that pushed inflation to intolerable heights when INDIA is still a developing economy with various types of constraints over investment and supply. The last decade of the country’s growth path shows that the economy is responsive to increase in money-supply, either by monetary-policy or fiscal policy, but in a supply-constrained scenario the economy easily starts overheating or inflating.

Inflation is an important determinant of investment and growth. The foreign investors deter investment when they experience and/or expect inflation and depreciation. Then the question arises that “how, then, inflation be good for domestic-investors or investment?” Inflation more than increase in wages or income reduces real wages and demand, and hurts growth. Some economists also argue that inflation reduces the value of debt even when the nominal interest-rates go up and you pay more in money terms. Inflation reduces the value of money thereby reducing demand for other things and increasing demand for money wages that makes the economy uncompetitive. Higher-prices also reduce domestic-demand by increasing nominal-interest-rates and reduce real-interest-rate which also reduces savings which could further be translated into higher interest-rate and low investment, inflation is a signal. The rate of inflation discourages investment, demand and economic growth.

Inflation reduces the value of capital which means less investment.