Q.3) The government, as one of the biggest borrowers, stands to benefit from rising inflation as high inflation will lower the national debt load in relation to the size of the economy. In light of this, explain the implications of rising inflation for the government as a borrower and other stakeholders. (10 Marks)

“Mentor’s Comments”

  • https://indianexpress.com/article/opinion/columns/its-time-for-rbi-to-turn-its-attention-to-inflation-7372814/
  • In the intro, mention the worrying level of CPI inflation above RBI’s upper limit of 6%.
  • In the body, describe how inflation benefits the government as a borrower as nominal GDP is used to calculate various fiscal ratios, also the value of past debt and debt servicing costs gets pared in real terms as inflation rises. Also, as the gap between growth and interest rates rises, the debt/GDP ratio falls. Inflation hits the purchasing power and hits private consumption. Inflation trends, specifically input prices (reflected better by WPI), matter for corporate performance as well.
  • Conclude by mentioning that the RBI will have to closely monitor inflation trends and calibrate its policy response as the current spell of inflation is over a high base.

 

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