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)

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Swatantra

“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.

Comments

26 responses to “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)”

June 24, 2021

Anupam Singh

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1. June 29, 2021
  
  Swatantra
  
  Anupam
  
  Introduction is fine. You have mentioned how inflation effects borrowers, that is good too.
  
  Points in implication are factually fine but generic. Mention the effects on government as that is a core demand of the question- Nominal GDP will rise due to surge in inflation and since it is used as a base for computing the fiscal ratios, these will get deflated. Value of past debt and debt servicing costs will become less and as the gap between growth and interest rates rises, the debt/GDP ratio falls.
  
  For private sector too, mention what is happening in the current context- Currently, producers seem to be bearing a part of the burden of rising input costs for now but these could get passed on in greater measure to consumers once demand recovers.
  
  Point about decreasing private consumption is good. Also, you can mention-
  Incomes are under stress, so impact on consumption may get worse.
  Private consumption in rural areas is hit more than in urban areas since non-food inflation is higher this time than food inflation. Also govt support to rural area/farmer is less this time.
  
  Conclusion is good.
  
  Read some other answers. Keep writing, structure of your answer is good, just improve your content a bit.
June 24, 2021

subhashree mallick

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1. June 30, 2021
  
  Swatantra
  
  Subhashree
  
  Introduction is fine. Inflation actually benefits the borrowers as the value of the money or the interest they pay back is less than what it would have been expected at the time of borrowing.
  
  This principle applies to government also. Debt and debt servicing cost becomes less. You have mentioned the implication on government, that is good. Try to write in your own words, it will help build upon your concept.
  
  Point about private consumption being hurt in rural areas more is due to non-food inflation being higher this time than food inflation, be careful in writing, if food inflation is higher, urban areas might get hit harder.
  
  For private sector mention that-currently, producers seem to be bearing a part of the burden of rising input costs for now but these could get passed on in greater measure to consumers once demand recovers.
  
  Conclusion is fine. Go through the article once more and clear all your concepts. In such questions, if concepts aren’t clear, it can become totally awkward in exam. Keep writing. 🙂
June 24, 2021

Utkarsha Yadav

Please review
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1. June 30, 2021
  
  Swatantra
  
  Utkarsha
  
  Introduction is fine, implications on government is also fine, you can mention about interest rate remaining same, and growth in nominal gdp due to surge in inflation- debt/gdp ratio falls.
  
  Points about other stake holders are fine. This happens in most of the cases. You can also mention some points for the current context when non-food inflation is higher than food inflation and what effect does it have.
  
  Incomes are under stress, so impact on consumption may get worse.
  
  Private consumption in rural areas is hit more than in urban areas since non-food inflation is higher. Also govt support to rural area/farmer is less this time.
  
  Conclusion is good. Read some other answers. Keep writing.
June 24, 2021

ankita thakur

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1. June 30, 2021
  
  Swatantra
  
  Ankita
  
  Keep the introduction simple, the question is not asking about trends in WPI & CPI in so much detail. Define inflation and more than 6% CPI inflation is a worrying sign.
  
  In the implications on government part too, you have mentioned so much data, these data will keep on changing, just mention the concept neatly and move on.
  
  Nominal GDP will rise due to surge in inflation and since it is used as a base for computing the fiscal ratios, these will get deflated. Value of past debt and debt servicing costs will become less and as the gap between growth and interest rates rises, the debt/GDP ratio falls- this should be enough.
  
  For private sector you can mention that-currently, producers seem to be bearing a part of the burden of rising input costs for now but these could get passed on in greater measure to consumers once demand recovers.
  
  Rest of the points are fine, conclusion is okay too.
  
  Read some other answers. Keep writing. 🙂
  
  4.5/10
June 25, 2021

AABHA RANI

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1. June 30, 2021
  
  Swatantra
  
  Aabha
  
  Your introduction is good. Points about implication on government are also fine, also mention that since interest rates remain same and nominal GDP increases due to rising inflation, debt/GDP ratio decreases.
  
  You have to mention about effect on other stakeholders -private citizens, corporates, farmers etc.
  
  For private sector – Currently, producers seem to be bearing a part of the burden of rising input costs for now but these could get passed on in greater measure to consumers once demand recovers.
  Private consumption is decreasing. Also, Incomes are under stress, so impact on consumption may get worse.
  Private consumption in rural areas is hit more than in urban areas since non-food inflation is higher this time than food inflation. Also govt support to rural area/farmer is less this time.
  
  Conclusion is good.
  
  Read some other answers. Keep writing, take the help of the article you need to work a bit on the content. 🙂
  
  3.5/10
June 25, 2021

SUMITA DOWERAH

Payment Id: pay HFrdyJMOEZ9967. Please review, Sir.

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1. June 30, 2021
  
  Swatantra
  
  Sumita
  
  Good attempt, introduction is fine, you can make it more concise.
  
  Rest of the answer is fine, structure is good and your understanding is also fine.
  
  In other stake holders, mention about impact on private sector, investors, exporters, importers also -currently, producers seem to be bearing a part of the burden of rising input costs for now but these could get passed on in greater measure to consumers once demand recovers.
  Higher imports, reduced exports reduce returns on fixed income investments etc
  
  Conclusion is good.
  
  Read some other answers. Keep writing🙂
June 26, 2021

Rajesh Reddy

order id #0000422220 please review it sir

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1. June 30, 2021
  
  Swatantra
  
  Rajesh
  
  Good attempt. Introduction is fine, implications that you have written are also fine.
  
  Exports won’t rise as value of raw materials, labour etc increases with inflation, also imports will be cheaper and increase as price of imports won’t rise, question is about domestic inflation.
  
  Also you can write some points keeping in mind the current nature of inflation. Private consumption in rural areas is hit more than in urban areas since non-food inflation is higher this time than food inflation. Also govt support to rural area/farmer is less this time.
  
  Conclusion is fine.
  
  Read some other answers. Keep writing. 🙂
June 26, 2021

Sushmita

Please review sir
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1. June 30, 2021
  
  Swatantra
  
  Sushmita
  
  Introduction is fine, in implications for government, mention that Nominal GDP will rise due to surge in inflation and since it is used as a base for computing the fiscal ratios, these will get deflated.
  
  In points about consumers, bring more clarity, you have mentioned food inflation> non-food, that is not the case.
  
  Rest of the points are good, you can also mention impact on investors, lenders, export-import etc
  
  Way forward and conclusion is good.
  
  Read some other answers. Keep writing. 🙂
June 27, 2021

Kartikey Singh

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1. June 30, 2021
  
  Swatantra
  
  Kartikey
  
  Good attempt, you can mention the current context too in introduction. In implications on government, mention about rise in nominal GDP, interest remaining unchanged, there will be fall in debt/GDP ratio.
  
  Rest of the points are fine, you should also mention the different effects on rural and urban population in the current context-Private consumption is decreasing. Also, Incomes are under stress, so impact on consumption may get worse.
  Private consumption in rural areas is hit more than in urban areas since non-food inflation is higher this time than food inflation. Also govt support to rural area/farmer is less this time.
  
  Currently, producers seem to be bearing a part of the burden of rising input costs for now but these could get passed on in greater measure to consumers once demand recovers.
  
  Conclusion is fine.
  
  Read some other answers. Keep writing. 🙂
June 28, 2021

Dr. House

REF ID: #0000425733
Please review @Swatantra Sir

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1. June 30, 2021
  
  Swatantra
  
  Dr House
  
  You can start with defining inflation. Implications on government should be explained in a bit more detail. Nominal GDP will rise due to surge in inflation and since it is used as a base for computing the fiscal ratios, these will get deflated. Value of past debt and debt servicing costs will become less and as the gap between growth and interest rates rises, the debt/GDP ratio falls.
  
  Rest of the points are good. In way forward, you have mentioned further accomodative monetary policy, not sure that will work since it means further lowering interest rates, which will lead to more money in the hands of people, increasing demand which might further increase inflation. You can frame the statement better. RBI stance is already accomodative, you can mention the need to be careful.
  
  Rest of the points and conclusion are fine.
  
  Read some other answers. Keep writing.
June 29, 2021

Deepali Rajan

kindly review @swatantra sir
ref id #420326

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June 29, 2021

Deepali Rajan

kindly review @swatantra sir

ref id #420326

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1. June 30, 2021
  
  Swatantra
  
  Deepali
  
  You can start with defining inflation. Implications on government are well written, elaborate a bit on private consumption- Private consumption is decreasing. Also, Incomes are under stress, so impact on consumption may get worse.
  Private consumption in rural areas is hit more than in urban areas since non-food inflation is higher this time than food inflation. Also govt support ( MGNREGA support is budgeted at a lower level, and price trends are not supportive) to rural area/farmer is less this time.
  Currently, producers seem to be bearing a part of the burden of rising input costs for now but these could get passed on in greater measure to consumers once demand recovers.
  
  Points mentioned are good. Way forward and conclusion is also fine. You have mentioned a point about RBI and supply-side, actually supply side interventions can mostly be impacted by the government, RBI can intervene through monetary policy. Frame that point better.
  
  Read some other answers. Keep writing.
June 29, 2021

shivanshu pandey

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1. June 30, 2021
  
  Swatantra
  
  Shivanshu
  
  Decent attempt but very generic answer. You can start with defining inflation. Implications on government should be explained in a bit more detail. Nominal GDP will rise due to surge in inflation and since it is used as a base for computing the fiscal ratios, these will get deflated. Value of past debt and debt servicing costs will become less and as the gap between growth and interest rates rises, the debt/GDP ratio falls.
  
  Rest of the points are fine, in the last point you have mentioned imports, better mention input prices, also this jump in production prices might be shifted to consumers when demand becomes normal. Also, domestic inflation might lead to rise in imports because imports will become cheaper.
  
  You can write a short way forward. Conclusion is fine.
  
  Read some other answers. Keep writing.
June 30, 2021

Sana Nawazish

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Please review
@swatantra sir

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