7.12          ndian    onom
     making consumption expenditure fall. Exact              benefits borrowers. This benefit, however, depends
     opposite happens once prices head downward.             upon the contemporary levels of fiscal deficit and
          On the other hand inflations makes                 the total national debt.
     ‘investment’ expenditure increase as a result                In the case of a government incurring high
     of decreased cost of money/finance (inflation           fiscal deficit (increased borrowing, printing
     brings benefit to borrower—known as ‘inflation          currency), inflation functions as a tax, i.e.,
     premium’). In times of price fall just opposite         inflation tax via which the government fulfils its
     happens.                                                expenditure by cutting down the expenditure and
                                                             consumption of the people.
     8. On Tax
     On tax structure of the economy, inflation creates      9. On Exchange Rate
     two distortions:                                        With every inflation the currency of the economy
           (i) Tax-payers suffer while paying their direct   depreciates (loses its exchange value in front of a
                and indirect taxes. As indirect taxes are    foreign currency) provided it follows the flexible
                imposed ad valorem (on value), increased     currency regime. Though it is a comparative
                prices of goods make tax-payers to pay       matter, there might be inflationary pressure on
                increased indirect taxes (like cenvat, vat,  the foreign currency against which the exchange
                etc., in India).                             rate is compared.
                   Similarly, due to inflation, direct tax
                (income tax, interest tax, etc.) burden of   10. On Export
                the tax-payers also increases as tax-payer’s With inflation, exportable items of an economy
                gross income moves to the upward slabs       gain competitive prices in the world market. Due
                of official tax brackets (but the real       to this, the volume of export increases (keep in
                value of money does not increase due to      mind that the value of export decreases here) and
                inflation; in fact, it falls). This problem  thus export income increases in the economy. It
                is also known as bracket creep—i.e.,         means export segment of the economy benefits
                inflation-induced tax increases.39 Some      due to inflation. Importing partners of the
                economies (as in the US and many             economy exert pressure for a stable exchange rate
                European countries) have indexed their       as their imports start increasing and exports start
                tax provisions to neutralise this distortion decreasing (see the next point).
                on the direct tax payers.
         (ii) The extent to which tax collections of         11. On Import
                the government are concerned, inflation
                                                             Inflation gives an economy the advantage of lower
                increases the nominal value of the gross
                                                             imports and import-substitution as foreign goods
                tax revenue, while real value of the tax
                                                             become costlier. But in the case of compulsory
                collection does not compare with the
                                                             imports (i.e., oil, technology, drugs, etc.) the
                current pace of inflation as there is a
                                                             economy does not get this benefit and loses more
                lag (delay) in the tax collection in all
                                                             foreign currency instead of saving it.
                economies.
          But governments get an advantage on their          12. On Trade Balance
     interest burden, on their borrowings as inflation
                                                             In the case of a developed economy, inflation
       39.    Samuelson and Nordhaus, Economics, p. 674.     makes trade balance favourable, while for the