International Journal of Management, IT & Engineering

Vol. 8 Issue 3, March 2018,

ISSN: 2249-0558 Impact Factor: 7.119
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Impact of GDP and Inflation on

Unemployment Rate:
"A Study of Indian Economy in 2011-2018”

Dr Rubee Singh*

Abstract
This study has examined the impact of inflation on GDP and unemployment rate in India. It is a
longitudinal study for the period in 2011-2018. The data has been taken from secondary sources.
The study concludes that inflation insignificantly influences GDP and unemployment and the
correlation is negative. The correlation between unemployment and inflation is positive i.e. 0.477
and is insignificant at 10% level of significance. The correlation between GDP and
unemployment rate has also been found insignificant with a value of 0.196. It is, therefore,
concluded that inflation has a role which influential but for GDP and unemployment with
insignificant levels in the macroeconomics factors of Indian economy.

Key Words: GDP, Unemployment, Poverty, Inflation

*
Assistant Professor in HR, Department of Business Management (MBA), H.R Institute of
Technology (Ghaziabad) U.P, India

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Introduction
For successive governments in Indian poverty stands as a single main challenge like other
developing and underdeveloped countries. Presently, governmental and certain non-
governmental organization have estimated more than quarter of indian population living under
poverty line. According to Human Development Index (HDI) report, April 2017, India have
medium human development with 0.624 category, alongside countries such as Congo, Namibia
and Pakistan respectively and it is ranked third among the SAARC countries behind Shri Lanka
(73), Maldives (105) and India 131 ranked among the 188 countries. Where as Norway become
first ranked with 0.949. India HDI value increased from 0.428 in 1990 to 0.624 in 2016. This
report also shows an uneven distribution of wealth in India where top 10% of the population
earning 27.6% and bottom 10% earning only 4.1% of the income. There are many factors
responsible for poverty in India; such as heavy pressure of population, unemployment and
employment, capital deficiency, lack of skilled labour, rural economy, net national income,
increase in price, under-developed economy. Although in this study relation

between inflation, unemployment and poverty has been studied. Inflation and unemployment
both vary from economy to economy. (Slesnic (1993). Some economies have found high
inflations related to higher unemployment. Some economies have found high inflation
moderately related to unemployment and others high inflation with low unemployment. Blank,
R.M. (1993). Similarly some countries are in the situation where the economy is in moderate to
low inflation and moderate to lower

unemployment and others are moderate to low inflation but moderate to high unemployment.
Therefore inflation exists in different economies differently.

Therefore inflation in economy exists everywhere and it would be a proper research objective for
investigation. The impact of inflation on unemployment would also be critically investigated in
the current study. As research student of higher studies the identification of these two variables
will provide something insights into the economic problems with a critical look on the issues of
inflation and unemployment and their relationship. The research study would be contributive to
lay down the main reasons for the stated phenomena and critically draw some imperative
statements for the improvement of the current status.

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Objectives of the Study

- To examine the role of inflation in the economy of India
- To examine the role of GDP in the economy of India
- To examine the role of unemployment in the economy of India
- To examine the influencing role of inflation in relationship to GDP
- To examine the influencing role of inflation in relationship to unemployment

Literature Review
Changes in the unemployment rate are important to explain variation in the conventional
earnings or income as the rate of unemployment determines the basis of consumptions. There
can be differences over the fixed ratio of unemployment but it is widely believed that the
problem of unemployment in india has increased during the decade of 1990s after that its has
decreseaes. According to UN ILO report (2017), In percentage terms unemployement rate will
remain at 3.4% in the year of 2017-2018 like as unemployment rate 3.8% in the year of 2011-
2012. Similar outcome have been observed on approach based about central needs and
unemployment and opportunity trends. Social indicators such as literacy rate, infant mortality
rate, population growth rate, access to water, nutritional items etc., all verify the above results
that Unemployment weak social and human development are not only at a high level in the
country but also have deteriorated over the last decade of the century. The findings also claim
that there is little effect of inflation on the income and the relationship between

inflation and the unemployment while the relationship with consumption was found positive.
The conclusive statement about this phenomenon relationship is found was that inflation and
unemployment are positively associated to each other.

Inflation
Inflation affects economics in various positive and negative ways. The negative effects of
inflation includes an increase in the opportunity cost of holding money, uncertainty over future
inflation which may discourage investment and saving. Positive effects include reducing the real
burden of public and private debt, keeping nominal interest rates above zero so that central banks
can adjust interest rates to stabilize the economy and reducing unemployment due to nominal

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wage rigidity. Inflation are caused by an excessive growth of money supply. Research studies
documented significant facts about the phenomenal relationships between inflation and
unemployment. The quantitative results about these variables were found that inflations and
unemployment are positively associated to each other (Mocan,1995) & 2011 to 2018.

Unemployment
Metin (1991) finds that unemployment is an influential phenomenon found in the economies that
is negatively influenced by inflation. The research study proved important facts with the help of
multivariate co integration analysis. The scale budget deficit is also seen to significantly affect
the inflation. Inflation also influences unemployment in the economic spheres. The economic
prospect regarding unemployment can be measured as the product of the unemployment risk in
the population and the amount to which people are protected from the income unemployment
risk. We have taken alternative for the unemployment risk changes in the employment rate.

Inflation and Gross Domestic Product

Zafar and Mustafa (1998) prove a statistically positive relationship between macro factors for the
economic growth of the Indian economy. They find that budget deficit negatively affects the
GDP of the economy and at the same time it influences positively the inflation of the economy.
The research study examines the private and public investments raises control on the inflations
and employment opportunities that aid values as a control mechanism for unemployment.
Therefore it is found that economic prosperity rises with proper guidelines, supporting strategies,
and effective initiatives for the development and control of inflation and for the control of
unemployment (Kemal, 1989). Zenneth (2007) investigates the economy of Nigeria. He finds
that unemployment alleviation influences economic factors such inflation, deficit economy,
unemployment low GDP growth rate. The same study examines role of fiscal policy in
alleviating

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unemployment.

Figure 1. Conceptual Framework

INFLATION

a. Inflation = f b. Inflation = α + β1 (GDP Rate) + β2

(GDP rate, Unemployment Rate) (Unemployment Rate)

Unemployment Rate

GDP Rate

Whereas
α: representing the coefficient intercept term as constant,
β: representing the slop intercept as vibrant due the multiplicative value of inflation in time series
i.e representing the error term of the study

Inflation

According to Catao and Terrones (2003) inflation is the continuous rise in the price with the
passage of time and declination in the value of money.
services.

Calculating the Current Inflation Rate

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If we compare March 2016’s CPI index which was 238.132 with march 2017 with 243.801. We
can see a 5.669 point increase in the 12 month period.
5.669/238.132 = 0.023806
Which when rounded 2 decimal places equals 2.38% annual inflation.

Annual Inflation Rate Chart:

Unemployment

The situation of economy where the labor class, professional, served and serving workforce face
problems for career prospects which raise the number of employed workforce towards
unemployment due to uncertainty and economic issues (Jamshaid, 2010).
Unemployment rate in India increased to 5.38 percent in the first quarter of Feb 2018 from 1.8
percent in the first quarter of march 2011. This unemployment rate in India is reported by the
india Bureau of Statistics. Historically, from 2011 until 2018, India’s unemployment rate
averaged 4.8 Percent reaching an all-time high rate from 1983 until 2016 and a record low of
3.46 percent in December 2016 from 3.49 percent in 2015. In india, the unemployment rate
measures the number of people actively looking for a job as a percentage of the labor force.
According to Jan 2018 report economic survey of 2017-2018, 20% graduates of Tripura state is
most unemployment comparison than other state of India like as Gujrat (2.9%), Karnataka
(1.19%), and Uttarakhand (1.2%) . About 7.3% the rate of unemployment inflation in India
occurs from 2010 up to 2015.

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India Unemployment Rate Chart

Gross Domestic Product

GDP is the sum of the value of all the products produced in a country during fiscal year. It is
found one of the indicators of the production and growth rate of the economy and play a strategic
role in development, employment and the balance of payment (Volker, 2005).
The Gross Domestic Product (GDP) in India expanded 6.75 percent in the fiscal year 2017-18
from the previous year and it will remain around 7 to 7.5 in the year of 2018-2019 according to
the World Bank report. The GDP growth rate in india is reported by the Indian Bureau of
Statistics.

Historically, from 1952 to 2010, India’s GDP growth rate averaged 5.0 percent reaching an all-
time high rate of 10.2 percent in the fiscal year of 1953-54 and a record low of -1.8 percent in the
fiscal year of 1951-52. India is one of the poorest and least developed countries in Asia. India
has a growing semi-industrialized economy that relies on manufacturing, agriculture and

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remittances. Although since 2005 the GDP has been growing with an average of 5 percent a year,
it is not enough to keep up with fast growing population. To make things even worst, political
instability, widespread corruption and lack of law enforcement hamper private investment and
foreign aid. According to IMF and World Economic Outlook (WEK) report Jan 2018, The
acceleration in India’s growth rate ahead comes after the slowdown last year due to
demonetization and the implementation of GST. India is projected to grow at 7.4 percent in
2018 as against China’s 6.8 percent. World Economic Outlook latest update in Davos
Switzerland on the summit of World Economic forum, the International Monetary Fund has
projected a 7.8 percent growth rate for India in 2019.

GDP Rate Chart

Research Hypothesis

H1: Inflation significantly influences the GDP rate of the Indian economy

H2: Inflation significantly influences the GDP rate of the Indian economy on the unemployment
of Indian economy.

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Research Design

The present study is focused on the experiential relationship between inflation, GDP and
unemployment rates of the Indian economy. For this purpose, the data is taken from the national
statistic website of the India. The period that has been chosen for the present study is from 2011-
2018.

Table 1. Unemployment rate and Inflation rate

Year Unemployment Rate in percentage Inflation rate

2011 3.54 6.49

2012 3.63 10
2013 3.57 9.4
2014 3.53 5.8
2015 3.49 4.9
2016 3.46 4.5
2017 4.76 3.8
2018 5.38 4.88

Analysis
On the basis of the quantitative data processed, analysis of the results from secondary data
provided us important insight information for the sake of realizing the influential impact on
unemployment. Secondary data is collected through books, magazines, newspapers, blogs,
websites, research papers etc. The findings are discussed along with critical explanation for the
stated hypothesis.

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Finally for the significance level, it can also be observed to be highly decreased the required
level that is 4.88 in 2018 and from 10 percent in 2012 therefore, the findings are providing
statistical grounds for the rejection of proposed hypothesis H1: Inflation significantly influences
GDP rate of the indian economy. On the other hand, the regression between inflation and
unemployment is found to show a positive unit change from inflation.

The findings are proving the phenomenon in such way that one unit change in inflation brings
positive 4.88 unit change in unemployment. therefore, the findings are providing statistical
grounds for the rejection of proposed hypothesis H2: Inflation significantly influences GDP rate
of the indian economy on the unemployment of Indian economy.

Conclusion
The conclusive outcome of the research study is that inflation is found as insignificantly
influential for GDP and unemployment with negative correlation. It is, therefore, concluded that
inflation possess a role which is influential but for GDP and unemployment with insignificance
levels in macro-economic factors of the India. Inflation is a serious problem for fixed income
investors. It’s important to understand the different between nominal interest rates and real
interest rates. Unemployment is caused by rapid technological change, business cycle of
recessions, seasonal factors in som industries such as change in tastes, and climate condition
which affects demand for certain products and services, individual perceptions and willingness to
work and search for job.

Recommendations
The research study at quantitative level provided some useful insights, but it also needs to be
familiar for the prerequisite objections. The understanding of this phenomenon is important for
the financial rationalism and impressive results. Therefore as researcher I am going to
recommend some considerable recommendations for the sake of desired quantitative outcomes.
These are as under, establishment of valid economic policy for the control of inflation. The
central elements of this consensus are that the instrument of monetary policy ought to be the
short term interests rate, the policy should be focused on the control of Inflation and the inflation
can be reduced by increasing short term interest rates.

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