Inflation – it is a word that has become commonplace in the population’s everyday vocabulary. And rightly so!
Inflation impacts every aspect of a common man’s life, and even businesses feel the impact of inflation. While some businesses thrive under inflation, it can affect others severely.
Before looking into the impact of inflation on various businesses, it might be useful to understand inflation and its causes.
What Is Inflation?
Inflation is the increase in the cost of various goods and services in the country over a duration. You may have heard your parents talk about how many products they could buy using just INR 10 when they were young. Today, the same amount of money can only purchase a fraction of what it could in their time.
Various factors can lead to inflation:
Impact Of Inflation On Various Businesses
Not all the causes of inflation are grave – some of them are positive indicators for the economy. Here is a look at how it impacts various businesses.
Agriculture And Agriculture-Related Businesses
When inflation is caused by economic growth, it improves the living conditions of the farmers. However, more often than not, inflation is caused by other factors, such as an increase in fuel prices. Fuel price rise directly impacts the farming activities as many of the machines need fuel to function.
It increases the overall selling price of the crop. However, there is never a low demand for food. Therefore, the high input costs are matched by an equal increase in the price of the end products.
Service Industries
While service industries do not manufacture any products, their business is usually dependent on procuring many other materials. As the price of these materials and transportation costs increase, the amount of the services will also increase.
If inflation is caused by economic growth, then it indicates that more customers are willing to pay for services. Here, inflation increases the customer base of the service industry, which leads to an increase in revenue.
Inflation can also increase the competition in the service industry as more and more companies enter the profitable sector.
Transportation Industry
Transportation forms the backbone of many other industries and businesses. Companies rely on transportation providers for the supply of raw materials and the delivery of finished products. Transportation is also often cited as the cause of inflation.
An increase in fuel prices directly increases the operating costs of transport providers. These businesses pass on these expenses to their customers, which increases the prices of goods and services.
However, when the need for goods, inflation ends up benefitting the transportation industry with a rise in business.
Import And Export
Inflation can increase the operating costs of import and export businesses. At the same time, it can come as a blessing. When the price of goods within the country increases or the supply is unable to keep up with the demand, people rely on exports from other countries to fill the gap.
How inflation impacts the import and export business is a subjective question that varies from company to company.
Real Estate
The real estate sector is another beneficiary of inflation. Inflation drives people to look for investments that are more stable and have a higher value than money. Real estate prices almost always increase with inflation: when the purchasing power of money decreases, the real estate world becomes more active.
Heavy Industries
These companies manufacture heavy machinery and rely on raw materials, fuel, and electricity. Inflation is either caused by or leads to an increase in all of these. Therefore, it ends up impacting this sector the worst.
It would be very beneficial for such input-heavy businesses to have keen knowledge about gst and its input tax credit system. The input tax credit can reduce the amount of tax as well as the domino effect of paying taxes on already taxed items.
Luxury Products
Inflation is an indicator of the purchasing power of the population. When people have more money at hand after paying for their necessities, they are bound to either invest it or spend it on luxuries. Hence, inflation ends up increasing the revenue of luxury products manufacturers.
The gold business is perhaps the only industry that always benefits from inflation. For people willing to splurge on luxuries, gold is often the go-to luxury item. Additionally, gold is considered a safe investment, especially when the value of cash is decreasing.
Conclusion
While GST itself doesn’t impact inflation in any way, not paying your taxes on time or claiming the wrong input tax credit can only make it worse. Perform a gst number check of all your suppliers and only get your raw materials from registered suppliers. This is the best way to ensure that you aren’t the cause of inflation.
