Previous Year Question
Given below are two statements, one is labelled as Assertion (A) and other as Reason (R):
Assertion (A): The government faces a tough time tackling the bottleneck inflation.
Reason (R): The situation is due to deficiencies existing in the economy such as supply bottleneck and inefficient distribution.
Select the correct answer from the codes given below:
Both (A) and (R) are true and (R) is correct explanation of (A).
Both (A) and (R) are true, but (R) is not correct explanation of (A).
(A) is true, but (R) is false.
(A) is false, but (R) is true.
Correct Answer: A
Detailed Solution
Assertion (A) is correct. Bottleneck Inflation occurs when supply in some important sectors of the economy cannot increase sufficiently rapidly while demand remains present. This can create shortages and rising prices.
Reason (R) is also correct. Its major causes include supply bottlenecks and an inefficient distribution system. For example, shortages of raw materials, inadequate transportation, storage constraints, limited production capacity or a weak distribution network may prevent supply from expanding in line with demand.
It can be understood simply as—
Supply Bottleneck → Limited Supply → Shortage relative to Demand → Prices ↑
This is precisely why such inflation can be comparatively difficult for the Government to tackle.
If inflation is primarily caused by excess demand, monetary and fiscal measures can be used to restrain demand. In Bottleneck Inflation, however, the underlying problem lies on the supply side.
Therefore, merely raising interest rates or reducing demand does not eliminate the underlying structural constraint. Supply-side measures, such as improvements in production capacity, transportation, storage, logistics and distribution systems, may also be required.