Consider the following statements Assertion A High inflation deters private investment both domestic...........

Economic Affairs Inflation

Consider the following statements

Assertion (A): High inflation deters private investment, both domestic and foreign.

Reason (R): Inflation reduces effective returns on investments and financial planning becomes uncertain. In the context of the above, which of these is correct?

A is correct, and R is an appropriate explanation of A.

A is correct, but R is not an appropriate explanation of A

A is correct, but R is incorrect.

Both A and R are incorrect.

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Explanation:

The reason is clear enough.

If an investor has invested 100 crores and expects to get a return of 20% with over 120 crores as revenue; he will receive less return if inflation is over 10% due to which effective return reduces to nearly 10%. The same 120 crore of revenue will now mean only 108 crores (10% deduction due to inflation) and thus means a loss for the company. Erratic inflation rates makes these cost-benefit calculations even more difficult and thus companies hesitate to invest.