4.

Rajes
h
Kum
PROJECT ar

REPORT
ON
MANAGEMENT
OF INFLATION
AND GROWTH IN
AN INDIAN CO
NT
ECONOMY EN
TS
Submitted to:
PA
Submitted by:
RTI
Ms.Nisha
Mary CUL
Thomas ARS
1.Aakriti
Upadhya
y

Rawat

3. Neha Dubey
 Conclusion excee
PAGE NUMBER 11
ds
the
amou
Suggestions nt of
good
Inflation 12-13 s and
3-5 servi
References ces
 How inflation is 14 avail
measured? able.
As to
whet
 Causes of inflation her
the
 Effect of inflation
fall in
the
value
Current Scenario of
6-7 mone
9. INFLATION y will
 Causes of affect
inflation in year Everywhere there are the
2010 headlines….Inflation functi
….Mehengai….and
 RBI’s Role even songs are made
ons of
mone
on these factors. Now y
Broad historical context let us look what is depe
7-8 inflation:- nds
Inflation can be defined on
Long term Prospective as a rise in the general the
8-11 price level and degre
therefore a fall in the e of
 Growth- value of money. the
inflation Inflation occurs when fall.
the amount of buying Basic
balance ally,
power is higher than
 Secret to refers
the output of goods and
accelerating services. Inflation also to an
growth incre
occurs when the
ase in
amount of money
the supply of currency or credit relative but steady increase in the PPI,
to the availability of goods and services, price of goods and but
resulting in higher prices. services. inves
Therefore, inflation can be measured in tors
terms of percentages. The percentage The second measure of watc
increase in the price index, as a rate per inflation is the h
cent per unit of time, which is usually in Producer Price Index, both
years. The two basic price indexes are or the PPI. While the closel
used when measuring inflation, the CPI indicates the y.
producer price index (PPI) and the change in the
consumer price index (CPI) which is also purchasing power of a 3.
known as the cost of living index number. consumer, the PPI CAU
measures the change in SES
2. HOW INFLATION IS the purchasing power
MEASURED? OF
of the producers of
INFL
those goods. The PPI
Inflation is normally given as a percentage measures how much ATI
and generally in years or in some instances producers of products ON
quarterly and is derived from the Inflat
are getting on the
Consumer Price Index (CPI). ion
However, there are two main indices used wholesale level, i.e. the
price at which a good is come
to measure inflation. The first is the s in
Consumer Price Index, or the CPI. The CPI sold to other businesses
before the good is sold differ
is a measure of the price of a set group of
goods and services. The “bundle,” as the to a consumer. The PPI ent
group is known, contains items such as actually combines a forms
food, clothing, gasoline, and even series of smaller indices and
computers. The amount of inflation is that cross many those
measured by the change in the cost of the industries and measure at
bundle: if it costs 5% more to purchase the the prices for three are
bundle than it did one year before, there famil
types of goods: crude,
has been a 5% annual rate of inflation over iar
intermediate and
that period based on the CPI. You will also with
often hear about the “Core Rate” or the finished. Generally, the
markets are most the
“Core CPI.” There are certain items in the
concerned with the econ
bundle used to measure the CPI that are
finished goods because omic
extremely volatile, such as gasoline prices.
By eliminating the items that can these are a strong matt
significantly affect the cost of the bundle indicator of what will ers
(in either direction) on a month-to-month happen with future CPI woul
basis, the Core rate is thought to be a reports. The CPI is a d
better indicator of real inflation, the slow, more popular measure obser
of inflation than the ve
that there are trends in the way that generally caused by an MON
prices are moving gradual and increase in wages or an ETA
irregular in relation to aggregate increase in the profit RY
sections of the economy. This suggest margins of the INFL
that there is more than one factor that entrepreneurs. ATIO
causes inflation and as different When wages are
N
sections of the economy develop it gives increased, this causes
Mone
rise to different types inflationary the business owner to
tary
periods. The main causes of inflation in turn increase the
inflat
are: price of final goods and
ion
services which would
occur
Demand-pull Inflation be passed onto the
s
Cost push Inflation consumers and the
when
Monetary inflation same consumers are
there
Structural inflation also the employees. As
is an
Imported inflation a result of the increase
exces
in prices for final goods
sive
DEMAND-PULL INFLATION and services the
suppl
Demand-pull inflation occurs when the employees realise that
y of
consumers, businesses or the their income is
mone
governments’ demand for goods and insufficient to meet
y. It
services exceed the supply; therefore their standard of living
is
the cost of the item rises, unless supply because the basic cost
unde
is perfectly elastic. The increase in of living has increased.
rstoo
demand is created from in increase in The trade unions then
d
other areas, such as the supply of act as the mediator for
that
money, the increase of wages which the employees and
the
would then give rise in disposable negotiate better wages
gover
income. As a result of the aggregate and conditions of
nmen
spending there would also be an employment. If the
t
increase in demand for exports and negotiations are
incre
possible hoarding and profiteering successful and the
ases
from producers. The excessive demand, employees are given
the
the prices of final goods and services the requested wage
mone
would be forced to increase and this increase this would
y
increase gives rise to inflation. further affect the prices
suppl
of goods and services
y
COST-PUSH INFLATION and invariably affected. faste
Cost-push inflation is caused by an r
increase in production costs. It is than
the quantity of goods increases, which the major factor, which may
results in inflation. Interestingly as the leads to inflation in the disco
supply of goods increase the money developing economies. urag
supply has to increase or else prices e
actually go down. IMPORTED inves
When a dollar is worth less because the INFLATION tmen
supply of dollars has increased, all Another type of t and
businesses are forced to raise prices just inflation is imported savin
to get the same value for their inflation. This occurs g,
products.  when the inflation of and
goods and services high
STRUCTURAL INFLATION from foreign countries inflat
Planned inflation that is caused by a that are experiencing ion
government’s monetary policy is called inflation are imported may
structural inflation. This type of and the increase in lead
inflation is not caused by the excess of prices for that to
demand or supply but is built into an imported good or short
economy due to the government’s service will directly ages
monetary policy. affect the cost of living. of
In India where the majority of the Another way imported goods
population live in the rural areas and inflation can add to our if
depend on agriculture and the inflation rate is when cons
government implements a new overseas firms increase umer
industry, some people get employment their prices and we pay s
outside the agricultural sector and more for our goods begin
settle down in urban areas. Because increasing our own hoard
there might be an unequal distribution inflation. ing
of land ownership and tenancy, out
technological backwardness and low of
4. EFFECT OF
rates of investments in agriculture conce
INFLATION rn
inclusive of inadequate growth of the Inflation can have
domestic supply of food which that
positive and negative price
corresponds with an increase in effects on an economy.
demand arising from increasing s will
Negative effects of incre
urbanization and population prices inflation include loss in
increase. ase
stability in the real in the
Food being the key wage-good, an value of money and
increase in its price tends to raise other futur
other monetary items e.
prices as well. Therefore, some over time; uncertainty
economists consider food prices to be Positi
about future inflation ve
effects include a mitigation of economic more abundant and its conse
recessions, and debt relief by reducing value is not lowered quenc
the real level of debt. yet). e of
Most effects of inflation are negative, runa
and can hurt individuals and companies Lowers national saving way
alike, below are a list of negative and (when there is a high inflat
“positive” effects of inflation: inflation, saving money ion,
would mean watching howe
Hoarding (people will try to get rid of your cash decrease in ver
cash before it is devalued, by hoarding value day after day, so we
defin
food and other commodities creating people tend to spend
e it, is
shortages of the hoarded objects). the cash on something
that
Distortion of relative prices (usually the else).
drasti
prices of goods go higher, especially the c
prices of commodities). CURRENT actio
SCENARIO n by
Increased risk – Higher uncertainties the
(uncertainties in business always exist, The long-term growth centr
but with inflation risks are very high, prospects of the Indian al
because of the instability of prices). economy provide an bank
enormously attractive and
Income diffusion effect (which is investment environment also
basically an operation of income for a range of businesses by
redistribution). and, consequently, for the
the people who would gover
Existing creditors will be hurt (because finance them. However, nmen
the value of the money they will receive as attractive as the t is
from their borrowers later will be lower opportunity may seem, neede
than the money they gave before). the assessment would d to
not be complete without rein
Fixed income recipients will be hurt a full understanding of it in,
(because while inflation increases, their the risks. We will focus whic
income doesn’t increase, and therefore on the risk of h is
macroeconomic boun
their income will have less value over
instability, with d to
time).
particular emphasis disru
on the issue of pt the
Increased consumption ratio at the grow
inflation: what drives
early stages of inflation (people will be th
it and whether it
consuming more because money is threatens to get out of proce
control. An unavoidable ss.
The challenge, therefore, is to keep 4.
inflation in check over long periods of Economists attribute Hoar
time, allowing the economy to grow at its inflation to a demand- ding
potential rate with minimal disruptions pull theory. According to and
and deviations. This is the best way in this, if there is a huge black
which the macroeconomic environment demand for products in mark
can contribute to a positive business all sectors, it results in a eting
climate. shortage of goods. Thus pract
prices of commodities ices
We will begin by discussing the current shoot up. of
inflationary scenario in India, which, as Another reason for publi
we have been saying in our recent inflation is the cost-push c.
assessments, is not very reassuring. We theory. It says that labor 5.
will then place this scenario in a broad groups also trigger Highe
historical context, with the intention of inflation. When wages r
demonstrating that India has a good for laborers are intere
record of reining inflation in, regardless increased, producers st
of what has driven it. The structure of the raise the prices of rates
domestic economy and the financial products to make up for charg
system may have changed and the global salary hike. ed by
context may be different, but the The rising prices of food bank
effectiveness of inflation control over the products, on
decades has not diminished.. manufacturing loans
products, and essential
Causes of inflation in year commodities have
pushed inflation rate
Now
the
2010 further in India. quest
2. Fuel prices: - Fuel ion
1-Food inflation:- Basically prices of all almost every week in the arise
commodities saw a jump in year 2010.Be previous year has gone s,
it milk, fruits and vegetables or even up by `1 per litre. The what
eggs, food inflation hovered in and current price is even has
around 20%. around 50 ` per litre, RBI
Everyone is facing the brunt of rising making the situation and
prices. Food prices are soaring . . . all worsened for people to the
essential items like vegetables, oil, milk, afford traveling by their gove
sugar are getting costlier. Rentals and own cars. rnme
real estate rates have almost doubled in nt
just a few months in most cities. The real 3. Large monetary been
estate prices are at record highs making expansion, fiscal doin
life miserable, especially for people who \dominance. g?
have migrated to cities for jobs.
RBI steps: - RBI has increased repo-rates inflation persisting for a Econ
and reverse-repo rates almost 6 times by few months omies
25 basis points to control inflation. The actua
signals are intended to spur banks to The rapidity of the lly
raise lending rates and to reduce the transition was saw a
amount of credit disbursed. The RBI’s surprising, given the fact sharp
measures are expected to suck out a that the recovery in accel
substantial sum from the banks. In effect, growth was just getting erati
while the economy is booming and the under way and, on in
credit needs grow, the central bank is importantly, the global grow
tightening the availability of credit. situation was still very th.
uncertain. However,
Government steps: - Three committees as Graphs 2 and 3 Mon
were formed:- indicate, the reason for etary
 To look at ways to increase the sharp increase was polic
agricultural production. that all the possible
y
 To look at the gap between farm drivers of inflation were
simultaneously resp
and retail prices.
onse
 Public distribution system. contributing. Each one
Out of which the most popular is the by itself may not have s
public distribution system which resulted in the outcome
operates on the assumption that there that we saw, but all The
are certain commodities for which the three working together final
price is lowered up to a certain quantity resulted in a rather point
which recently was practiced during the sharp acceleration. on
Graph 2 displays the the
hike in price of onions.
pattern of supply-side curre
pressures, as manifested nt
BROAD HISTORICAL in the food and fuel scena
CONTEXT components of the rio is
Wholesale Price Index. with
Food prices rose sharply refere
As you well know, the predominant policy because the monsoon of nce
concern in the Indian economy as 2009 was deficient in to
recently as one year ago was the most parts of the mone
significant slowdown in growth in the country, impacting tary
wake of the financial crisis in the agricultural production. policy
advanced economies.  As  Graph 1  shows, Fuel prices also rose as respo
the inflation rate, which was briefly the prospects of a global nses. 
negative in the middle of 2009, began to recovery improved and, Grap
accelerate rapidly later in the year. This particularly, the h
upward momentum continued into the Emerging Market 4 sho
first half of 2010, with double-digit
ws displays the movement of the monetary policy stance be
overnight call money rate, which reflects from where it had calibr
the combined actions taken by the moved during the crisis ated
Reserve Bank on policy rates and management phase. Not to the
liquidity. To place the recent policy doing so would have put needs
actions in perspective, we must us in the situation of of
remember that the response to the crisis being unable to respond deali
involved an enormous reduction in both to another negative ng
policy rates and the cash reserve ratio in shock, were it to with
late 2008 and early 2009. Along with materialize.  In sum, our inflat
this, a number of ad hoc measures were policy actions over the ion
also taken. As the crisis abated, even if past several months while
inflationary pressures had not were motivated by the sustai
manifested as they did, the need to exit twin objectives of ning
from the crisis management stance sustaining the recovery a
would have motivated some actions on while reining in inflation grow
rates and liquidity – of course, at a pace and normalizing the th
that would not derail the still incipient policy stance as quickly recov
recovery. as possible. In our mid- ery in
quarter assessment last a still
This process began in October 2009, with month, we indicated uncer
the withdrawal of most of the ad hoc that the normalization tain
measures, but gained momentum in process is now close to globa
January 2010, with an increase in the being complete and that l
cash reserve ratio and, further, in March further actions on rates envir
2010 with the first of a series of rate and liquidity will be onme
hikes. The pace and sequencing of actions driven more nt.
was, as we articulated in our various significantly by what the The
assessments, determined by the need to growth and inflation choic
balance a number of potentially numbers tell us, both es on
conflicting factors. First, we needed to domestically and the
address the rapidly mounting demand- globally. magn
side inflationary pressures while itude,
ensuring that the recovery was not cut We would like to seque
short by a surge in interest rates. Second, conclude by ncing
while the domestic economy was doing emphasizing the point and
well, the global environment remained that the current episode timin
uncertain, with a number of new stress of inflation posed a g of
points emerging periodically. significant challenge to actio
policymakers by virtue ns
Third, apart from everything else, it was of its timing. Monetary were
imperative that we normalize the policy responses had to drive
n by the need to find a balance between – over long periods of in
these factors. time, from the growth grow
calculations. These th
LONG TERM patterns clearly suggest can
that there is no long- cause
PROSPECTIVES term trade-off between the
growth and inflation; if econo
Let me now take a longer term view of anything, accelerating my to
the growth-inflation balance in the growth is accompanied overh
Indian economy. To begin with, we do by decelerating eat,
have a fairly explicit statement of what inflation. thus
we see as a desirable rate of inflation, stoki
consistent with the economy growing at  This may appear to be ng
its potential rate on a sustained basis. an obvious conclusion. inflat
Our policy reviews say that we would The textbook treatment ionar
like inflation to be in the 4-4.5 per cent of the growth –inflation y
range in the medium-term, while trade-off sees it as an press
aspiring for a 3 per cent rate in the essentially short-run ures.
long term. This might sound a little phenomenon, with the This
unrealistic in the current scenario, quantum of resources is the
but in order to both justify the and capacity in the bread
aspiration itself as well as assess its economy being fixed. -and-
realism we need to look at the However, the reason I butte
historical record of inflation specifically mention this r
management in the Indian economy. point is that in the wake issue
of recent assessments of
Growth-inflation balance shift that the Indian economy mone
in the Indian economy is poised to significantly tary
increase its growth rate policy
Graph 5 provides a very revealing picture many people have asked , the
of how the growth-inflation balance has me whether this will be effect
shifted in the Indian economy. The first accompanied by an ivene
graph, relating decadal averages of inflationary surge. My ss of
growth and inflation over the past answer to this is whic
several decades clearly indicates that a precisely with reference h
steady upward movement in the growth to the distinction must
rate has been accompanied by a steady between the short-run be
downward movement in the inflation and the long-run judge
rate. The contrast is even more striking relationship between d by
when we remove the agricultural sector, growth and inflation. In its
which is the slowest growing among the the short-run, with abilit
three – Agriculture, Industry and Services capacities fixed, a surge y to
keep the economy growing at a rate just by enhancing domestic depre
short of overheating, thereby keeping capacity, which the ciatio
inflation in check. Indian economy has n of
clearly done, or by the
In the long run, capacities are not fixed. tapping into global rupee
Acceleration in growth over long periods sources, which the in the
of time occurs in part because investment significant liberalization midst
activity, which itself contributes to in trade policy, of an
growth, leads to an increase in capacity. particularly since the oil
This pushes up the potential growth rate early 1990s, also shock
of the economy, i.e., the rate at which it enabled. has
can grow without causing overheating. also
Looking back over the growth However, while this playe
performance of the Indian economy, it is combination of domestic da
quite evident that the acceleration of and global supply role
growth from the 5-6 per cent range to responses has helped to on
the 8-9 per cent range was accomplished steadily bring the one
by a massive increase in investment. The inflation rate down, the occas
Investment-GDP ratio rose quite sharply Indian economy has ion.
over the decades. Even the relatively high always been vulnerable While
number of 30.5 per cent during the last to inflation shocks, the
decade masks the sharp surge in this which have caused dema
ratio towards the middle of the decade, uncomfortable spurts in nd
which saw it rise above 35 per cent. At prices across the drive
that rate of investment, the capacity of board. Some major n
the economy to increase output is shocks to the system, all inflat
growing quite rapidly and its ability to of which required strong ion
meet the requirements of a growing and policy responses. As is shock
increasingly affluent population is clearly evident from the graph, s can
expanding. the vulnerability of the be
Indian economy to avoid
Secret to accelerating supply shocks on the ed by
growth food and energy fronts is prude
persistent. There have nt
In short, the secret to accelerating also been periods in mone
growth while still being able to keep which a significant fiscal tary
inflation in check over long periods of expansion accompanied and
time is in the speed and efficiency of the by an accommodating fiscal
supply response. As long as the growth in monetary stance – i.e., polici
supply keeps pace or even exceeds the demand-side pressures – es,
growth in demand, inflationary pressures raised the inflation rate the
do not sustain. Supply can be expanded significantly. Sharp vulne
rability to supply shocks in the form of a fundamentals are what In the
failed monsoon or a surge in oil prices will continue to drive case
will obviously remain. prices in the coming of
years. consu
Energy became a significant factor mer
during the 1970s, following the first oil As regards food, the dura
shock of 1973. It has persisted in its pressures in the Indian bles,
contribution since then. Adding up the economy are vehicl
two provides the overall contribution of predominantly domestic. es
supply-side factors, which, as the graph Our Green Revolution in and
suggests, have persisted in one form or the 1960s raised the mobil
another through the entire period. production of cereals e
Looking ahead, it would be reasonable to dramatically, which phon
argue that these pressures are likely to increased availability es,
persist, as a result of both global and and stabilized prices. the
domestic imbalances between demand However, what we are expa
and supply. seeing today is the nsion
impact of increasing in
On the energy front, one of the affluence on the demand capac
fundamental drivers of high oil prices is for a variety of food ity
increasing demand in Emerging Market items that go far beyond was
Economies, whose rising affluence is cereals. As people enor
resulting in very rapid growth of energy- become more affluent, mous
intensive activities. As relatively low-cost their diets diversify. Just and
reserves of fossil fuels are exhausted, as the growing Indian rapid,
rising global demand is being met by consuming class has result
exploiting higher cost sources. The cost stimulated a boom in ing in
differential between petroleum and the demand for the
alternative sources makes such sources consumer durables, dema
viable even at their relatively high costs. vehicles and mobile nd
Steadily rising costs of production, in phones, to give but a few being
turn, exert inflationary pressures on the examples, it has also met
global economy, which hits those manifested an enormous witho
economies hardest whose energy increase in the demand ut
intensity is increasing most rapidly. In for various food items prices
recent years, the prices of petroleum, as beyond cereals. Demand incre
well as other commodities, are perceived for protein sources – asing.
to have been further impacted by their pulses, milk, meat, fish In
emergence as an attractive asset class. and eggs – has surged as fact,
However, as significant as the has the appetite for econo
contribution of this factor may have been sugar, fruits and mies
to price increases, the underlying vegetables. of
scale and technological advancements RBI Credit to inflat
actually helped to bring down the prices Government, was clearly ion
of many products even as volumes were a contributor to balan
increasing. The globalization of the inflationary pressures in ce.
supply chain also contributed the economy.
significantly, as global capacities were Government spending It is
brought into play to meet the rising boosts demand and if also
demand. This combination of forces has the government faces no striki
certainly not been in play in meeting the effective financial ng in
rising domestic demand for the food constraints, it can Grap
items mentioned above. Supply is increase spending h7
predominantly domestic and, for the without limit and, that,
most part, is unable to respond effectively certainly beyond the contr
to the expansion in demand. The capacity of a relatively ary to
inevitable consequence of this is an closed economy to meet popul
increase in prices. This is a significant the demand. ar
structural driver of inflation in the Indian notio
economy. A good monsoon may provide  The emergence of an ns
some relief, while a bad one will effective constraint on about
aggravate the pressures, but the monetization of the the
enduring solution to this problem lies in a fiscal deficit during the link
rapid and sustained increase in the 1990s helped to rein this betw
supply of these items. source of inflationary een
pressure in. Now, if the the
Graph 6 also displays the positive Government wants to grow
impacts of effective supply response. The increase its spending, it th in
contribution of manufactured goods to has to raise resources mone
inflationary pressures has declined from the market, y and
significantly over the decades. This bringing in some the
decline can be attributed to increasing realistic cost-benefit inflat
effectiveness of policy reforms in calculations, including ion
increasing domestic capacities and the fact that the cost of rate,
competition and integrating domestic funds for the private the
markets with the global supply chain. sector will also increase. rate
Against this backdrop, of
Now let us look at inflation dynamics the Government’s grow
from the macroeconomic policy commitment to fiscal th of
perspective, i.e., monetary and fiscal prudence in the form of mone
actions that may have contributed to the fiscal responsibility y
rise and fall of the inflation rate. During legislation is an remai
the 1970s and 1980s, the monetization of important contribution ned
the fiscal deficit, and the growth in net to maintain the growth- const
ant even as inflation declined. The reason the 1990s were challe
for this was that the expansion in money responded to by nge
was absorbed by the growing volume of significant monetary more
transactions that involved money actions in terms of both comp
exchange. This absorption mitigated the rates and liquidity licate
potentially inflationary impact of money management. As the d. 
growth. inflation rate trended The
lower, a process to mone
One important consideration in inflation which the monetary tary
management is the stability of the policy actions of the policy
inflation rate. Forward-looking period contributed, the respo
transactions build in some expectations policy stance in turn nse to
about inflation rates over the tenure of changed to these
the contract. Significant deviations of accommodate the new press
actual outcomes from expected ones can circumstances. In other ures
cause huge losses to one of the words, monetary policy has
transacting parties, thereby acting as a has been aimed at been
deterrent to what may be growth- keeping inflation under a
enhancing transactions. The more stable control, which involves calibr
the inflation rate, the less these tightening when ated
deviations will be. There appears to be an inflation exceeds the one,
almost universal correlation between the comfort level and seeki
level of the inflation rate and its stability. loosening when it falls ng a
The reduction in the average inflation below. balan
rate over the years has been ce
accompanied by a sharp reduction in the CONCLUSION betw
volatility of that rate. The aspiration of a een
“low and stable” inflation rate is a The current inflation sustai
realistic one. scenario is a cause of ning
concern, as the inflation the
Finally, let u make a few comments on rate persists well above recov
the role of monetary policy in this the upper bound of the ery
transition from a relatively high-inflation comfort zone. The fact and
economy to a relatively low-inflation one. that these inflationary reinin
Conventional monetary policy began to pressures emerged g in
apply only during the 1990s, with the rather quickly in a inflat
freeing up of restrictions and mandatory situation in which the ion,
allocations of credit to various sectors. economy was just while
Genuine markets for both products and beginning to recover being
credit emerged after the reforms of the from the significant mindf
early 1990s. As Graph 13 shows, the slowdown of 2008-09 ul of
persistent inflationary conditions during made the policy the
risks that still remain in the global on which is contingent goods
environment.  Recent data suggest that the longer term outlook and
the approach is working, with the for food price inflation. servic
economy set to grow at a reasonably es.
healthy rate during the current year and However, over the years, The
the inflation rate beginning to decline, both fiscal and follo
including, significantly, in the monetary policy wing
manufacturing sector, where inflation is approaches have clearly are
seen as being most responsive to assimilated the lessons some
monetary actions. of the past and have impo
moved in a direction rtant
This approach must be viewed in the which helps contain steps
context of a long-standing policy inflationary pressures one
commitment to maintain a balance even as growth remains can
between growth and inflation in the robust. Making inflation take
short run, while fostering faster growth low and stable was the into
with lower inflation over long periods of outcome of a dema
time. The growth pattern of the Indian combination of long- nd
economy over the past six decades clearly term and short-term and
shows that accelerating growth has been policies over the past suppl
accompanied by declining inflation. This decades. Keeping it y.
is primarily because growth has been there remains the The
driven by expanding capacities across the objective, while an suppl
board as well as, in recent years, by appropriate y side
increasing global linkages. Both these combination of long- 9. In
factors have helped to achieve a strong term and short-term cr
supply response to growing demand, thus policies will provide the ea
keeping inflation in check. instrument to achieve it. se
d
This is not to say that the Indian SUGGESTIONS Pr
economy is now invulnerable to inflation od
shocks. Food and energy price shocks uc
There are several steps
have been a regular part of the economic ti
to effectively control
landscape and may continue to be so in on
inflation before it gets
the future. Food prices, in particular, are .
out of hand. Given that
now being driven by some structural The
inflation shows the
imbalances between demand and supply, suppl
imbalance between
as increasingly affluent consumers y of
supply and demand of
diversify their dietary patterns away goods
goods at current prices
from cereals and towards protein and
so that measures are
sources. This calls for an effort to quickly servic
taken to reduce demand
increase the availability of these items, es
or increase supply of
can be increased by increasing The supply of etc.
agricultural and industrial production. agricultural and All
Agricultural production can be increased industrial products is these
by providing an adequate supply of highly dependent on meth
agricultural inputs at low prices, the energy availability. If ods
modernization of agriculture and the energy source is are
scientific farm management, adequate expensive, the cost of useful
water supply for irrigation; industrial production of goods and to
production etc similarly can be increased services will be contr
by increased foreign direct investment, expensive too. Increased ol the
industrial credit growth, fiscal production costs raise rate
concessions, etc. prices and cause of
inflation. Therefore all inflat
2. Control of illegal activities. necessary measures ion in
There are some illegal activities that must be taken to ensure a
cause significant inflation in a country. It major sources of energy count
is hoarding, smuggling, profiteering, in industrial and ry.
black markets, etc. In the case of agricultural sectors of
smuggling of large quantities of staples the economy. 6.
like sugar, butter, wheat, rice, etc are There
exported abroad illegally in order to 5. Control of Money is no
obtain higher prices. Similarly, the Supply Defici
shortage in most cases artificial staples The money supply has a t
to create higher profits. All activities of great influence on the Finan
this evil must be controlled through rising inflation that is, cing
advertising, as well as punishment. inflation with increasing Defici
the money supply and t
vice versa. Therefore, to finan
3. Peace and Security control inflation, cing
Production and distribution of goods and measures must be taken show
services can be effected due to the to control the money s that
existence of unease and insecurity in supply. The money publi
society. In such circumstances, investors supply can be controlled c
hesitant to invest for fear of potential with the help of spend
loss. Similarly, the production of monetary policy in ing
industrial products is affected due to which the central bank beyon
several unpleasant events such as strikes uses various methods, d
etc or therefore peace and security must such as bank rate policy, their
be ensured to maintain the supply of open market operations, inco
goods and avoid the danger of famine. changes in reserve me.
requirements, credit The
4. Main Energy Sources rationing, direct action purp
ose of deficit financing is to meet the
additional costs that the budget deficit.
Because the money supply increases in
the country and causes inflation.
Therefore the deficit financing should be
discouraged and all development costs
must be met through taxes and debt.

7. Population Control
In developing countries, the population is
increasing very quickly that the
production of goods and services does not
increase at the same pace. Because the
imbalance between supply and demand
of goods and services are produced and
cause inflation. Therefore, to control
inflation, appropriate measures should
be taken to control the population.

8. Fiscal Policy
Fiscal policy refers to government policy
of public spending and taxes. The main
fiscal policy objective is to maintain only
the slight change in the general price
level. During inflation, the government
tries to reduce its expenditure on
unproductive activities and the direct tax
rate increases so that the purchasing
power of the population is reduced. Due
to the reduction in the purchase of the
population, demand for goods and
services will be reduced and controlled
inflation.

9. Direct Measures
There are several other options available
to the government to control inflation
and wage and price freeze, the rationing
of goods, establishment of public service
shops, the price review committees,
boards of price stabilization, etc.
 REFERENCES

http://www.rbi.org.in/

www.planningcommission.nic.in/

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