INFLATION-PATTERN OVER 1991-2011 REASONS AND IMPACT (INDIA)

Definition

Inflation can be defined as the rise in overall price level in the economy, i.e. rise in prices of all the goods and services.

When prices rise, it erodes the purchasing power of money.

Inflation is a situation in which there is a persistent and

appreciable increase in general level of prices.

Inflation is the gravest economic concern which has gripped India into its jagged tentacles India has been plagued by the disease of inflation since the 1950s but it has started showing its prominently harmful symptoms and ill effects since 1991, post liberalization Kick started by the fiscal crisis of 1991, marked by deficits in government finances and devaluation of the rupee, a whopping inflation of 13.66 per cent took its toll on the Indian economy Inflation is a determinant in functioning of any economy The recent rise in inflation has been found to consist of several political and economic crisis under the prime ministry of Dr. Manmohan Singh Contesting on the challenges faced, several economists have questioned the method of measuring inflation to be faulty

India Inflation Rate

The present day process being used in India has been The Wholesale Price Index while several other developed countries adopt the Consumer calculate inflation Price Index to

The inflation rate in India was recorded at 6.62 percent in January of 2013 Inflation Rate in India is reported by the Ministry of Commerce and Industry Inflation rate refers to a general rise in prices measured against a standard level of purchasing power. The most well known measures of Inflation are the CPI which measures consumer prices, and the GDP deflator, which measures inflation in the whole of the domestic economy.

Historically, from 1969 until 2013, India Inflation Rate averaged 7.75 Percent reaching an all time high of 34.68 Percent in September of 1974 and a record low of -11.31 Percent in May of 1976

India Inflation Rate

In India, the wholesale price index (WPI) is the main measure of inflation. The

WPI measures the price of a representative basket of wholesale goods.

In India, wholesale price index is divided into three groups: Primary Articles (20.1 percent of total weight), Fuel and Power (14.9 percent) and Manufactured Products (65 percent)

Food Articles from the Primary Articles Group account for 14.3 percent of the total weight. The most important components of the Manufactured Products

Group are Chemicals and Chemical products (12 percent of the total weight);
Basic Metals, Alloys and Metal Products (10.8 percent); Machinery and Machine Tools (8.9 percent); Textiles (7.3 percent) and Transport, Equipment and Parts (5.2 percent).

Types Of Inflation

There are different types inflation which are explained below:

Creeping Inflation: This is also known as mild inflation or moderate inflation. This type of inflation occurs when the price level persistently rises over a period of time at a mild rate.

Galloping Inflation: If mild inflation is not checked and if it is

uncontrollable, it may assume the character of galloping inflation.

Inflation in the double or triple digit .Indian economy has witnessed a galloping inflation .It causes economic distortion and disturbances.

Hyperinflation: It is a stage of very high rate of inflation. While economies seem

to survive under galloping inflation, a third and deadly strain takes hold when the cancer of hyperinflation strikes. Nothing good can be said about a market economy in which prices are rising .

Stagflation: It is an economic situation in which inflation and economic stagnation or recession occur simultaneously and remain unchecked for a period of time. Stagflation was witnessed by developed countries in 1970s, when world oil prices rose dramatically. Deflation: Deflation is the reverse of inflation. It refers to a sustained decline in the price level of goods and services. It occurs when the annual inflation rate falls below zero percent (a negative inflation rate), resulting in an increase in the real value of money.

REASONS OF INFLATION IN 1990S

The 1990s is widely described in general as a price stability era all over the globe, barring some external factors like

Increase in international oil price and Exceptional economic growth in the period 1991-1998 Natural disasters like drought or flood showed an ebbing trend. The main problem of inflation came to head in August 1990.When Iraq invaded Kuwait the prices of oil doubled in international market. supply shortage in agricultural growth due to lack of irrigation facility and irregular climate change caused due to Afghan war.

Trade deficit (import exceeding exports)

in 1991 rose to 15600 cores

therefore, India borrowed funds from International Monetary Fund(IMF).

REASONS FOR INFALTION IN EARLY 20TH CENTURY

The first half of India's fiscal 2002-03 (beginning April 1, 2002) witnessed uptrend in inflation largely due to:

Increase in oil prices twice during the period Adverse impact of drought on Agricultural products leading to increase in prices particularly of: Oilseeds and Edible oils

At the end of the fiscal 2002-03 inflation was up 3.3 percentage points. In the light of overall variation in wholesale price inflation, the inflation in fiscal 2002-03 was dominated by non-food items unlike preceding years, as per a RBI report

Defence expenditures (official) skyrocketed, also four times, from Rs 16,347 cores to Rs 65,000 cores in the budget of 2002/03

Reasons for inflation in the Indian economy

2000 onwards The growth rate of inflation during this period has gone down but the inflation has been still rising. Major reasons of inflation change during this period in India are: 1. Reduction in fuel subsidies in the country 2. The price of basic goods such as lentils, vegetables, fruits and poultry were expected to slow their rise in this period.

The price of various manufactured goods also fell in 2007, and this contributed to a
reduced inflation rate.

Inflation is caused due to several economic factors

Below is listed the many reasons behind the cause of inflation in India in 2010-2011 Inflation can be caused if the government prints notes in excess. If there is a lot of money circulating in the market then prices increase just to keep pace with the increase in currency.

Sometimes a country demands more goods and services than what it actually

produces. This type of inflation is known as Demands pull inflation.

Sometimes the price of a finished good is strikingly high, this happens mainly if there is increase in its production and labor cost. This increase in the cost of the final product also leads to inflation.

Inflation also occurs with increasing interest rates. Sometimes countries

borrow money, which have high interest rates attached to it. The burden that this rate of interest causes also results in inflation.
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INFLATION IN DIFFERENT SECTORS

YEAR
1990-1991 1991-1992

ANNUAL RATE OF INFLATION(%)

13.81 11.88

YEAR
2001-2002 2002-2003

ANNUAL RATE OF INFLATION(%)

3.8 3.4

1992-1993
1993-1994 1994-1995 1995-1996

6.31
10.24 10.22 8.98

2003-2004
2004-2005 2005-2006

5.4
6.4 4.4

2006-2007
2007-2008 2008-2009 2009-2010 2010-2011

5.3
4.7 12.44 10.2 9.4

1996-1997
1997-1998 1998-1999 1999-2000

7.25
13.17 4.84 4.02

Causes of inflation
1-Cost push inflation
2-Rising imported raw materials costs 3-Rising labor costs 4-Higher indirect taxes imposed by the government 5-Demand pull inflation

Effects of inflation on prices

1. Over-expansion of money supply i.e. excess liquidity in the

economy leads to inflation .

-- Expansion of Bank Credit . -- Deficit Financing: The high doses of deficit financing which may cause reckless spending. -- A high population growth leads to increase in demand and money

income and cause a high price rise.

-- Excessive increase in the price of fuel or food products due to political, economic or natural reasons

2. Western economies like us are consuming on a massive scale leading to huge trade imbalance.

3. As government has reduced protection and subsidies on agriculture that results into high cost of energy which directly translates into high cost of cultivation and therefore high prices of output. . 4. The problem of inflation is directly linked to the price of crude oil imported by our country. Indias 70% oil needs are fulfilled through imports.

Effect of Inflation on Different Industries

Effect on Bank 1-The RBI may go for further monetary tightening in the light of rising inflation . 2-Yields are rising, compelling the banks to raise interest rates, which will hamper their business growth . 3-Inflation concerns remain high with finance ministry officials indicating the rate could go up to 13 per cent in the near term. Effect On Airline Industry 1-One major issue is cost of Aviation Turbine Fuel 2-Job cuts in airline industries on a rise

Effect of Inflation on Different Industries

Effect on Automobile Industries in India 1-The automobile sector is also suffering because of soaring raw material price. 2-The two-wheeler sector is especially suffering, as banks are not willing to lend fearing delinquency Effect on IT Companies 1-Patni computers has handed the pink slip to over 400 employees for non performance. 2-TCS other companies warns its employees that non performance wont be tolerated. 3-Companies like Wipro and Sutherland may cut down on incentives and other perks

Effects On Stock Market

1-A huge 6.5 % fall in Reliance Industries & 4.5 % fall in Bharti Airtel was responsible for the benchmark Sensex to close at 14590.16 points, down 498 points. 2-For the first time in 2008, the Sensex dipped from the

psychological level of 15,000 point.

3-Investors confidence is dented by the rising inflation

Inflation widening gap between rich and poor

Inflation in country creates a breeding ground for social upheavals

.Inflation redistributes income and wealth in favor of rich and black

marketers .

The rich and business class get ample chances of making profit

while poor indirectly suffer the social sins done by rich.

MEASURES TO CONTROL INFLATION

Here are broadly two ways of controlling inflation in an economy

Monetary measures and fiscal measures.

1). Monetary measures 2). Fiscal measures I).Monetary Measures The most important and commonly used method to control inflation

is monetary policy of the Central Bank. Most central banks use high
interest rates as the traditional way to fight or prevent inflation.

Monetary measures used to control inflation include:

(i) bank rate policy (ii) cash reserve ratio and (iii) open market operations

(i) Bank rate policy is used as the main instrument of monetary control during the period of inflation. The central bank raises the bank rate. The increase in bank rate increases the cost of borrowing which reduces commercial banks borrowing from the central bank. Consequently, the flow of money from the commercial banks to the public gets reduced. Therefore, inflation is controlled to the extent it is caused by the bank credit.

(ii) Cash Reserve Ratio (CRR) : To control inflation, the central bank
raises the CRR which reduces the lending capacity of the commercial banks. Consequently, flow of money from

commercial banks to public decreases. In the process, it halts the rise in prices. (iii) Open Market Operations: Open market operations refer to sale and purchase of government securities and bonds by the central bank. To control inflation, central bank sells the government

securities to the public through the banks.

2) Fiscal Measures

Fiscal measures to control inflation include decrease in government expenditure and delay in payment of old debts and taxation.

The government can also take some protectionist measures

(such as banning the export of essential items such as pulses,

cereals and oils to support the domestic consumption, encourage imports by lowering duties on import items etc.)

Others Measures:
(a)Increase in production

(b) Provision of subsidies

(c) Proper commercial polices

(d) Imposing direct control on prices of essential items.

(e) Encouragement to savings

Measures Taken By Government

Government has reduced import duty on skimmed milk powder, petrol and diesel and customs duty on crude oil.

As part of the monetary policy review stance, the RBI has taken suitable steps to maintain its growth without provoking price rise.

Headline inflation, as measured by Wholesale Price Index (WPI), has been above the 9 per cent mark since December, 2010, and stood at 9.22 per cent in July . Food inflation stood at 9.80 per cent in mid-Year.

The government has been under attack from various quarters over sustained inflationary pressure.

In its Annual Report the RBI said inflation is likely to stay elevated at least till the third quarter of the current fiscal, before falling to 7 per cent by March, 2012.

Reserve Bank of India (RBI) Governor D Subbarao has said that inflation will come down by March on the back of strengthening agro-based economy in the country. "Inflation will come down because the production and agriculture sectors will boost up the rural agro-based economy of the country," Subbarao said at a RBI Financial Outreach Programme in Dungabori in central Assam's Morigaon district. According to the RBI Governor, the Indian economy is stable and will grow despite the global economic slow down.

RBI's Role:

The Reserve Bank of India has tightened liquidity by raising the interest rate. It currently stands at 8.5 per cent.

In India RBI uses repo technique for increasing or decreasing liquidity in market.

The RBI takes into account the important concern of balancing the targets of controlling inflation and keeping up growth and employment generation.

The fiscal deficit as a percentage of GDP was 6.4 per cent in 2009-10. In

2010-11 this was brought down to 4.7 per cent. This year a target of 4.6 per
cent has been set. This is a difficult target, given the deterioration in the global economy and its impact on India over the last 3 to 4 months.

Government role:

Liberalization of imports and cutting of excise and custom duties

Has directed RBI to take monetary measures and to put down

interest rates to control inflation

State governments have taken initiative to provide lower priced ration goods for the BPL (below poverty line).

METHODS TO MEASURE

Measuring

A chief measure of price inflation is the inflation rate. It is

measured by:
1.Change in price index a)Consumer Price Index(CPI) b) Wholesale Price Index (WPI) 2. Gross National Product Deflator (GNP Deflator).

Change in price index

Rate of change in inflation can be measured through change in

price index

where,P0 is current average price level

P-1

is the price level a year ago

Consumer Price Index(CPI)

A consumer price index measures changes in the price level of consumer goods and services purchased by households.

A CPI can be used to index (i.e., adjust for the effect of inflation) the real value of wages, salaries, pensions, for regulating prices and for

deflating monetary magnitudes to show changes in

real values.

Wholesale Price Index(WPI)

The Wholesale Price Index or WPI is the price of a representative basket of

wholesale goods.

The Indian WPI figure is released every 10 days and influences stock and

fixed price markets.

The Wholesale Price Index focuses on the price of goods traded between corporations, rather than goods bought by consumers, which is measured by the Consumer Price Index.

The purpose of the WPI is to monitor price movements that reflect supply and demand in industry, manufacturing and construction.

In India WPI is the indicator for inflation rate.

GNP DEFLTOR

GNP deflator is not obtained directly like CPI and WPI. It is

measured as follows:

where, nominal GNP= GNP at current prices Real GNP= GNP at constant prices