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PROJECT

REPORT

ON

MANAGEMENT

OF INFLATION

AND GROWTH IN

AN INDIAN

ECONOMY

SUBMITTED

TO: SUBMITTED

BY:

Ms.Nisha

Mary

Thomas

1.Aakriti

Upadhya

y

3. Neha Dubey

4. Rajesh Kumar

CONTENTS

PAR

TIC

ULARS

PAG

E

NU

MB

ER

Infl

atio

n



3-5

y H ow inflation is measured?

y Causes of inflation

y Effect of inflation

Current Scenario 6-7

y Causes of

inflation in year

2010

y RBIs Role

Broad historical context 7-8

Long term Prospective8-11

y Growth-inflation

balance

y Secret to

acceleratinggrowth

Conclusion11

Suggestions

12-13

References

14

9. INFLATION

Everywhere there are

headlines.Inflation

.Mehengai.and even

songs are made onthese factors. Now let

us look what is

inflation:-

Inflation can be defined

as a rise in the general

price level and therefore a fall in the

value of money .

Inflation occurs when

the amount of buyingpower is higher than

the output of goods and services. Inflation also

occurs when the

amount of money

excee

ds theamou

nt of goods

and servic

esavail

able.

As to

whet her

thefall in

thevalue

of mone

y will

affect

the

functions of

mone

y depen

ds on

the

degree of

the

fall .

Basic

ally,

refers

to an

incre

ase inthe

suppl



y of currency or credit relative to the

availability of goods and services,resulting in higher prices.

Therefore, inflation can be measured in

terms of percentages. The percentage

increase in the price index, as a rate per cent per unit of time, which is usually in

years. The two basic price indexes are

used when measuring inflation, the

producer price index (PPI) and the

consumer price index (CPI) which is also

known as the cost of living index number .

2. HOW INFLATION IS MEASURED?

Inflation is normally given as a percentageand generally in years or in some instances

quarterly and is derived from the

Consumer Price Index (CPI).

H owever, there are two main indices used to measure inflation. The first is the

Consumer Price Index, or the CPI . The CPI is

a measure of the price of a set group of

goods and services. The bundle, as the

group is known, contains items such as

food, clothing, gasoline, and even

computers. The amount of inflation ismeasured by the change in the cost of the

bundle: if it costs 5% more to purchase the

bundle than it did one year before, there

has been a 5% annual rate of inflation over

that period based on the CPI . You will also

often hear about the Core Rate or the

Core CPI . There are certain items in the

bundle used to measure the CPI that are

extremely volatile, such as gasoline prices. By eliminating the items that can

significantly affect the cost of the bundle(in either direction) on a month-to-month

basis, the Core rate is thought to be a

better indicator of real inflation, the slow,but steady increase in the price of goods

and services.

The second measure of inflation is the

Producer Price Index,or the PPI . While the

CPI indicates thechange in the

purchasing power of aconsumer, the PPI

measures the change in

the purchasing power

of the producers of those goods. The PPI

measures how muchproducers of products

are getting on thewholesale level, i.e. the

price at which a good issold to other businesses

before the good is sold

to a consumer . The PPI

actually combines aseries of smaller indices

that cross many industries and measure

the prices for threetypes of goods: crude,

intermediate and finished . Generally, the

markets are most concerned with the

finished goods because

these are a strong

indicator of what will happen with future CPI

reports. The CPI is amore popular measure

of inflation than thePPI, but investors watch

both closely .

3.

CAU

SES

OF

INFLATIO

N Inflat ion

comes in

differ

ent

forms

and those

at

arefamili

ar with

the

econo

mic

matters

woul

d obser

vethat

there

are

trend

s intheway

that

price

s are



moving gradual and irregular in

relation to aggregate sections of theeconomy . This suggest that there is

more than one factor that causesinflation and as different sections of the

economy develop it gives rise todifferent types inflationary periods. The

main causes of inflation are:

Demand-pull Inflation

Cost push Inflation

Monetary inflationStructural inflation

Imported inflation

DEMAND-PULL INFLATION Demand-pull inflation occurs when the

consumers, businesses or the

governments demand for goods and

services exceed the supply; therefore the

cost of the item rises, unless supply isperfectly elastic. The increase in

demand is created from in increase in

other areas, such as the supply of

money, the increase of wages which

would then give rise in disposableincome. As a result of the aggregatespending there would also be an

increase in demand for exports and

possible hoarding and profiteering from

producers. The excessive demand, theprices of final goods and services would

be forced to increase and this increase

gives rise to inflation.

COST-PUS H INFLATION Cost-push inflation is caused by an

increase in production costs. It is

generally caused by an increase in

wages or an increase in

the profit margins of the entrepreneurs.

When wages areincreased, this causes

the business owner to inturn increase the price

of final goods and services which would be

passed onto the

consumers and the

same consumers arealso the employees. As a

result of the increase inprices for final goods

and services theemployees realise that

their income isinsufficient to meet

their standard of living

because the basic cost

of living has increased . The trade unions then

act as the mediator for the employees and

negotiate better wagesand conditions of

employment . If thenegotiations are

successful and theemployees are given the

requested wage

increase this would

further affect the pricesof goods and services

and invariably affected .

MONETARY

INFLATION

Mone

tary inflat

ionoccur

swhen

thereis an

exces

sive

suppl y of

money . It is

under stood

that the

gover

nmen

t incre

asesthe

money

suppl y

faster than

the

quant

ity of goods

increases,

which

result s in



inflation. Interestingly as the supply of

goods increase the money supply has toincrease or else prices actually go down.

When a dollar is worth less because thesupply of dollars has increased, all

businesses are forced to raise prices just to get the same value for their

products.

STRUCTURAL INFLATION Planned inflation that is caused by a

governments monetary policy is called

structural inflation. This type of inflation is not caused by the excess of

demand or supply but is built into aneconomy due to the governments

monetary policy .

In India where the majority of the

population live in the rural areas and depend on agriculture and the

government implements a new industry,

some people get employment outside

the agricultural sector and settle downin urban areas. Because there might be

an unequal distribution of land ownership and tenancy, technological

backwardness and low rates of

investments in agriculture inclusive of

inadequate growth of the domesticsupply of food which corresponds with

an increase in demand arising from

increasing urbanization and population

prices increase.

Food being the key wage-good, an

increase in its price tends to raise other prices as well . Therefore, some

economists consider food prices to be

the major factor, which leads to

inflation in the developing economies.

IMPORTED

INFLATION Another type of inflation is imported

inflation. This occurswhen the inflation of

goods and services from

foreign countries that

are experiencinginflation are imported

and the increase in

prices for that imported

good or service will

directly affect the cost

of living. Another way imported inflation can

add to our inflation

rate is when overseas

firms increase their prices and we pay more

for our goodsincreasing our own

inflation.

4

. EFFECT OF INFLATION Inflation can havepositive and negative effects on an economy.

Negative effects of inflation include loss in

stability in the real

value of money and

other monetary items

over time; uncertainty about future inflationmay discourage

investment and saving,

and high inflation may

lead to shortages of

goods

if

consumers

begin

hoarding

out of conce

rn

that

prices will

increase in

thefutur

e. Positi

ve

effect

sinclu

de amitig

ationof

economicrecess

ions,

and debt

relief

by

reducing

the

real level



of debt .

Most effects of inflation are negative,and can hurt individuals and companies

alike, below are a list of negative and positive effects of inflation:

H oarding (people will try to get rid of

cash before it is devalued, by hoardingfood and other commodities creating

shortages of the hoarded objects).

Distortion of relative prices (usually the

prices of goods go higher, especially theprices of commodities).

Increased risk H igher uncertainties

(uncertainties in business always exist,but with inflation risks are very high,

because of the instability of prices).

Income diffusion effect (which is

basically an operation of incomeredistribution).

Existing creditors will be hurt (because

the value of the money they will receive

from their borrowers later will be lower than the money they gave before).

Fixed income recipients will be hurt

(because while inflation increases, their

income doesnt increase, and thereforetheir income will have less value over

time).

Increased consumption ratio at the

early stages of inflation (people will beconsuming more because money is moreabundant and its value is not lowered

yet).

Lowers national saving

(when there is a highinflation, saving money

would mean watchingyour cash decrease in

value day after day, sopeople tend to spend

the cash on somethingelse).

CURRENT

SCENARIO

The long-term growth

prospects of the Indian

economy provide an

enormously attractive

investment environment for a range of businesses

and, consequently, for

the people who would

finance them. H owever,

as attractive as the

opportunity may seem,

the assessment would

not be complete without a full understanding of

the risks. We will focus

on the risk of

macroeconomic

instability, with

particular emphasis

on the issue of

inflation: what drives

it and whether it

threatens to get out of control. An unavoidable

consequence of runaway

inflation, however we

define it, is that drastic

action by the central

bank

and also

by the

gover

nment is

neede

d to

rein it

in,

which

is

boun

d to

disrupt thegrowt

h

proce

ss.

The

challe

nge,

theref

ore, is

tokeep

inflati

on in

check

over

longperio

ds of

time,

allowing

the

econo

my to

grow



at its potential rate with minimal

disruptions and deviations. This is thebest way in which the macroeconomic

environment can contribute to a positive

business climate.

We will begin by discussing the current

inflationary scenario in India, which, as

we have been saying in our recent

assessments, is not very reassuring. We

will then place this scenario in a broad

historical context, with the intention of

demonstrating that India has a good

record of reining inflation in, regardless

of what has driven it . The structure of thedomestic economy and the financial

system may have changed and the global

context may be different, but the

effectiveness of inflation control over the

decades has not diminished ..

Causes of inflation in year

2010

1-Food inflation:- Basically prices of all

commodities saw a jump in year 2010.Beit milk, fruits and vegetables or even eggs,

food inflation hovered in and around

20%.

Everyone is facing the brunt of rising

prices. Food prices are soaring . . . all

essential items like vegetables, oil, milk,

sugar are getting costlier . Rentals and

real estate rates have almost doubled in

just a few months in most cities. The real

estate prices are at record highs makinglife miserable, especially for people who

have migrated to cities for jobs.

Economists attribute inflation to a

demand-pull theory . According to this, if

there is a huge demand

for products in all sectors, it results in a

shortage of goods. Thus

prices of commodities

shoot up. Another reason for

inflation is the cost-push

theory . It says that labor

groups also trigger

inflation. When wages

for laborers are

increased, producers

raise the prices of

products to make up for

salary hike.

The rising prices of food

products, manufacturingproducts, and essential

commodities have

pushed inflation rate

further in India.

2. Fuel prices: - Fuel

almost every week in the

previous year has gone

up by `1 per litre. The

current price is evenaround 50 ` per litre,

making the situation

worsened for people to

afford traveling by their

own cars.

3. Large monetary

expansion, fiscal

\dominance.

4. H oarding and black marketing practices of

public.

5 . H igher interest rates

charged by bank on

loans

Now

the

quest

ion

arises,

what

has

RBI

and

the

gover

nmen

t

beendoing

?

RBI

steps:

- RBI

has

incre

ased

repo-

ratesand

revers

e-

repo

rates

almost 6

times

by 25

basispoints

to

contr

ol

inflati



on. The signals are intended to spur

banks to raise lending rates and toreduce the amount of credit disbursed .

The RBIs measures are expected to suck

out a substantial sum from the banks. In

effect, while the economy is booming and the credit needs grow, the central bank is

tightening the availability of credit .

Government steps: - Three committees

were formed:-

y To look at ways to increase

agricultural production.

y To look at the gap between farm

and retail prices.

y

Public distribution system.

Out of which the most popular is thepublic distribution system which operates

on the assumption that there are certain

commodities for which the price is

lowered up to a certain quantity which

recently was practiced during the hike in

price of onions.

BROAD HISTORICAL

CONTEXT As you well know, the predominant policy

concern in the Indian economy as

recently as one year ago was thesignificant slowdown in growth in the

wake of the financial crisis in the

advanced economies. As Graph 1 shows,

the inflation rate, which was briefly

negative in the middle of 2009, began to

accelerate rapidly later in the year . This

upward momentum continued into the

first half of 2010, with double-digit

inflation persisting for a few months

The rapidity of the

transition wassurprising, given the fact

that the recovery in

growth was just getting

under way and,importantly, the global

situation was still very

uncertain. H owever,

as Graphs 2 and 3

indicate, the reason for

the sharp increase was

that all the possible

drivers of inflation were

simultaneously

contributing.

Each oneby itself may not have

resulted in the outcomethat we saw, but all

three working together

resulted in a rather

sharp acceleration.

Graph 2 displays the

pattern of supply-side

pressures, as manifested

in the food and fuel

components of theWholesale Price Index .

Food prices rose sharply

because the monsoon of

2009 was deficient in

most parts of the

country, impactingagricultural production.

Fuel prices also rose as

the prospects of a global

recovery improved and,particularly, the

Emerging Market

Economies actually saw

a sharp acceleration in

growth.

Mone

tary

polic

y

responses

The

final

point

on

the

current

scena

rio iswith

refere

nce to

mone

tary

policy

respo

nses.

Graph

4 shows

displa

ys themove

ment

of the

overn

ight

call

mone

y

rate,

which

reflec

ts the

combi



ned actions taken by the Reserve Bank on

policy rates and liquidity . To place therecent policy actions in perspective, we

must remember that the response to the

crisis involved an enormous reduction in

both policy rates and the cash reserveratio in late 2008 and early 2009. Along

with this, a number of ad hoc measures

were also taken. As the crisis abated, even

if inflationary pressures had not

manifested as they did, the need to exit

from the crisis management stance would

have motivated some actions on rates

and liquidity of course, at a pace that

would not derail the still incipient

recovery .

This process began in October 2009, with

the withdrawal of most of the ad hoc

measures, but gained momentum in

January 2010, with an increase in the

cash reserve ratio and, further, in March2010 with the first of a series of rate

hikes. The pace and sequencing of actions

was, as we articulated in our various

assessments, determined by the need to

balance a number of potentially conflicting factors. First, we needed to

address the rapidly mounting demand-

side inflationary pressures while ensuringthat the recovery was not cut short by a

surge in interest rates. Second, while the

domestic economy was doing well, the

global environment remained uncertain,

with a number of new stress points

emerging periodically .

Third, apart from everything else, it was

imperative that we normalize the

monetary policy stance from where it had

moved during the crisis management

phase. Not doing so would have put us in

the situation of being

unable to respond toanother negative shock,

were it to materialize.

In sum, our policy

actions over the past several months were

motivated by the twin

objectives of sustaining

the recovery while

reining in inflation and

normalizing the policy

stance as quickly as

possible. In our mid-

quarter assessment last

month, we indicated that the normalizationprocess is now close to

being complete and that

further actions on rates

and liquidity will be

driven more significantly

by what the growth and

inflation numbers tell us,

both domestically and

globally .

We would like to

conclude by emphasizing

the point that thecurrent episode of

inflation posed a

significant challenge to

policymakers by virtue

of its timing. Monetary

policy responses had to

be calibrated to theneeds of dealing with

inflation while

sustaining a growth

recovery in a still

uncertain global

envir onme

nt .

The

choic

es onthe

magn

itude,

seque

ncing

and

timin

g of

actio

nsweredrive

n by

the

need

to

find a

balan

ce

betwe

enthese

factor

s.

LO

NG

TE

RM

PR

OSP

ECT



IVES

Let me now take a longer term view of

the growth-inflation balance in the

Indian economy . To begin with, we do

have a fairly explicit statement of what

we see as a desirable rate of inflation,

consistent with the economy growing at

its potential rate on a sustained basis. Our policy reviews say that we would

like inflation to be in the 4-4.5 per cent

range in the medium-term, while

aspiring for a 3 per cent rate in the

long term. This might sound a little

unrealistic in the current scenario, but

in order to both justify the aspirationitself as well as assess its realism we

need to look at the historical record of

inflation management in the Indian

economy.

Growth-inflation balance shift

in the Indian economy

Graph 5 provides a very revealing picture

of how the growth-inflation balance hasshifted in the Indian economy . The first

graph, relating decadal averages of growth and inflation over the past

several decades clearly indicates that a

steady upward movement in the growth

rate has been accompanied by a steady

downward movement in the inflation

rate. The contrast is even more striking

when we remove the agricultural sector,

which is the slowest growing among the

three Agriculture, Industry and Services over long periods of time, from the

growth calculations. These patterns

clearly suggest that there is no long-term

trade-off between growth and inflation; if

anything, accelerating

growth is accompanied by decelerating inflation.

This may appear to be

an obvious conclusion. The textbook treatment

of the growth inflation

trade-off sees it as an

essentially short-run

phenomenon, with the

quantum of resources

and capacity in the

economy being fixed . H owever, the reason I specifically mention this

point is that in the wake

of recent assessments

that the Indian economy

is poised to significantly

increase its growth rate

many people have asked me whether this will be

accompanied by an

inflationary surge. My

answer to this is

precisely with referenceto the distinction

between the short-run

and the long-run

relationship betweengrowth and inflation. In

the short-run, with

capacities fixed, a surge

in growth can cause the

economy to overheat,

thus stoking inflationary pressures. This is the

bread-and-butter issue

of monetary policy, the

effectiveness of which

must be judged by its

abilit

y tokeep

the

econo

my growi

ng at

a rate

just

short

of

overh

eatin

g,

thereby keepi

ng

inflati

on in

check .

In the

long

run,

capacities

are

not fixed .

Accel

eratio

n in

growt

h

over long

perio

ds of

time

occur



s in part because investment activity,

which itself contributes to growth, leadsto an increase in capacity . This pushes up

the potential growth rate of the economy,

i.e., the rate at which it can grow without

causing overheating. Looking back over the growth performance of the Indian

economy, it is quite evident that the

acceleration of growth from the 5-6 per

cent range to the 8-9 per cent range was

accomplished by a massive increase in

investment . The Investment-GDP ratio

rose quite sharply over the decades. Even

the relatively high number of 30.5 per

cent during the last decade masks the

sharp surge in this ratio towards themiddle of the decade, which saw it rise

above 35 per cent . At that rate of investment, the capacity of the economy

to increase output is growing quite

rapidly and its ability to meet the

requirements of a growing and

increasingly affluent population is clearly

expanding.

Secret to accelerating

growth

In short, the secret to accelerating

growth while still being able to keep

inflation in check over long periods of

time is in the speed and efficiency of thesupply response. As long as the growth in

supply keeps pace or even exceeds the

growth in demand, inflationary pressures

do not sustain. Supply can be expanded

by enhancing domestic capacity, whichthe Indian economy has clearly done, or

by tapping into global sources, which thesignificant liberalization in trade policy,

particularly since the early 1990s, also

enabled .

H owever, while this

combination of domesticand global supply

responses has helped to

steadily bring the

inflation rate down, theIndian economy has

always been vulnerable

to inflation shocks,

which have caused

uncomfortable spurts in

prices across the

board . Some major

shocks to the system, all

of which required strong

policy responses.

As isevident from the graph,the vulnerability of the

Indian economy to

supply shocks on the

food and energy fronts is

persistent . There have

also been periods in

which a significant fiscal

expansion accompanied

by an accommodating

monetary stance i.e.,demand-side pressures

raised the inflation rate

significantly . Sharp

depreciation of the

rupee in the midst of an

oil shock has also played a role on one occasion.

While the demand

driven inflation shocks

can be avoided by prudent monetary and

fiscal policies, the

vulnerability to supply

shocks in the form of a

failed monsoon or a

surge

in oil prices

will

obvio

usly remai

n.

Energ

y

beca

me a

signifi

cant factor

durin

g the

1970s

,

follow

ingthe

first

oil

shock

of 1973.

It has

persisted in

its

contri

butio

n

since

then. Addin

g up

the

two

provi



des the overall contribution of supply-side

factors, which, as the graph suggests,have persisted in one form or another

through the entire period . Looking ahead,

it would be reasonable to argue that

these pressures are likely to persist, as aresult of both global and domestic

imbalances between demand and supply .

On the energy front, one of the

fundamental drivers of high oil prices is

increasing demand in Emerging Market

Economies, whose rising affluence is

resulting in very rapid growth of energy-

intensive activities. As relatively low-cost reserves of fossil fuels are exhausted,

rising global demand is being met by

exploiting higher cost sources. The cost

differential between petroleum and

alternative sources makes such sources

viable even at their relatively high costs.

Steadily rising costs of production, inturn, exert inflationary pressures on the

global economy, which hits those

economies hardest whose energy

intensity is increasing most rapidly . In

recent years, the prices of petroleum, aswell as other commodities, are perceived

to have been further impacted by their

emergence as an attractive asset class. H owever, as significant as the

contribution of this factor may have been

to price increases, the underlying

fundamentals are what will continue to

drive prices in the coming years.

As regards food, the pressures in theIndian economy are predominantly

domestic. Our Green Revolution in the

1960s raised the production of cereals

dramatically, which increased

availability and stabilized prices.

H owever, what we are

seeing today is theimpact of increasing

affluence on the demand

for a variety of food

items that go far beyond cereals. As people

become more affluent,

their diets diversify . Just

as the growing Indian

consuming class has

stimulated a boom in the

demand for consumer

durables, vehicles and

mobile phones, to give

but a few examples, it has also manifested anenormous increase in the

demand for various food

items beyond cereals.

Demand for protein

sources pulses, milk,

meat, fish and eggs has

surged as has the

appetite for sugar, fruits

and vegetables.

In the case of consumer

durables, vehicles and

mobile phones, theexpansion in capacity

was enormous and

rapid, resulting in the

demand being met

without prices

increasing. In fact,

economies of scale and technological

advancements actually

helped to bring down the

prices of many products

even as volumes were

increasing.

The

globa

lizati

on of the

suppl

y

chain

also

contri

buted

signifi

cantly

, asglobal

capac

ities

were

broug

ht

into

play

to

meet the

rising

dema

nd .

Thiscombi

natio

n of

forces

hascertai

nly

not

beenin



play in meeting the rising domestic

demand for the food items mentioned above. Supply is predominantly domestic

and, for the most part, is unable to

respond effectively to the expansion in

demand . The inevitable consequence of this is an increase in prices. This is a

significant structural driver of inflation in

the Indian economy . A good monsoon

may provide some relief, while a bad one

will aggravate the pressures, but the

enduring solution to this problem lies in a

rapid and sustained increase in the

supply of these items.

Graph 6 also displays the positive

impacts of effective supply response. The

contribution of manufactured goods to

inflationary pressures has declined

significantly over the decades. This

decline can be attributed to increasing

effectiveness of policy reforms inincreasing domestic capacities and

competition and integrating domestic

markets with the global supply chain.

Now let us look at inflation dynamicsfrom the macroeconomic policy perspective, i.e., monetary and fiscal

actions that may have contributed to the

rise and fall of the inflation rate. During

the 1970s and 1980s, the monetization of

the fiscal deficit, and the growth in net

RBI Credit to Government, was clearly acontributor to inflationary pressures in

the economy . Government spending

boosts demand and if the government faces no effective financial constraints, it

can increase spending without limit and,

certainly beyond the capacity of a

relatively closed economy to meet the

demand .

The emergence of an

effective constraint onmonetization of the

fiscal deficit during the

1990s helped to rein this

source of inflationary pressure in. Now, if the

Government wants to

increase its spending, it

has to raise resources

from the market,

bringing in some

realistic cost-benefit

calculations, including

the fact that the cost of

funds for the privatesector will also increase. Against this backdrop,

the Governments

commitment to fiscal

prudence in the form of

fiscal responsibility

legislation is an

important contribution

to maintain the growth-

inflation balance.

It is also striking in

Graph 7 that, contrary

to popular notions about the link between the

growth in money and

the inflation rate, the

rate of growth of money

remained constant even

as inflation declined . The

reason for this was that the expansion in money

was absorbed by the

growing volume of

transactions that

involved money

excha

nge. This

absor

ption

mitigated

the

poten

tially

inflati

onary

impac

t of

mone

y growt h.

One

impor

tant

consi

derati

on in

inflati

onmana

geme

nt isthe

stabil

ity of

the

inflati

on

rate. Forw

ard-

looki

ng

trans



actions build in some expectations about

inflation rates over the tenure of thecontract . Significant deviations of actual

outcomes from expected ones can cause

huge losses to one of the transacting

parties, thereby acting as a deterrent towhat may be growth-enhancing

transactions. The more stable the

inflation rate, the less these deviations

will be. There appears to be an almost

universal correlation between the level of

the inflation rate and its stability . The

reduction in the average inflation rate

over the years has been accompanied by

a sharp reduction in the volatility of that

rate.

The aspiration of a low and stable inflation rate is a realistic one.

Finally, let u make a few comments on the

role of monetary policy in this transition

from a relatively high-inflation economy

to a relatively low-inflation one. Conventional monetary policy began to

apply only during the 1990s, with the

freeing up of restrictions and mandatory

allocations of credit to various sectors.

Genuine markets for both products and credit emerged after the reforms of the

early 1990s. As Graph 13 shows, the

persistent inflationary conditions during

the 1990s were responded to by significant monetary actions in terms of

both rates and liquidity management . As

the inflation rate trended lower, a

process to which the monetary policy

actions of the period contributed, the

policy stance in turn changed toaccommodate the new circumstances. In

other words, monetary policy has been

aimed at keeping inflation under control,

which involves tightening when inflation

exceeds the comfort level

and loosening when it falls below .

CONCLUSION

The current inflation

scenario is a cause of

concern, as the inflation

rate persists well above

the upper bound of the

comfort zone. The fact

that these inflationary pressures emerged

rather quickly in a

situation in which theeconomy was just

beginning to recover

from the significant slowdown of 2008-09

made the policy

challenge more

complicated . The

monetary policy

response to these

pressures has been a

calibrated one, seeking a

balance betweensustaining the recovery

and reining in inflation,

while being mindful of

the risks that still

remain in the global

environment . Recent

data suggest that theapproach is working,

with the economy set togrow at a reasonably

healthy rate during the

current year and the

inflation rate beginning

to decline, including,

signifi

cantly , in

the

manu

factur ing

sector

,

wher

e

inflati

on is

seen

as

beingmost respo

nsive

to

mone

tary

actio

ns.

This

approach

must

beviewe

d in

the

conte

xt of a

long-

stand ing

policy

comm

itmen

t to



maintain a balance between growth and

inflation in the short run, while fosteringfaster growth with lower inflation over

long periods of time. The growth pattern

of the Indian economy over the past six

decades clearly shows that acceleratinggrowth has been accompanied by

declining inflation. This is primarily

because growth has been driven by

expanding capacities across the board as

well as, in recent years, by increasing

global linkages. Both these factors have

helped to achieve a strong supply

response to growing demand, thus

keeping inflation in check .

This is not to say that the Indian economy

is now invulnerable to inflation shocks.

Food and energy price shocks have been a

regular part of the economic landscape

and may continue to be so in the future.

Food prices, in particular, are now beingdriven by some structural imbalances

between demand and supply, as

increasingly affluent consumers diversify

their dietary patterns away from cereals

and towards protein sources. This callsfor an effort to quickly increase the

availability of these items, on which is

contingent the longer term outlook for food price inflation.

H owever, over the years, both fiscal and

monetary policy approaches have clearly assimilated the lessons of the past and

have moved in a direction which helps

contain inflationary pressures even asgrowth remains robust . Making inflation

low and stable was the outcome of a

combination of long-term and short-term

policies over the past decades. Keeping it

there remains the objective, while an

appropriate

combination of long-term and short-term

policies will provide the

instrument to achieve it .

SUGGESTIONS

There are several steps

to effectively control

inflation before it gets

out of hand . Given that

inflation shows theimbalance between

supply and demand of

goods at current pricesso that measures are

taken to reduce demand

or increase supply of

goods and services. The

following are some

important steps one cantake into demand and

supply .

The supply side9.

Increased Production.

The supply of goods and services can be increased

by increasing

agricultural and

industrial production.

Agricultural production

can be increased by

providing an adequate

supply of agricultural

inputs at low prices, themodernization of

agriculture and

scientific farm

management, adequate

water supply for

irriga

tion;indus

trial

produ

ctionetc

simila

rly

can

be

incre

ased

by

incre

ased foreign

direct

invest

ment,

indus

trial

credit

growt

h,

fiscal conce

ssions

, etc.

2.

Contr ol of

illega

l

activities.

There

are

some

illega



l activities that cause significant inflation

in a country . It is hoarding, smuggling,profiteering, black markets, etc. In the

case of smuggling of large quantities of

staples like sugar, butter, wheat, rice, etc

are exported abroad illegally in order toobtain higher prices. Similarly, the

shortage in most cases artificial staples

to create higher profits. All activities of

this evil must be controlled through

advertising, as well as punishment .

3. Peace and Security

Production and distribution of goods and

services can be effected due to theexistence of unease and insecurity insociety . In such circumstances, investors

hesitant to invest for fear of potential

loss. Similarly, the production of

industrial products is affected due to

several unpleasant events such as strikes

etc or therefore peace and security must

be ensured to maintain the supply of

goods and avoid the danger of famine.

4. Main Energy SourcesThe supply of agricultural and industrial

products is highly dependent on energy

availability . If the energy source is

expensive, the cost of production of goods

and services will be expensive too.

Increased production costs raise pricesand cause inflation. Therefore all

necessary measures must be taken to

ensure major sources of energy in

industrial and agricultural sectors of theeconomy .

5 . Control of Money Supply

The money supply has a great influence

on the rising inflation that is, inflation

with increasing the

money supply and viceversa. Therefore, to

control inflation,

measures must be taken

to control the money supply . The money

supply can be controlled

with the help of

monetary policy in

which the central bank

uses various methods,

such as bank rate policy,

open market operations,

changes in reserve

requirements, credit rationing, direct actionetc. All these methods

are useful to control the

rate of inflation in a

country .

6. There is no Deficit

Financing

Deficit financing shows

that public spending

beyond their income. The purpose 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

Indevel

oping

count

ries,

thepopul

ation

is

incre

asing

very

quickl

y that

the

productionof

goods

and

servic

es

does

not

incre

ase at

thesame

pace.

Becau

se the

imbal

ancebetwe

en

suppl

y and dema

nd of

goods

and servic



es 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 thepopulation, 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/

Economic times. Business today.



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r i e s

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l d Dec-08

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