INFLATION IN INDIA

The term “inflation” is from the Latin term ‘inflare’, meaning to “blow up or inflate”

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.

WHAT IS INFLATION?

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 IN INDIA

CPI (Consumer Price Index)

WPI (Wholesale Price Index)

GNP Deflator (Gross

National Product

Deflator)

MEASURING PRICE INFALTION

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.

CONSUMER PRICE INDEX

CPI INFLATION(July,11-July,13)

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.

WHOLESALE PRICE INDEX

WPI INFALTION(as on Jan,13)

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

GNP DEFLATOR

GDP DEFLATOR (annual %)

The rate at which the prices of everything go up is called the "rate of inflation".

For example, if the price of something is Rs.100 this yearand next year the price becomes approximately Rs.104 then the rateof inflation is 4%.

WHAT IS INFLATION RATE ?

INFALTION RATE OF INDIA(Jan,11-Jan,13)

INFALTION RATE OF INDIA(1969-2013)

The main problem of inflation came to head in August 1990.

When Iraq invaded Kuwait the prices of oil doubled in international market.

Trade deficit (import exceeding exports) in 1991 rose to 15600 cores

India borrowed funds from International Monetary Fund(IMF).

REASONS FOR INFLATION(in 1990s)

The first half of Indias fiscal 2002-03 (beginning April 1, 2002) witnessed uptrend in inflation.

Due to Increase in oil prices, adverse impact of drought on Agricultural products leading to increase in prices particularly of: Oilseeds and Edible oils.

REASONS FOR INFLATION(in early 20th century)

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.

CONTD.....

Wholesale prices of all commodities have risen by about 38% between 2005 and 2010, but prices of food items have jumped by over 77%. Some food items have seen even bigger hikes like vegetables (101%), milk, eggs, meat and fish (80%).

In 2009-2010 the country faced worst situation in food inflation which was the major cause of overall inflation.

FOOD INFLATION

They add inefficiencies in the market, and make it difficult for companies to budget or plan long-term.

Uncertainty about the future purchasing power of money discourages investment and saving.

There can also be negative impacts to trade from an increased instability in currency exchange prices caused by unpredictable inflation.

Higher income tax rates. Inflation rate in the economy is higher than rates

in other countries; this will increase imports and reduce exports, leading to a deficit in the balance of trade.

EFFECTS OF INFLATION

Measures

MonetaryMeasures

Fiscal Measures

OtherMeasures

CONTROLLING INFLATION

Credit Control

Demonetization of Currency

Issue of New Currency

MONETARY MEASURES

Reduction in Government Expenditure

Delay in Payment of Old Debts & Taxation

Banning Exports of Essentials like Food Crops

FISCAL MEASURES

Increase Production

Rational Wage Policy

Price Control

OTHER MEASURES

In reality, low inflation rate and an upward economic growth is never possible. Nevertheless, low inflation rate means slow economic growth.

Whenever, money is in excess, there is bidding by the consumers due to which the cost of goods escalate.

CONCLUSION

Prepared byAparthiba DebrayXI-B

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