INFLATION SCENARIO IN INDIA (MAR’08-AUG’09)

8/3/2019 INFLATION SCENARIO IN INDIA (MAR’08-AUG’09)

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Group No: 11

Bijal Darji (16)

Bhavika Desai (17)Deepika Gabani (22)

Anita Gandhi (24)

Nikita Mehta (50)

Revathi Nair (57)

Submitted to: Mrs Ranjan Sabhya



Inflation is a rise in the level of prices of goodsand/or services in an economy over a certainperiod of time.

When the price level rises, each unit of currencywill buy fewer goods and services; consequently,

leading to erosion in the purchasing power of money.

It is a loss of real value in internal medium of exchange and a unit of account in the economy.

The inflation rate is a chief measure of price

inflation. It is the annualized percentage changein the general price index (normally ConsumerPrice Index and wholesale price index) over time.



Famous economist Friedman said that Inflation isalways and everywhere a monetary phenomenonand it increases due to rapid increase in the

quantity of money than output.

DEGREES OF INFLATION

Creeping - inflation of about 3 % annually whichis good for an economy.

Trotting - inflation of about 4% - 7% which needsto be controlled.

Running - 10% - 20% increase in the price level.

Hyperinflation - 20% - 30% increase in price levelwhich may lead to breakdown of the economy.



As explained by Friedman

Step 1 - increase in the money supply (wages)

Step 2 - increase in demand

Step 3 - derived demand for factors of production increases,example-labour.

Step 4 - workers settle for higher wages and other factors of

production also become costly.

Step 5 - profit margins decrease, thus manufacturersincrease the price of finished goods to maintain the profitmargins.



Inflation can have positive and/or negativeeffects on an economy.

Negative effects of inflation could be a decreasein the real value of money and other monetaryitems over time; uncertainty about future

inflation can also discourage investment andsavings, and high inflation might lead toshortages of goods if the consumers beginhoarding out of concern that the prices willincrease in the future.

Positive effects of inflation include a mitigationof economic recessions and debt relief by way of reducing the real level of debt.



Inflation is such a situation where in too many people chase too few

goods and/or too few services, that automatically leads to rise in the

prices of the goods and services because of the high demand. On the

other hand, when inflation drops below the desired mark, then too few

people chase too many goods and services, leading to underpricing of

goods and services.

For the past few years in the global economic scenario owing to its

varying inflation patterns. In the fiscal year 2004-05 and 2007-2008,

India experienced an average growth rate of more than 9%.

Till February inflation rate was between 9 to 11 % which dropped below

1% during the 3rd week of March, 2009 i.e. 8.03%.





Year 2008 Inflationrate Year 2009 Inflation

rate March 7.87 January 10.45 April 7.75 February 9.63 May 7.75 March 8.03

June 7.69 April 8.70 July 8.33 May 8.63

August 9.02 June 9.29 September 9.77 July 11.89

October 10.45 Aug 11.72 November 10.45 December 9.70



0

2

4

6

8

10

12

14

Inflation rate

Inflation rate



Economic factors causing inflation: If the government of a country prints money in excess,

then the prices increase to keep up with this increase incurrency that leads to inflation.

An increase in production costs and labour costs, have adirect impact on prices of the final product, also resulting

in inflation. When countries borrow money, they need to cope with the

interest burden. This interest burden causes inflation. High tax rates on consumer products can also result in

inflation. High demands can pull inflation, wherein the economy

demands more number of goods and services ascompared to what is produced.

Costs push inflation or supply shock inflation, wherein thenon-availability of a commodity leads to increase in prices.



Inflation in India is calculated as perWholesale Price Index

435 commodities are used for the WPI basedinflation calculation and base year for the WPIcalculation is 1993-94

WPI is available at the end of every week(generally Saturdays.

There's a time lag of 2 weeks After several years of rapid growth, 2009

proves to be a testing year for India.



In this method, a set of 435 commodities andtheir price changes are used for thecalculation. The selected commodities are

supposed to represent various strata of theeconomy and are supposed to give acomprehensive WPI value for the economy.

WPI is calculated on a base year and WPI forthe base year is assumed to be 100.



As on today, India uses a basket of 435commodities and a base year of 1993-94 forits WIP based inflation rate calculation. The435 commodities used for finding WPI range

from food items like rice, wheat to petroleumproducts to medicines and are givenweightages depending upon their importanceand impact on the economy. Discussions aregoing on to revise the number of commodities to 980 and base year 2004 -2005.



The 435 commodities are divided to various groupsand subgroups. Individual commodities, and as aresult, groups and subgroups have weightages. On a

broader level, the 435 commodities are grouped into,1. Primary Articles2. Fuel, Power, Light & Lubricants3. Manufactured Products

Primary Articles consist of food grains, fruits andvegetables, milk, eggs, meats and fishes, condimentsand spices, fibres, oil seeds and minerals.

Fuel, Power, Light & Lubricants consist of coal andpetroleum related products, lubricants, electricity etc.

Manufactured Products consist of dairy products,atta, biscuits, edible oils, liquors, cloth, toothpaste,batteries, automobiles etc.



After reaching a growth of 9.8% in 2007-08,growth is expected to slow down to 7%. It maynot be a bad thing since it will avoid inflationarypressures building further. However, the globalcredit crunch might reduce growth much more.

Inflation continues posing a threat. Inflation was12% in early August 08. Inflation has been causedby rapid growth [demand pull factors] but, also

due to the cost push inflation factors [rising oilprices]. Hopefully, a fall in oil prices and higherinterest rates will lead to reduction in inflationwithout causing much of a slowdown.



It appears that Japan, Europe, and the US areentering into recession. The falling houseprices and crisis in the financial system couldlead to a sharp downturn, with the worst still

to come.

Many believe that India's growth is not somuch dependent on growth in the West. But

the Indian stock markets have been affectedby the global crisis. India's service sector andmanufacturing sector will be adverselyimpacted by the global downturn.



Getting inflation under control Spreading the growth benefits more

equitably.

Completing investment projects that areessential for the long term development of economy.

Dealing with global financial uncertainty that

will make the capital flows and exports moredifficult.



The Indian Rupee has had a weak year. TheRupee had fallen from 39 Rupee to 1$ in

January 2008, to 44 Rupee in month of September. Real interest rates in India were

still negative. However, if the Indian inflationrate is reduced, and the government does notgo all out for growth, the Rupee may possiblyrebound, at least against the dollar, thatfaced more difficulties in 2009.



In order to keep a check on the high inflationrate, the Reserve Bank of India (RBI) wasplanning to increase the rate of interest. Theinflation rate touched 7.41% in March 29, the

highest in the last three years. The prices of some essential commodities like fruits,vegetables and pulses were rising constantlyand the UPA government has failed to checkprices. Government says that it doesn't haveany magic stick in order to stop inflation.



However the government planned to takehard measures to curb inflation. Thegovernment is planning to ban the export of cement and steel which are the main causesof rising prices. It's also planning to lower theexcise duty on steel from 14% to 8%.

The prices of vegetables have grown by 16%in the past 1 year whereas the prices of cereals have risen by 6.6%. The measures

taken by RBI and the government areexpected to curb inflation that has broken thebackbone of the common man.



• Government launched a new series of wholesale priceindex (WPI) with 2004-05 as base year. At present,

1993-94 is used as base year to calculate WPI. Thenew series of WPI will have 676 items as against 435items in the previous series.

• Consumer items widely used by the middle class like

ice-cream, mineral water, flowers, microwave oven,washing machine, gold and silver will be reflected inthe new series of WPI.

•

''This would give better picture of the pricevariation," a senior official said. Readymade food,computer stationary, refrigerators, dish antenna,VCD, petroleum products and computers will also bepart of the new series.



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INFLATION SCENARIO IN INDIA (MAR’08-AUG’09)

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