Project Report Project Report

OnOnMeasures ToMeasures To

Control Control InflationInflation

Meaning Meaning Inflation in general terms means expansion.Inflation in general terms means expansion. In the context of prices inflation means In the context of prices inflation means

continous rise in price level.continous rise in price level. Definition:Definition:

According to Gregory,` it is an increase in According to Gregory,` it is an increase in the quantity of purchasing power`.the quantity of purchasing power`.

Johnson defines inflation,` as the increase Johnson defines inflation,` as the increase in the quantity of money faster than the in the quantity of money faster than the national output is expanding`national output is expanding`

Types of InflationTypes of InflationThere are many types of inflation. There are many types of inflation. It can be classified on the basis of the following :It can be classified on the basis of the following :

A-A- On the basis of the degree of On the basis of the degree of government controlgovernment control :: ::

Open inflationOpen inflation : : Situation in which no steps are taken to Situation in which no steps are taken to control rising pricescontrol rising prices..

According to Milton, According to Milton, ““it is a process in which prices are allowed it is a process in which prices are allowed to rise without any attempt on part of to rise without any attempt on part of government to control them. Under open government to control them. Under open inflation goods are distributed through inflation goods are distributed through price  mechanism. Price mechanism is a price  mechanism. Price mechanism is a situation in which , those people who have situation in which , those people who have large money to spend,  buy more goods.”large money to spend,  buy more goods.”

Suppressed inflation-Suppressed inflation- Situation in which rising prices are Situation in which rising prices are controlled through measures taken by controlled through measures taken by the government .the government .

According to FRIEDMAN, According to FRIEDMAN, ““suppressed inflation is more dangerous suppressed inflation is more dangerous than open inflation because of the corrupt than open inflation because of the corrupt officials responsible for administrating price officials responsible for administrating price control ,black market raises its ugly head”.control ,black market raises its ugly head”.

B-B- On the basis of political On the basis of political conditionsconditions :: ::

1. War time inflation-1. War time inflation- In order to meet the war expenses In order to meet the war expenses government increases the supply of   money. government increases the supply of   money. Large proportion of the production is bought Large proportion of the production is bought by government itself. Relatively small by government itself. Relatively small proportion is left to the general public.proportion is left to the general public.

2 .2 .Peace time inflation-Peace time inflation- Underdeveloped countries need large Underdeveloped countries need large resources for economic planning. In order to resources for economic planning. In order to mobilize resources, government has to resort mobilize resources, government has to resort deficit financing .It leads to inflation which is deficit financing .It leads to inflation which is known as peace time inflation.known as peace time inflation.

C- On the basis of the scopeC- On the basis of the scope :: ::1.1. Sectoral inflation-Sectoral inflation- When inflation affects only a When inflation affects only a

particular part of the country or covers only particular part of the country or covers only one or two goods like pulses,petrol etc,it is one or two goods like pulses,petrol etc,it is called sectoral inflationcalled sectoral inflation..

2.2. Comprehensive inflation-Comprehensive inflation- When inflation is not When inflation is not confined to a given part of the country or a few confined to a given part of the country or a few goods ,but comprise the entire country and all goods ,but comprise the entire country and all goods ,it is called comprehensive inflationgoods ,it is called comprehensive inflation

D-D- Some other general types of inflation Some other general types of inflation are:are:

Creeping inflation :Creeping inflation :In this inflation   prices rise very slowly.In this inflation   prices rise very slowly. Such an inflation is not only considered Such an inflation is not only considered

beneficial to the economy but is also beneficial to the economy but is also considered essential to some extent. considered essential to some extent.

Some economists are of the view that 3% rise in Some economists are of the view that 3% rise in prices can be called creeping inflation .prices can be called creeping inflation .

Appropriate and desirable in the interest of Appropriate and desirable in the interest of national  development .national  development .

Running inflation:Running inflation: When there is rapid increase in prices in very When there is rapid increase in prices in very short period of time it is called running short period of time it is called running inflation .In this case rate of inflation is inflation .In this case rate of inflation is between 80 and 100% over a decade. Such an between 80 and 100% over a decade. Such an  inflation has adverse effect on poor and  inflation has adverse effect on poor and middle sections of the society.middle sections of the society.

Measures to control inflation::Measures to control inflation:: 1. Monetary measures-1. Monetary measures- Classical Classical

economists are of the view that inflation can economists are of the view that inflation can be checked by controlling the supply of be checked by controlling the supply of money. Some of the important monetary money. Some of the important monetary measures to check the inflation are as under:measures to check the inflation are as under:

    Control over money-Control over money- It is suggested that to check inflation It is suggested that to check inflation government should put  strict restrictions on government should put  strict restrictions on the issue of money by the central bank.the issue of money by the central bank.

Credit control-Credit control- Central bank should pursue credit control Central bank should pursue credit control policy .In order to control the credit it should policy .In order to control the credit it should increase the bank rate ,raise minimum cash increase the bank rate ,raise minimum cash reserve ratio etc. It can also  issue notice to reserve ratio etc. It can also  issue notice to other banks in order to control credit other banks in order to control credit

2.Fiscal measures- 2.Fiscal measures- Measures taken by the Measures taken by the government to control inflation.government to control inflation.

A: Decrease in public expenditure-A: Decrease in public expenditure- One of the main One of the main reasons of inflation is excess public expenditure like reasons of inflation is excess public expenditure like building of roads ,bridges etc. Government should building of roads ,bridges etc. Government should drastically scale down its non essential expendituredrastically scale down its non essential expenditure..

   B-Delay in payment of old debts:B-Delay in payment of old debts: Payment of old Payment of old

debts that fall due should be postponed for debts that fall due should be postponed for sometime so that   people may not acquire extra sometime so that   people may not acquire extra purchasing power.purchasing power.

   C-Increase in taxes :C-Increase in taxes : Government should levy some Government should levy some

new direct taxes and raise rates of old taxes.new direct taxes and raise rates of old taxes.

D-Over valuation of moneyD-Over valuation of money: : To control the over To control the over valuation of money it is essential to encourage valuation of money it is essential to encourage imports and imports and discourage  exports                                                    discourage  exports                                                                                                                                                                                                        

Other measuresOther measures                       1 Increase in the production-1 Increase in the production- One of the One of the

major causes of the inflation is the excess of major causes of the inflation is the excess of demand  over supply ,so those goods should be demand  over supply ,so those goods should be produced more whose prices are likely to rise produced more whose prices are likely to rise rapidly .In order to increase production public rapidly .In order to increase production public sector should be expanded and private sector sector should be expanded and private sector should be given more incentives.should be given more incentives.2 Proper commercial policy-2 Proper commercial policy- Those goods Those goods which are in scarcity should be imported as which are in scarcity should be imported as much as possible from other countries and much as possible from other countries and their export should be discouraged.their export should be discouraged.3 Encouragement to savings3 Encouragement to savings – –During inflation During inflation government should come out with attractive government should come out with attractive saving schemes. It may issue 5 or 10 year saving schemes. It may issue 5 or 10 year bonds in order to attract savings.bonds in order to attract savings.

4 Proper investment policy-4 Proper investment policy- Investment in Investment in those industries should be increased those industries should be increased wherein more production of goods can be wherein more production of goods can be generated over a short period of time .Less generated over a short period of time .Less investment should be made in industries investment should be made in industries having long production period. having long production period.

5 Marginal requirements-5 Marginal requirements- It is the difference It is the difference between the value of security and loan between the value of security and loan advanced .advanced .

Inflation rates in IndiaInflation rates in India                                       2006-072006-07          2007-082007-08                                                            Inflation               Inflation                 7.8                 12.0 7.8                 12.0Food inflation        Food inflation         6.3                 17.6 6.3                 17.6Non food inflationNon food inflation 10.2             10.2             6.8 6.8  

Result of Inflation in Result of Inflation in Zimbabwe inZimbabwe in

20082008

Hyper Inflation Zimbabwe: 355,000%!Hyper Inflation Zimbabwe: 355,000%!

The inflation in Zimbabwe for the The inflation in Zimbabwe for the month of March 2008 rose to month of March 2008 rose to 355,000%! Yes, 355,000 per cent! It 355,000%! Yes, 355,000 per cent! It more than doubled from the February more than doubled from the February figure of 165,000%.. figure of 165,000%..

Almost 80% of the nation is Almost 80% of the nation is unemployed. unemployed.

The Zimbabwean central bank has The Zimbabwean central bank has introduced $500 million bearer introduced $500 million bearer cheques (or currency notes) for the cheques (or currency notes) for the public, and $5 billion, $25 billion, $50 public, and $5 billion, $25 billion, $50 billion agro-cheques for farmers. billion agro-cheques for farmers.

The nation had introduced $250 The nation had introduced $250 million bearer chequesmillion bearer cheques

A sausage sandwich sells for A sausage sandwich sells for Zimbabwean $50 million. Zimbabwean $50 million.

A 15-kg bag of potatoes cost A 15-kg bag of potatoes cost Zimbabwean $260 million. Zimbabwean $260 million.

But then, Zimbabwean $50 million is But then, Zimbabwean $50 million is roughly equal to US$ 1roughly equal to US$ 1

Thanks Thanks Presented by:Presented by:Ravi Inder SinghRavi Inder SinghTina ChopraTina ChopraKulwinder KaurKulwinder Kaur