Sustainability of Economic Growth and Controlling Inflation

8/4/2019 Sustainability of Economic Growth and Controlling Inflation

1/13

Sustainability of economic

growth & Controlling Inflation


2/13

Definition of Sustainability of economic growth

Sustainable development is a pattern of resource usethat aims to meet human needs while preserving theenvironment so that these needs can be met not only

in the present, but also for generations to come. ...OR

: Sustainable economic growth in operational termsis the upward trend in environmentally adjusted net

domestic product (EDP) under certain conditionsand assumptions (Bartelmus, 1994).


3/13

What is inflation ?

In simple terms, inflation is a situation wheretoo much money chases too few goods .

OR

Inflation means a considerable and persistent rise inthe general level of prices of goods and services in aneconomy over a period of time.


4/13

Inflation in economic terms is the percentage by which demand is higher thanthe supply. For example, if the inflation rate is 5% for a particular item, itmeans that the demand is 5% more than the total supply of that particular item.

Inflation can also be defined as an increase in the general level of price ofgoods and services over a period of time. It is measured as an annualpercentage increase and is a major concern for common people. It negativelyaffects the purchasing power of money as you can buy less of goods andservices with same amount of money.
http://businesswatch.in/inflation-in-india-major-concern-for-economy/effects-of-inflation/


5/13

What are the types of inflation?

Economists have classified inflation into several heads.Demand pull inflation

When demand grows faster than supply it pushes general prices up. This canbe described as too much money chasing too few goods. India being agrowing economy has experienced this type of inflation for years. Almost all

industries in India face demand pull inflation especially when it comes to thetechnology driven industry like Automobile, Consumer Electronics.

Cost push inflationThis is also known as supply shock inflation. When there is shortage of a

particular product it causes the price levels to rise which has a rippleeffect on the economy thus leading to inflation.


6/13

Pricing power inflationThis type of inflation is caused by business houses who tend to increase prices toincrease their profit margins. It is more common in oligopolistic economies

The recent rise in inflation has been termed as skewflation or skewinflation. This term has been coined observing the unusual inflation whereinthere was huge inflation in the food sector with the non-food sectorremaining more or less constant.

Causes/reasons of inflationPrinting too much money by the central bank causes inflation.When banks ease the lending norms and liquidity in market increases beyonda limit, which is sufficient for the required industrial development.Increase in labor costs and production costs sets off a spiraling effect on the

general price levels and causes inflation. High levels of taxation can also causeinflation.Inflation can also be attributed to increase in wages.Money which is unaccounted or unrecorded like black money is also a majorfactor behind rising inflation rates.


7/13

How inflation is a threat to Indian economy

The global economic crisis saw manyeconomies stumble but India reboundedfaster and was surging ahead with a growthrate of 9%. But the inflationary pressure isforcing the government to adopt measureswhich are taking the steam out of the Indiangrowth story.

For the last two years India is witnessing double digit food inflation which hadreached a high of around 18% in December 2010 with prices of onions, garlic andtomatoes skyrocketing. Lentils, milk and meat have witnessed a steady rise inprices which is putting pressure on the home budget of millions of Indians.Millions of poor people in India are struggling to arrange a two-square meal for

their family members. We are running the risk of having an entire generation ofmalnourished children who are otherwise considered the future of India.The tightening of the economy may control inflation in the long run but it is alsoslowing our economy and as predicted by the IMF Indias growth will be onlyaround 6-7% instead of 9%.
http://businesswatch.in/inflation-in-india-major-concern-for-economy/inflation-in-india-a-major-concern-for-economy/


8/13

How to control the inflation?In India the Reserve Bank of India (RBI) has adopted monetary policies to controlinflation. Since March 2010 the RBI has raised key policy rates nine times in orderto rein in inflation. Along with these it has also adopted a variety of fiscal measures

like reducing exports of essential items like onions and pulses and also encouragingimports.

There are broadly two ways of controlling inflation in an economy:1). Monetary measures and2). Fiscal measures

I).Monetary MeasuresThe most important and commonly used method to control inflation is monetarypolicy of the Central Bank. Most central banks use high interest rates as thetraditional 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.


9/13

Bank rate policyis used as the main instrument of monetary control during theperiod of inflation. When the central bank raises the bank rate, it is said to haveadopted a dear money policy. 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 getsreduced. Therefore, inflation is controlled to the extent it is caused by the bankcredit.

Cash Reserve Ratio (CRR) : To control inflation, the central bank raises theCRR which reduces the lending capacity of the commercial banks. Consequently,flow of money from commercial banks to public decreases. In the process, it haltsthe rise in prices to the extent it is caused by banks credits to the public.

Open Market Operations: Open market operations refer to sale and purchase ofgovernment securities and bonds by the central bank. To control inflation, centralbank sells the government securities to the public through the banks. This resultsin transfer of a part of bank deposits to central bank account and reduces creditcreation capacity of the commercial banks.


10/13

II). Fiscal MeasuresFiscal measures to control inflation include taxation, government expenditureand public borrowings. The government can also take some protectionist

measures (such as banning the export of essential items such as pulses, cerealsand oils to support the domestic consumption, encourage imports by loweringduties on import items etc.).


11/13

Current status of inflation in India

Currently inflation rate is around 9.44% in India, much above the acceptablerate of 5%. The food price index is at 8.31% causing much discomfort to thepolicymakers. Economists have strongly criticized the Indian government fornot being able to restrict inflation. They also feel that RBI needs to take

additional measures to tame down inflation. The RBI has decided to review itsmonetary policies mid-quarterly to assess the economic scenario. Economistshave welcomed this move as such proactive reaction is needed in times ofeconomic volatility.The Indian policymakers are walking on a tight rope and it is yet to seewhether they can bring back inflation to the acceptable 5% mark which under

the current scenario seems impossible.


12/13


13/13

Food inflation soars to disturbing level of 10.05 percent| Written on 1 Sep, 2011 at 17:17 in Business

The following are the yearly rise and fall in prices of some maincommodities that form the sub-index for food articles:Onions: 57.01 percentVegetables: 15.78 percentFruits: 21.58 percent

Potatoes: 13.31 percentEggs, meat, fish: 12.62 percentCereals: 4.64 percentRice: 4.40 percentWheat: (-) 2.52 percentPulses: (-) 4.16 percent
http://liveindia.tv/category/business/http://liveindia.tv/category/business/

Date post:	07-Apr-2018
Category:	Documents
Upload:	ashishshuklaonline
View:	219 times
Download:	0 times

Sustainability of Economic Growth and Controlling Inflation

Documents