GOVERNMENT COLLEGE OF ROPAR

PRESENTATION ON

Business Environment

B.Com- II (Sem-IV)

India is one of the Leading development nations of the world. It is

pursuing ultimate economic growth as its. Price stability is viewed as a

necessary condition to ensure the development performance of the

country. Although certain level of price rise follows the process of

development, but steep rise in prices work against the development

process of the country.

It works to the disadvantage of the poor person most.

As the price rise, the value of money declines so does the real

income in the hands of the poor.

Introduction

The term "inflation" is from the Latin term 'inflare', meaning to

"blow up or inflate", and it was first used in the year 1838 in

the monetary sense to describe "an increase in the amount of

money". Inflation is commonly understood as a situation of

substantial and rapid general increase in the price level and

consequent fall the value of money over a period of time.

Inflation means persistent rise in the general level of prices.

Meaning and Definition of Inflation

1. Gross domestic product Deflator.

2. Change in Consumer Price Index (CPI)

3. Change in Wholesale Price Index (WPI)

Methods to Measure Inflation

Gross domestic product deflator is the broadest

measure of the change in the price level.

1. Gross domestic product Deflator

A consumer price index (CPI) 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.

2. Change in Consumer Price Index (CPI)

Wholesale Price Index or WPI is the price of a representative basket of wholesale goods.

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. Very often WPI and CPIs differ from each other. It is mainly because they differ in

term of their weighting pattern. First, food has a larger weight in CPI ranging from 46 per cent in CPI-IW to 69 per cent in CPI-AL whereas, it has a weight of only 27 per cent in WPI.

3. Change in Wholesale Price Index (WPI)

Types of Inflation

GallopingInflation

Creeping Inflation

Deflation Stagflation Hyper Inflation

Decades WPI CPI-IW1971-72 to 1980-81 10.3 8.31981-82 to 1990-91 7.1 9.01991-92 to 2000-01 7.8 8.72001-02 to 2008-09 5.2 5.32009-10 3.8 12.442010-11 9.6 10.22011-12 9.1 9.41

Table: showing average annual percentage increase in the inflation over different decades:

Price Movement in India

Source: Reserve bank of India, report

Major Groups Commodity Weight

2008-09 2009-10 2010-11

All commodities 100 126 130.8 143.3Primary articles 20.1 137.5 154.9 182.4-Food Articles 14.3 134.8 155.4 179.6Fuel and Power 14.9 135.0 132.1 148.3Manufactured product

65.0 120.4 123.1 130.1

Average yearly %age change in WPI

3.8 9.6

Table: Index No. Wholesale Prices in India (commodity wise) (2004-05 =100)

Source: O/o Economic Advisor, Ministry of Commerce

Indian economy is in the developing stage. Development process needs continuous and

sustained investment in a large quantity. As the domestic saving might not meet the

requirement, the govt. might resort to high taxation, external borrowing and deficit

financing. Although impacts for the development purpose, such measures are necessary

but basically it is deficit financing that put's major pressure on prices.

Causes of Increase in Prices

The first and foremost factor of course is the rapidly rising money supply.

One more important fact to mote is the increase in the money supply is not

correspondingly followed by the increase in the prices at same rate.

1. Increase in money supply

Indian economy is an agricultural economy.

The productive level of agriculture mostly depends upon nature in India.

Draught, floods seriously affects the productivity of agricultural in India, thus

causing irregular growth in the production of agricultural goods.

On the other hand industrial sector is marred by the insufficiency of public sector,

thus causing low production on the industrial fronts.

2. Irregular growth in production

India is in the second stage of demographic transition theory and the population

of the country is rising at the faster pace.

Rapidly rising population is responsible for increasing demand of food grains

and items, which puts pressure on scarce goods, thus causing increase in prices.

3. Increase in demand of food grains and consumer goods

The prices of larges number of commodities the economy are formally or informally controlled by the govt. These commodities are either vital raw material or items that are essential for

final consumers. Accordingly, the government has been taking responsibility to intervene in the

determination of prices of selected essential commodities. (Such as rise / wheat, sugar, edible oil, cloth etc.)

4. Rise in administered prices

For finding the investment for development purpose, govt. has resorted beside domestic saving taxation external borrowings and deficit financing.

Taxation includes direct taxes and indirect taxes. While direct taxes mop up additional resources with the public, on the other hand,

indirect taxes increase the cost products. Price increase in the international market is also making its impact on the price r

ise in the country.

5. Excessive resort to Indirect taxes

Over the years, the Govt. of India is always resorting to this measure to improve

the balance of payment position.

But directly or indirectly this measure is also resulting into overall increase in the

price of commodities.

6. Devaluation of Rupee

The prevalence of black money is also resulting into increase in the prices of the

commodities.

For controlling the demand of the economy, govt. tries to control the money

supply in the economy.

7. Prevalence of Black Money

Particular attention will have to be given to increasing domestic

production.

Efficient management of supplies in the case of essential

commodities.

Wherever necessary, domestic production will have to be

supplemented by timely imports.

Measures for Price Stability

1. Maintaining proper supply of essential goods

In our economy, through direct measures of intervention, the government plays an

important role in improving the distribution of real incomes and ensuring a much

greater.

In the recent years, there is an increase in administered prices again and again, due

to increase in costs.

When there is an increase in costs, the options are limited.

2. Proper administered price policy:

Another important step required is to reduce the inequalities of income.

We know that our fiscal system additional resources generated in the economy do

not percolated to the lower level.

3. Reducing inequalities of income.

It is essential that a proper relationship between price structure and income

structure should be evolved.

4. Integration of prices and incomes

Development should be limited to the availability of real savings in the

economy.

Deficit financing should not be resorted to as a routine measure.

Further expenditure on non productive activities should be controlled.

5. Economic development within means