inflating problems due to inflation

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28 States Team Name: We for the Change Tech-id TECH51306 Topic : Inflating Problem du To Inflation

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Solution to the problem Inflation in India

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Page 1: Inflating Problems due to Inflation

28 States

Team Name: We for the Change

Tech-idTECH51306

Topic :Inflating Problem due

To Inflation

Page 2: Inflating Problems due to Inflation

What isInflation

?Inflation : Inflation is defined as a rise in the general price

level over a period of time.

In other words, prices of many goods and services such as housing apparel, food,transportation, and fuel become dearer during

inflation.

Deflation : Deflation is defined as fall in the general pricelevel over a period of time.

What happens during Inflation : Value of Money goes down↓↓ and Prices rise High↑↑

Both Inflation and Deflation create Problems…

Page 3: Inflating Problems due to Inflation

Growth vs. Inflation: India, 1951-2011

PeriodAverage annual growth rate of GDP at constant prices (%)

Average annual rate of WPI inflation (%) 2005-06 to 2010-11 8.47 6.552000-01 to 2005-06 6.93 4.681995-96 to 2000-01 5.92 5.071990-95 to 1995-96 5.38 10.181980-81 to 1990-91 5.64 8.511970-71 to 1980-81 3.16 10.281960-61 to 1970-71 3.75 6.241950-51 to 1960-61 3.94 1.75The Indian evidence above shows the lack of any simple unidirectional relationship between inflation and growth.

Rate of Inflation

WPI - Wholesale Price Index - measured weekly in India

The relative price of food is computed as the ratio of the WPI component for primary food commodities to an index of non-food manufacturing prices computed from WPI data.

Page 4: Inflating Problems due to Inflation

Why is Inflation a Problem in India?1. Inflation makes some people worse off, but it makes others better off

Ex: 1. Increase in Gasoline prices affect the Truck drivers more but barely affects people who go to there work by walk and economy vehicles

2. College tuition fees has risen almost twice as fast as average prices over the past 10 years, which hurts you a lot,but may have little impact on a married couple with no children.

3. Poultry diseases causes a rise in the prices of Non-veg food items and affect people who eats more of Non- veg food items but it barely affects people eating Veg food.

4. People in Cities get affected more than people in small towns and villages

Price Effects :

Income Effects :1. Prices for goods and services mean income for some people. So, as some prices increase faster

than other, some people’s income increase faster than others.Ex: 1.Due to increase in number of automobiles working on Gasoline increased, due to this most of the Oil companies

record very high amounts of improvements in profits every year 2. Due to ever increasing in pollution, the number of people suffering from different diseases also increased which gave

chance to many pharmaceutical companies to improve profits every year 3. All the retail stores working on % profit’s increase there income when ever there is increase in prices of goods

Wealth Effects :1. Inflation redistributes income between Borrowers and Lenders2. Inflation benefits the borrowers and hurts the lenders Reason: As the value of money decreases at higher rate

Page 5: Inflating Problems due to Inflation

Inflation redistributes the social conditions of people

Causes of InflationFactors on Demand side :

1. Increase in Money Supply2. Increase in Disposable Income3. Deficit Financing4. Foreign exchange reserves

Factors on Supply Side :

1. Rise in administered prices2. Erratic agricultural growth3. Agricultural price policy4. Inadequate industrial growth

Printing Of Moneyis never a

Solution for Inflation

Page 6: Inflating Problems due to Inflation

Factors on Demand side 1. Increase in Money Supply If the currency in circulation increased, there would be a proportional increase in the price of goods

2. Increase in Disposable Income Disposable income is total personal income minus personal current taxes. disposable income is the amount of "play money“ left to spend or save. If this is increased people spend money on unnecessary things and there demand increases and thus inflation

3. Deficit Financing government spends more money than it receives as revenue, the difference being made up by borrowing or minting new funds, minting new funds decrease the value of money and thus inflation

4. Foreign Exchange ReservesForeign exchange reserves include foreign currency deposits and bonds and also adds gold reserves, which increase the circulation of money and thus inflation

Factors on Supply Side 1. Rise in administered prices

Prices decided by an individual producer or seller not purely by market forces, this is common when there is only one supplier and he has chance to increase the cost with out any conditions

2. Erratic agricultural growth India is country where in 60% of people still relay on farming and the weather is so uneven and prices depend on the agricultural productivity

3. Agricultural price policy Due to fluctuating prices during mid 60’s during the Pakistan war APP was introduced to ensure stability in prices, so when the supply decreases they have to manage the prices in order to stabilize the cost and inflation occurs

4. Inadequate industrial growth Most of the markets in India run foreign imported products due to lack of technology and other issues, so the pieces also keep fluctuating on the other countries markets and market value and too much imports can lead to fall of value of money

Page 7: Inflating Problems due to Inflation

Increase in Printed Money Increase in Disposable Income

Due to Increase in disposablemoney people spend moneylavishly independent of therenecessity and thus there is increase in Inflation

Mainly seen inIT Sectorin India

due to its speedy growth

Deficit Financing

This happens every yearin India and India has a

debt of172 Billion Dollar up-to now and still unable to

repay it to World bank

Foreign Exchange ReservesForex reserves increase every week due to good participation

of foreign companies and latestreports from RBI says 293 Billion Dollar investment from Foreign companies

Factors on Demand side

Page 8: Inflating Problems due to Inflation

Factors on Supply Side Rise in administered prices

In case of India the administer can be

government or individualif it is government then

it is a fixed price if it is on the individual then there

is lot more variations based

on ones decision costs are

decided

Erratic agricultural growth

Vegetable Max Cost/kg

Min Cost/kg

Tomato 60 5

Potato 30 14

Onion 70 20

Cauliflower 45 20

Brinjal 45 20

Agricultural price policy Though APP was successful

for in some regions but due to poorInfrastructure the food grainsand vegetables stored always

getspoiled and due this the

demand supply would decrease

Inadequate industrial growth

GDP growthwhich clearly

depicts IndustrialGrowth

Page 9: Inflating Problems due to Inflation

Effect of InflationThey add inefficiencies in the market and make it difficult for companies to budget orplan for long termUncertainty about the future purchasing power of money discourages investmentsand savings

Higher income tax rate

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

If the inflation rate in the economy of a country is higher than rates in other economy’sthere will be huge increase in imports and decrease in exports (in terms of vaule)and hence huge fall in GDP

Value of money decreases

Page 10: Inflating Problems due to Inflation

Measures to control Inflation1. Effective policies to control inflation need to focus on the underlying causes of inflation in the

economyEx: 1. If the main cause is excess demand for goods and services, then government policy should look to reduce the level of aggregate demand 2. If cost-push inflation is the root cause, production costs need to be controlled for the problem to be reduced

Step to be takenInvestment in infrastructure and human capital to ensure

that desired growth does not exceed the productive capacity of the economy.

Step to be takenIn the short-run the RBI should raise interest rates sharply to

protect its anti-inflationary credibility.

2. If Inflation is for short period of time and If not Food Inflation

Page 11: Inflating Problems due to Inflation

3. To eradicate Erratic agricultural growth problem

Step to be takenInvestment and promotion of organizational innovations in agriculture to ensure that food supply does not become a bottleneck to growth and price to price (cost effectively)

4. Demonetization Of Currency

Step to be takenPrimarily to curb unaccounted money. The higher

denomination banknotes in Rs.5000 and Rs.10000 were to reintroduced and these banknotes (Rs.5000 and Rs.10000)

were to be demonetized

5. A strong Fiscal Policy Reduction in unnecessary expenditure by the government

Step to be takenExpenditures on public functions and rally's and public meeting, usage highstandards Infrastructure by public officials need to be decreased to certain

fixed level

Page 12: Inflating Problems due to Inflation

6. Check on the amount the government sector borrows each year

7. Moving towards greater independence for the central bank and transparency in monetary policy to stabilise inflationary expectations.

8. Increase in Savings

What happens

with fiscal Policy

These fiscal policies increase the rate of leakages from the circular flow and reduce injections into the circular flow of income and will reduce demand pull inflation at the cost of slower growth of economy

Policy recommended for short-run

Fiscal consolidation to ensure that fiscal policy does not work at cross-purposes with monetary policy.

A loose fiscal policy, by increasing the debt burden both directly and through its effect on interest rates, would prove to be unsustainable in the long run

As the debt burden rises, the pressure to print money to finance the fiscal deficit would rise, thereby making it impossible to pursue an anti-inflationary monetary policy.

Page 13: Inflating Problems due to Inflation

Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit man.Ronald Reagan