INFLATION GOOD OR BAD!!

GROUP 5

ROHTI GUPTASOURABH KHUBCHANDANIPIYUSH MALVIYASONY YADAVMAHITA PENDYALAVIKAS HEGDE

What cost Rs 100 in 1947 would cost Rs 5,920.91 in 2011, a whopping rise of 5920.91 %

DEFINITIONS OF INFLATION

• Inflation exists when money income is expanding more than in proportion to increase in earning activity

• Inflation is a situation of “Too much money chasing too few goods”.

• Inflation is a persistent and appreciable rise in the general level or average of prices.

IS INFLATION DESIRABLE OR UNDESIRABLE?

Desirable:

Inflation of 1- 2 % in developed nations(USA and UK) and 4-5% in developing nations is considered reliable.

To Drive the Economic Growth

To help grow Production and employment

To mobilization of resources(Saving and Investing)

UNDESIRABLE

•It lead to unstable economy

•Uncertainty about the purchasing power of money discourage investing and saving

•Effects employment

•Affects balance of trade where fixed exchange rates are imposed

•Increased instability in currency exchange

NOT EVERY PRICE RISE IS INFLATION

•Prices tend to rise due to changes in the composition of GDP.

•Price rise due to qualitative change in products is not inflation.

•Short-run rise in price due to sudden increase in demand and /or decrease in supply is not inflation

•Price rise after depression or recession is not inflationary

DRIVERS OF INFLATION IN INDIA

•Poor agricultural productivity and high dependence on monsoon.

•Commodity price shock, mainly oil prices(1970’s).

•Global business cycle and wars.

INFLATING TREND IN INDIA (1953-2011)

HISTORY OF INFLATION

•In 1956, inflation stayed at a controlled level below 10%. No one could even set their own prices, since everything was government controlled.

•In the 60s, we faced spiky inflation as wars hit our economy – the Chinese war in 62, and then the war with Pakistan in 65.

•Prices of wholesale goods spiked and after India devalued it’s currency, things got slightly better, with inflation going below the zero level in 1969.

•The 70s saw the great oil spike which led to extremes in inflation – the Emergency calmed things down

•After ‘77, when the emergency was lifted, prices spiked again, and spiked to over 18% in 1981-82.

•The rest of the 80s , the inflation came down as rules were eased, slowly, over supply and prices.

•In the late 1980s and the early 1990s, supply shocks (food shortages and oil price rise due to US-Iraq war) were accompanied by demand pressures of high fiscal deficit in the 1980s and growing GDP in the 1990s.

•The declining trend in inflation during 1994-95 to 2004-05 was the result of structural changes in the macroeconomic framework due to liberalisation.The improved supply response, improved financial and real economy, better monetary policy and emphasis on fiscal consolidation all helped bring down inflation.

•Post 2004-05, we observe a new phenomenon— demand conditions (especially non-government) influencing inflation along with the supply side. The Indian economy grew at an average rate of 8.24 per cent between 2004-05 and 2009-10, fuelled by the growth rate in the services sector.

•India experienced growth rates of above 9 per cent for three years from 2005-06 to 2007-08. This implied a rise in real per capita income, as inflation was below 6 per cent during those three years.

•The 2008 oil price rise saw inflation temporarily go into double digits and interest rates went all the way to 9%. The Lehman bust then took inflation down to very low numbers in 2009. As the elections removed the left from power in 2009, the subsequent recovery then took inflation back up vigorously, and it has been above the 8% mark since.

CONCLUSION

•Economists agree that Moderate rate of inflation is conclusive to economic growth.

•But in longer term, there is no empirical relation between the inflation and economic .

Example.

Post World War II Period

1. Low rate of inflation and high rate of growth(West Germany).

2. High rate of inflation and high rate of growth(Japan).

3. High rate of inflation and low rate of growth(UK).

4. Low rate of inflation and low rate of growth(India).