inflation management in india

8/6/2019 Inflation Management in India

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INFLATION

MANAGEMENT ININDIA

SUBMITTED TO:



INDEX:

INTRODUCTION

TYPES OF INFLATION

CALCULATION

CAUSES

EFFECTS OF INFLATION

INFLATION AND INDIA (IMPACT ON

INDIA)

MEASURES TO CONTROL INFLATION



INTRODUCTION:

INFLATION: INFLATION CAN BE DEFINED AS THE GENERAL

TENDENCY FOR PRICES TO RISE AND A

DECLINE IN THE PURCHASING POWER OF

MONEY.

INFLATION NEEDS TO BE EXAMINED IN REAL

TERMS TO UNDERSTAND ITS ACTUAL IMPACT

UPON THE ECONOMY.

EXAMPLE: IF WAGES RISE BY 5% AND

INFLATION STANDS AT 6% THEN IN REAL

TERM WAGES HAVE FALLEN BY 1%.



INFLATION RATE:

THE INFLATION RATE IS THE PERCENTAGE BY WHICH PRICES OF GOOD AND SERVICES RISE

BEYOND THEIR AVERAGE LEVELS.

IT IS THE RATE BY WHICH THE PURCHASINGPOWER OF THE PEOPLE IN A PARTICULAR

GEOGRAPHY HAS DECLINED IN A SPECIFIED

PERIOD.

THE RATE OF INFLATION MAY BE CALCULATED

WEEKLY, MONTHLY, OR ANNUALLY.

HOWEVER , IT IS ALWAYS EXPRESSED AS AN

ANNUALIZED FIGURE.



TYPES OF INFLATION:

MODERATE INFLATIONMODERATE INFLATION

RUNNING INFLATIONRUNNING INFLATION

GALLOPING INFLATIONGALLOPING INFLATION

HYPER INFLATIONHYPER INFLATION



MODRATE INFLATION:

IT OCCURS WHEN PRICES ARE RISEING

SLOWLY & WHEN RATE OF INFLATION IS

LESS THEN 10 % ANNUALLY OR IT IS A

SINGLE DIGIT INFLATION RATE.

WHEN THE PRICE IS MODRATE & IS IN THE

RANGE UP TO 2% IT IS CALLED CREEPING

INFLATION. AND WHEN IT IS IN THE RANGE

OF 4% TO 5% IT IS CALLED WALKING

INFLATION.



RUNNING INFLATION:

WHEN PRICES RISE BY MORE THEN 10 % A

YEAR , RUNNING INFLATION OCCURS.

BUT , WE MAY SAY THAT A DOUBLE DIGITINFLATION OF 10-20 % PER ANNUM IS A

RUNNING INFLATION.



GALLOPING INFLATION:

ACCORDING TO SAMUELSON , WHEN PRICES

ARE RISEING AT DOUBLE OR TRIPLE DIGIT

RATES OF 20 , 100 % OR 200% A YEAR , THE

SISTUATION IS DESCRIBED AS ¶GALLOPING

INFLATION·.

GALLOPING INFLATION IS REALLY A

SERIOUS PROBLEM. IT CAUSES ECONOMIC

DISTURBANCES.



H YPER INFLATION:

IN HYPER INFLATION PRICE RISES EVERY

MOVEMENT , AND THERE IS NO LIMIT TO THE

HEIGHT TO WHICH PRICES MIGHT RISE.

IN QUANTITATIVE TERMS , WHEN PRICES RISE

OVER 1000 PER CENT IN A YEAR, IT IS CALLED

HYPER INFLATION.



CAUSES OF INFLATION:

DEMAND PULL INFLATION:REFERS TO THE IDEA THAT THE ECONOMY

DEMANDS MORE GOODS AND SERVICES THAN

ARE AVAILABLE, ENABLING SELLERS TO RAISE

PRICES TILL EQUILIBRIUM IS PUT IN PLACE.

COST-PUSH THEORY OR SUPPLY SHOCK

INFLATION:

SHORTAGES IN THE AVAILABLE SUPPLY OF A CERTAIN GOOD WILL CREATE A RIPPLE

EFFECT THROUGH THE ECONOMY BY RAISING

PRICES THROUGH THE SUPPLY CHAIN FROM

THE PRODUCER TO THE CONSUMER.



CONTROL OF MONEY SUPPLY BY CENTRAL

BANKS:

IF THE CENTRAL BANKS OF COUNTRIES DONOT CONTROL THE MONEY SUPPLY

ADEQUATELY, IT MAY ACTUALLY GROW AT A

RATE FASTER THAN THAT OF THE POTENTIAL

OUTPUT IN THE ECONOMY, LEADING TO

INFLATION.

ARTIFICIAL CREATION:

CAN BE ARTIFICIALLY CREATED THROUGH A

CIRCULAR INCREASE IN WAGE EARNERS

DEMANDS AND THEN THE SUBSEQUENT

INCREASE IN PRODUCER COSTS WHICH WILL

DRIVE UP THE PRICES OF THEIR GOODS AND

SERVICES.



EFFECTS OF INFLATION:NEGATIVE EFFECTS:

DECREASE IN THE REAL VALUE OF MONEY OVER TIME.

DAMPENED INVESTMENT AND SAVINGS DUE TO

UNCERTAINTY OVER FUTURE INFLATION.

SHORTAGE OF GOODS IF CONSUMERS BEGIN

HOARDING FEARING FUTURE INCREASE IN PRICE.

CREATION OF IMBALANCES WHEN EXTEMES

ARISE IN THE SUPPLY/DEMAND STRUCTURE.

E.g.. THE MORTGAGE CRISIS OF 2007.

POSITIVE EFFECTS:

MITIGATION OF ECONOMIC RECESSIONS, AND

DEBT RELIEF BY REDUCING THE REAL LEVEL OF

DEBT.



MEASURES TO CONTROL INFLATION:

THE SUPPLY SIDE:

� Increased production:

Agricultural production can be increased by

modernization, providing agricultural inputs at low prices.

Industrial production can be increased by increased FDI,

fiscal concessions, etc.

� Control of illegal activities:

Hoarding, smuggling, profiteering, black marketing, etc.

cause significant inflation in a country.



� Peace and security:

Unease and insecurity in society can affect the production

and distribution of goods and services. Peace and security

must be ensured to maintain the supply of goods.� Main energy sources:

The supply of agricultural and industrial products is highly

dependent on energy availability. If the energy source is

expensive, the cost of production of goods and services will

be expensive too. Increased production costs raise prices

and cause inflation.



THE DEMAND SIDE:

� Control of money supply:

Money supply in an economy can be controlled by various

tools such as bank rate policy, open market operations, reserve requirements, credit rationing, etc.

� No deficit financing:

Deficit financing shows that public spending is more than

income. The purpose of deficit financing is to meet the

additional costs that the budget deficit causes. As a result,

money supply increases and causes inflation. Thus, deficit

financing should be minimized and development costs

should be met through taxes and debt .



� Population control:

In developing countries, the rate of population increases at

a faster pace than the production of goods and services.

This causes imbalance between supply and demand of goods and services, leading to inflation. Hence, population

must be controlled.

� Fiscal policy:

Fiscal policy refers to government spending and taxes.

During inflation, the govt. tries to reduce its expenditure on

unproductive activities and increases the direct tax rate so

that the purchasing power of the population is decreased.



� Direct Measures:

The government also uses methods

like the rationing of goods,establishment of public service shops,

the price review committees, boards of

price stabilization, etc. to control

inflation.



CALCULATION:

WPI CPI

Measure the temporal price change

of wholesale transactions of all

commodities in the country.

Measures the average price of

consumer goods and services

purchased by households.

The weights of items have been

assigned in proportion to their

share in the total value of

transaction (output) in the economy

Weights are assigned in proportion

to their share in the consumption

expenditure of the family of

industrial workers in the selected

centers

Measures inflation at each stage of

production

Measures inflation only at final

stage of production.



INDIA OTHER

India, is amongst few countries of

the world, which selected WPI as

its official scale to measure the

inflation in the economy.

Most of the major economies like

US, UK, Japan, France, Singapore

and even our arch rival China have

selected CPI as its official

barometer to weigh its inflation



YEAR WISE WPI INDIA:

121.6127.2

132.8 140.7 145.3

155.7161.3

166.8175.9

187.3195.6

206.2215.7

0

50

100

150

200

250WPI

Index



INFLATION 2009:

� In 2009 inflation fell below the target range due to thereversal of the supply shocks that affected the prices of

food, recording a rate of 0.25 percent in December.

� A reversal of the declining trend of inflation was observed

as from January, although inflation still remained below the

target range.

� Annualised inflation at February 2010 was 0.8 percent, a

rate explained by the higher prices of some foodstuffs and

fuels.



INFLATION 2010: WPI IDEX INCREASED FROM 258.1 IN MAY ·10

TO 259.8 IN JUN·10. THIS IMPLIED INFLATIONFOR JUN ·10 AT 10.55% (YoY), LOWER THAN

MARKET EXPECTATIONS OF 10.8%.

FOR APRIL ·10, INFLATION WAS REVISEDUPWARDS FROM 9.59% TO 11.23%. ONCE AGAIN

INFLATION HAS BEEN REVISED UPWARDS

SIGNIFICANTLY. IN MAY-10 UPDATE, MARCH

2010 NUMBERS WERE REVISED UPWARDS FROM

9.9% TO 11.04%.



WPI JUN -10

INFLATION

INDEX RATE OF

INFLATION

MAY-10 JUN-10 MAY-10 JUN-10

PRIMARY ARTICLES 299.9 302.1 16.61 16.28

FOOD ARTICLES 294.6 295.2 16.5 14.6

NON-FOOD ARTICLES 292.4 286.4 18.60 18.59

FUEL PRODUCTS 368.2 374.4 13.03 14.32

MANUFACTURING

PRODUCTS

219.1 219.5 6.41 6.66

WPI INFLATION 258.1 259.8 10.16 10.55

CORE INFLATION 111.3 111.8 6.58 7.29

inflation management in india

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