impact of inflation on a developing economy

7/28/2019 Impact of Inflation on a developing economy

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NEHAL MEHTA

SUPERVISOR-SUKANYA

SARKHEL

ROOM -34

ROLL-136


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Impact of inflation on a

Developing Economy:A case study on India.


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INTRODUCTION

Inflation is currently most important contemporary economic issue

in the world.

Inflation in the developing economies is associated with the

developmental effort and the structural response to the effort. The socio-economic-political structure of the developing countries

ultimately determines the sources and nature of inflation .

Today, high and rising food prices pose a major policy challenge for

developing countries..

Brazil, which saw triple-digit inflation in the late 1980s and early1990s.


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IMPORTANCE & OBJECTIVES.

OBJECTIVES

What Economic activity will

produce general rise in prices?

Is high inflation getting

embedded in the Indian

economy?

Why inflation turns out to be

more volatile in developing

countries.

IMPORTANCE

Inflation has very undesirableimpacts on the economic growth andresource allocation.

in India inflation has also led to thedownfall of various governments whohave been ineffective in controllingthe rate of inflation having invokedthe anger of the people.

A high inflation rate is highlyundesirable because it has negative

and far reaching consequences onthe economy.

One estimate suggests that about 44million people might be pushed intopoverty.


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INFLATION

Inflation is a rise in the general level of prices of goods and services in

an economy over a period of time.

INFLATION RATE

Inflation rate =[(PI for a current year - PI for a earlier year) / PI for a earlieryear]*100

X 100


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MEASUREMENT OF INFLATION Measuring inflation is a difficult problem for government statisticians. A

number of goods that are representative of the economy are put together

into what is referred to as a "market basket.

Some notable price indices include:

Consumer price index

Wholesale price index

GDP deflator

Across most countries, emerging and developed, the best indicator of

overall inflation (as measured by GDP deflator) is the Consumer Price

Index (CPI).


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Inflation & Developing Economy

The rate of inflation and the economy are closely related to each

other.

Rise in consumption of goods and services without corresponding rise

in supply leads to General Rise In Prices.

Money is created out of thin air i.e., by the central bank. money out of thin air gives rise to an exchange of nothing for

something or to consumption without preceding production.

The growth of the economy of the nation is judged by the growth in the

Gross domestic product but that is not enough.

Most developing countries are prone to supply shocks due to their high

dependence on agriculture and imported energy.


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CAUSES OF INFLATION IN DEVELOPING

ECONOMY

Increase in money supply.

Deficit financing.

Increase in public expenditure .

Increase in investment expenditure.

Increase in export demand

Increase in population

Higher wage rates

Higher taxes

Supply shocks

Hoardings

War or events causing inflation.

Others (Black money spending, Global factors.

Factors etc)


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EFFECTS OF INFLATION IN

DEVELOPING ECONOMY.

Inflation effects the different sectors ofthe economy-

Effects on the distributionof income and wealth,

Effects on production,

Effects on the Balance ofPayment,

Social and moraldegradation

Political instability.

Confidence in currency

Adverse effect on savings.

Effect on public revenue

Inflation effects the different classesof the people

Debtors & Creditors,

Salaried Class, Wages earners,

Fixed income

group(pensioners),

Investors and shareholders,

Profit earners(Businessmen)

Farmers (Agriculturists).


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WAYS TO CONTROL INFLATION IN

DEVELOPING ECONOMY. Monetary Measures-The most important and commonly used method to

control inflation is monetary policy of the Central Bank. Most central

banks use high interest rates as the traditional 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.

Fiscal Measures-Fiscal measures to control inflation include taxation,

government expenditure and public borrowings. The government can also

take some protectionist measures .

Control on deficit financing.

Income policy.

Price controls and rationing

Increasing the availablity of goods.


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INFLATION & INDIAN ECONOMY The Inflation rate in India often crosses six or seven percent. Outside of

India in the developed countries the rates of seven percent and beyond

are unheard of.

The inflation rate is also a tool which helps us to witness what the

common man is going through.

Inflation rate was reported around 8.8% in Feb 2012.

While the inflation rate (point to point, WPI) was 4.5 % in Jan 2008, itincreased to 12.8%by Aug 2008. It was followed by a period of low

inflation till October 2009. But from Nov onwards prices were on an

accelerating trend again and by Apr 2010 inflation rate touched 11%.

This is in sharp contrast to most of the 2000-2005 period when inflation

rate hardly ever crossed 7%, and the last time inflation crossed doubledigit was in May 1995.


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MEASURING INFLATION IN INDIA

Policy makers in India, including

the RBI, have been erroneouslyusing the Wholesale Price Index(WPI) as a surrogate forunderlying inflation even whenits ability to accurately forecastoverall inflation is close to zero,

especially in the presence ofinformation on CPI inflation.

Starting Feb. 20th 2011, a newnational CPI index has beenreleased with urban and ruralAll-India components. This

series has wider coverage andattempts to accurately reflectchanged expenditure pattern


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Decadal Average InflationDecades WPI CPI-IW GDP Deflator PFCE Deflator

1971-72 to 1980-

81 10.3 8.3 8.8 8.4

1981-82 to 1990-

91 7.1 9 8.7 8.31991-92 to 2000-

01 7.8 8.7 8.1 8.5

2001-02 to 2008-

09 5.2 5.3 4.6 4.4

1971-72 to 2008-

09 7.7 8 7.7 7.6

0

2

4

6

8

10

12

1971-72 to 1980-

81

1981-82 to 1990-

91

1991-92 to 2000-

01

2001-02 to 2008-

09

WPICPI-IW

GDP Deflator


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PRICE TRENDS IN INDIA IN RECENT

YEARS(WPI)

From 1970 until 2010, the average inflation rate in

India was 7.99 % reaching an historical high of 34.68 %

in September of 1974 and a record low of -9 percent

(aprox.)in May of 1976.


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PRICE TRENDS IN INDIA OVER THE YEARS

(CONSUMER PRICE INDEX)

1975: -6.18%

1974-:25.40%


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India has already had 20 consecutive months of inflation in excess of 8%, from January 2010to August 2011.

. The previous inflationary episode in 2008 was more intense, with a higher peak. But itlasted for just seven consecutive months.

The demand collapse after the economic crisis brought down inflation in the intervening 13months, from December 2008 to December 2009.

It is tempting to ask whether high inflation would have persisted in that period in case therehad been no global economic crisis. If so, then India would have now had 40 months of highinflation in a row.

The inflation expectations of households, which are surveyed by the Reserve Bank of India(RBI) every three months, are running ahead of actual inflation.

How inflation has been applicable in Indian economy?


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INDIA & FOOD INFLATION

Standard explanations of India's inflation story has focused mostly on food grain pricesand specific supply and policy shocks.

Food Inflation is consistent driver of Non-food inflation and hence overall inflation.

Besides conventional monetary policy responses, the immediate prescriptions to the

problem have revolved around government buffer-stock operations, increasing imports

and other efforts to increase food grain supplies

PRICE BAROMETER (IN %)

COUNTRY GENERAL

INFLATION

FOOD INFLATION MONTH

INDIA 10.16 16.49 MAY

SRI LANKA 4.76 - JUN

BANGLADESH 8.78 10.80 MAR

PAKISTAN 13.10 14.80 MAY

MALAYSIA 1.61 2.50 MAY

THAILAND 3.34 11.92 JUN

INDONESIA 5.05 10.27 JUN

PHILLIPINES 4.28 3.06 MAY

ARGENTINA 10.70 - MAY

BRAZIL 4.84 - JUN

CHINA 3.10 6.10 MAY

RUSSIA 5.80 4.50 JUN


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IMPACT OF FOOD INFLATION ON INDIA.

Food inflation has increased the greatest over the past period of years than the inflation

of primary non-food articles, manufactured non-food products and fuel and power.

Hence we will focus on impact food inflation in India .

The graph explains food inflation>non food inflation. Its volatility is also greater than

non food inflation.


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IMPACT OF HIGH FOOD PRICE INFLATION ON INDIAN

CONSUMER.

The chart gives the way theIndians spend.

Nearly 43% of the personal

disposable income goes into food

products.

this is the segment which isexperiencing highest inflation

A high food inflation ensures that

consumers have to cut back on

their spending

This in turn will impact the

consumption part of the GDP

growth.

42.80%

16.20%

8.20%

4.20%

5.85%

6.20%

8.80%

3.90% 3.90%

food

non routin

others

durables

clothing

education

transport

health

housing


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FOOD INFLATION IN INDIA

CAUSES

The immediate reason for the spurt inthe prices of specific food items, ishoarding.

the growing penetration of big

corprates in the food economy,

Not producing enough to meet theneeds of a growing population.

our income is rising a lot faster thanfood production.

the cuts in subsidies and price hikes of

inputs like diesel and fertilizer lack of post harvesting

infrastructure such as cold chains,transportation, and storage facilities.

bad monsoon in India, 60% of thecountry's total cropped area is not

irrigated.

IMPACT

The social implications severe for thepoor.

the rise in input cost will increase the costof production resulting in lower

profitability cut down on other costs such as R&D,

advertisement and promotion as well asthe manpower cost.

price increase which will reduce thedemand for the products.

consumers in general, will have lessdisposable income

rise in prices has also resulted into shortsupply of the basic agricultural input.

the rising cost of production will impactthe exporters of processed food products.

External balances of net commodity

importers have deteriorated.


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Commodity Food Price Index Monthly Price -

Index Number

155

160

165

170

175180

Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12

Price

Price

Commodity Food Price Index - Monthly Price

Month Price Change

Sep-11 175.53 -

Oct-11 165.95 -5.46%

Nov-11 164.28 -1.01%

Dec-11 162.14 -1.30%

Jan-12 164.19 1.26%

Feb-12 169.43 3.19%

Mar-12 174.01 2.70%

Description: Commodity Food Price Index, 2005 = 100, includes Cereal,

Vegetable Oils, Meat, Seafood, Sugar, Bananas, and Oranges PriceIndices


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Product 2005 2007 Oct, 2009 Jan,2010

Rice 13 15 22 48

Wheat 9 12 13 29

Sugar 19 19 32 50

Tur Dal 30 36 82 100

Retail Prices (Rs./kg)-Metro Cities(Source :Department of Consumer Affairs-Govt. of India)


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0

20

40

60

80

100

Rice Wheat Sugar Tur Dal

20052007Oct, 2009

Retail Prices (Rs./kg)-Metro Cities(Source :Department of Consumer Affairs-Govt. of India

Monthly budget of a common man is disturbed due to heavy food inflation.

It has upset his routine life. 50% of the people are now having Dal onetime in a day.

Expenses on the childrens education has been curtailed.

Expenses on medical treatment are reduced drastically. Operations/

surgeries are postponed.


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FOOD INFLATIONSkyrocketing Retail Prices

Price Rs/kg

Item 2004 2008 January 2010

Wheat 9 20 29

Rice 10 22 48

Sugar 14 20 50

Edible Oil 40 95 100

Dalda 40 72 85

Chana Dal 25 40 56

Mung Dal 24 48 100

Besan 20 48 60

Milk 14 20 30

Kerosene/litre 18 35 35


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FOOD INFLATIONSkyrocketing Retail Prices


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RESTAURANTS TWEAK MENU AS FOOD PRICE

INFLATION RAGES.

While eating at Pizza Hut is set to turn 4-5% more expensive,

Your favorite cup at Costa Coffee will become costlier by 2-3%

Yo! China is rejigging its menu to factor in soaring input prices,

while Kwality Group which has quick-service restaurant brands like Kwality

Express, Chopsticks Express, bakery outlets Bread & More and outdoorcatering services has also increased its product prices by 5-7%.

McDonalds is not looking at an increase in prices, its products have

become tax-exclusive, which means the consumer pays extra in the form

of taxes.


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IMPACT OF ORGANISED FOOD RETAIL ON STREET VENDORS & SMALL STORES.

Basic food items such as are 30 % cheaper in organized retail stores than small stores or at street

vendors.

A study conducted in five big cities of India found that prices could be as much as 70% cheaper for

fruits and vegetables, 50% for milk & 5-7% for branded flour in super markets.

Large retailers have said that they will squeeze margins & do more promotions to counter inflation.

Research shows that 60-70% of the price formation happens between the farmer and the consumer,

due to the commissions of several layers of middlemen that leads to hike in prices.

Although the retail biggies are taking a hit by selling food items at lower prices, they are able to offset

losses with profit made in other products, an option not available to the hawkers.

Bulk buying by retailers helps them in keeping their prices lower than street vendors.


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STORY OF SUGARENOUGH STOCK-AVAILABILITY YET PRICES TOUCHING SKY

Prices have gone up from Rs 22 to Rs 50/kg in just one year. A sugar

exporting country is converted into importing country.

India produced 573 lac tons sugar during 2007-10. The country hadopening stock of 105 lac tons

Total availability of sugar for these 3 years was 678 lac tons

Yearly consumption of sugar including consumption by confectionaryand sweet manufacturing industry was 213 to 220 lac tons.

India exported 80 lac ton sugar @ Rs 12 to 14/kg during 2007 to 2009& now we are importing 50 lac ton sugar @ Rs 38/kg

Govt paid thousand crores subsidy of Rs 1.44/kg to these exporters

Farmers got the same price of Rs 85/quintal for his sugarcane &

consumer paying double rate


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SUGAR PRODUCTION CONSUMPTION - AVAILABILITY in lakh tonnes

2003-

04

2004-

05

2005-

06

2006-

07

2007-

08 (Est)

Opening Stock 116 85 40 36 92

Production 140 127 193 283 263

Imports 4 21 - - -

Total

Availability260 233 233 319 355

Off-take

(a) Internal

Consumption

(b) For Exports

173

2

185

0.04

185

11

210

17

225

48

Closing Stock as

on 30th Sept.

85 48.25 36 92 82

(Source: Indian Sugar Manufacturers

Association


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SUGAR COMPANIESSHARE PRICES AT BSE

Name of the Sugar

Company

Price as on

7.1.2010 11.11.2008

Bajaj Hindustan 35 13

Balrampur Chini 143 47

Dhampur Sugar 152 26

Shree Renuka Sugar 243 70

Sir Shadilal Enterprises 176 56


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SUGAR COMPANIESSHARE PRICES AT BSE


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STEPS TO FIGHT FOOD INFLATION IN INDIA. To strengthen state intervention in the

food economy, both in food distributionand production.

Raising agricultural productivity andmodernization of storage and marketingof agricultural products cannot be left toprivate corporates and MNCs.

Inflation cannot be controlled withliberalised trade and private profiteering

in food items. The influence of private corporates and

traders in the food economy needs to becurbed.

Coordinate measures against hoardingand black-marketing.

Prohibit commodity futures trading infood articles

The costs of agricultural inputs like fueland fertilisers have to be controlled by thegovernment.

Government must continue to subsidisefuel and fertiliser.

rapid growth in organized food retailmarket, we can control inflation in food

industries due to economies of scale.


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CONCLUSION

A high inflation rate is highly undesirable because it has negative and far

reaching consequences on our economy. Therefore, the government, its

policy makers, the central bank of any country must diagnose its causes

in depth by implementing pragmatic and effective policies to control

inflation.


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THANK YOU!

impact of inflation on a developing economy

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