Gokarn Bahadur Karkee Roll No: 13043

INFLATION AND ITS CURRENT RELEVANCE IN

INDIAN ECONOMY

ObjectiveTo study the causes and effects of inflation in the

Indian economy and analyze its trends in the past few years and current scenario.

What is InflationInflation can be defined as a rise in the

general price level and therefore a fall in the value of money.

Inflation occurs when the demand of goods and services is higher than the output of goods and services.

Inflation also occurs when the costs of producing goods and services increases.

Causes of InflationDemand-pull inflation

Cost-push inflation

Imported Inflation

Major reasons of Inflation in IndiaRise in Crude oil prices

Rise in Food prices

Black Money/ Hoarding

Wage rate wise

Sub Prime crisis

Measuring Inflation435 commodities are used for the WPI based

inflation calculation and base year for the WPI calculation is 1993-94 previously.

Current series of WPI at base 2004-05 constitutes 676 commodities.

WPI is available at the end of every week (generally Saturdays), for a period of one year ended that day

The wholesale price index comprises of the following indices:

Formula for calculating Inflation=(WPI in month of current year-WPI in same month of previous year)-------------------------------------------------------------------------------------- X 100WPI in same month of previous year

Contd…..CPI for Industrial Workers (CPI-IW) based on

2001 included 120-360 items, CPI for Agriculture Labourers (CPI-AL) and

CPI for Rural Labourers (CPI-RL) both with base year 1986-87 included 260 items.

In addition, there is now the new series of CPI-(U+R) based on the year 2010 for both rural and urban areas and also combined has been introduced from January 2011 and includes 456 items.

Effects of InflationHoarding Increased riskFixed income recipientsIncreased consumption ratioLowers national savingIllusions of making profitsRising prices of imports Causes business cycles to go out of business

Curbing InflationStrengthen local currency e.g. Indian

RupeeThe Reserve Bank of India (RBI) hikes the

interest rates and other policy rates to control inflation.

Government uses the fiscal policy to check inflation.

Inflation and GDP growth in the India

Trend of Rate of Inflation for some important items during last six months

Commodities/Major Groups/Groups/Sub-Groups

Weight (%)

Rate of Inflation for the last six months Mar-13 Feb-13 Jan-13 Dec-12 Nov-12 Oct-12

ALL COMMODITIES 100.00 5.96 6.84 7.31 7.31 7.24 7.32 PRIMARY ARTICLES 20.12 7.60 9.70 11.41 10.56 9.56 7.81 Food Articles 14.34 8.73 11.38 12.35 10.63 8.80 6.72 Cereals 3.37 18.36 19.19 18.60 19.08 17.84 16.28 Rice 1.79 17.90 18.84 17.77 17.10 15.28 14.97 Wheat 1.12 19.87 21.63 21.87 22.63 23.25 19.78 Pulses 0.72 10.51 14.96 15.89 16.25 18.77 19.86 Vegetables 1.74 -0.95 12.11 30.02 14.36 -1.53 -9.05 Potato 0.20 20.06 45.99 73.10 58.03 67.85 49.13 Onion 0.18 94.85 154.33 125.17 72.79 16.55 -9.12 Fruits 2.11 4.71 8.93 10.28 4.84 7.43 3.43 Milk 3.24 4.42 4.57 4.52 6.15 6.18 6.35 Egg, Meat & Fish 2.41 11.03 12.85 11.20 12.66 14.24 13.10 Non-Food Articles 4.26 8.95 10.06 13.00 13.56 14.04 11.43 Fibres 0.88 13.25 7.56 3.27 0.69 -1.34 -4.74 Oil Seeds 1.78 18.97 23.43 27.05 30.02 30.60 27.25 Minerals 1.52 -0.39 0.57 4.03 5.57 6.88 8.63 FUEL & POWER 14.91 10.18 10.47 9.27 10.25 9.97 11.65 Liquefied petroleum gas 0.91 25.66 26.21 24.24 19.01 4.01 2.04 Petrol 1.09 5.12 6.25 3.43 3.43 1.48 3.75 High speed diesel 4.67 21.22 19.19 18.47 14.60 14.60 14.60 MANUFACTURED PRODUCTS 64.97 4.07 4.51 4.95 5.04 5.41 5.95 Food Products 9.97 7.01 8.16 8.68 8.74 9.25 9.82 Sugar 1.74 9.41 10.21 10.09 9.84 15.48 18.88 Edible Oils 3.04 2.40 6.53 7.54 9.20 9.76 9.38

Beverages, Tobacco & Tobacco Product 1.76 5.82 6.56 6.76 7.14 8.13 8.85 Cotton Textiles 2.61 5.24 5.56 5.10 4.89 5.46 630 Man Made Textiles 2.21 5.91 6.42 6.26 5.55 4.36 3.77 Wood & Wood Products 0.59 5.28 5.98 6.17 6.90 5.98 5.81 Paper & Paper Products 2.03 5.50 4.54 5.61 4.08 3.47 3.10 Leather & Leather Products 0.84 1.97 2.61 2.44 2.66 2.50 2.68 Rubber & Plastic Products 2.99 3.57 3.58 3.65 3.51 3.30 3.15 Chemicals & Chemical Products 12.02 4.53 5.08 5.66 5.86 6.27 6.66 Non-Metallic Mineral Products 2.56 6.01 5.51 5.71 4.10 4.75 6.63 Cement & Lime 1.39 5.40 5.05 5.18 2.23 4.73 8.13

Basic Metals Alloys & Metal Product 10.75 0.92 1.85 2.54 3.18 4.45 6.32 Iron & Semis 1.56 -6.18 -3.53 -2.76 -0.19 4.32 6.01 Machinery & Machine Tools 8.93 2.45 2.38 2.62 2.55 2.63 2.63 Transport Equipment & Parts 5.21 4.67 4.37 4.70 4.71 4.39 4.32

Source: www.rbi.org.in Date: 27th Dec, 2013

Major HighlightsIn 2010-11, increase in inflation was due to

factors like food inflation hike. (Supply shortage of cereals, pulses, wheat, and rice due to drought in country)

In 2011-12, high inflation is attributed to increased prices of fruits and vegetables (due to increase in demand) and increase in commodity prices e.g. crude oil.

In 2012-13, high inflation is attributed to increased prices of fruits and vegetables (due to increase in demand, hoarding ) and increase in commodity prices e.g. crude oil.

Inflation Control in India – 2013Measures taken by Reserve Bank of India:

Headline inflation in Nov, 2013 rise to 7.50%, 14 months high.

Reserve Bank of India hiked key policy

rates (repo rate and reverse repo) by 25 basis points.

Steps taken by Government of IndiaIt targeted the limit of revenue Account deficit below 5

percent of GDPTo increase industrial production, government

liberalised laws related to and reduced prices of necessary raw materials and services.

Too-grain is a factor, responsible for the rise of inflation in India, to fulfill its demand, various measures like import of wheat, oil seeds, opening market selling of India Food Corporation's stock of wheat and rice, regulating process etc. are taken in recent times.

To check and curtail black market, laws have been made stringent

ConclusionInflation continues posing a threatInflation has been caused by rapid growth in recent decade.Inflation has been caused by increased prices of vegetables

and fruits, and crude oils in recent years.Higher interest rates and other policy rates will lead to

reduction in inflation

Challenges for Indian Economy in 2013 Getting inflation under control Spreading the growth benefits more equitably. Completing investment projects that are essential for the

long term development of economy. Dealing with global financial uncertainty that will make the

capital flows and exports more difficult.

References:http://www.rbi.org.in/Scripts/bs_viewcontent.aspx?

Id=203

http://www.worldjute.com/inflation.html

http://www.inflation.eu/inflation-rates/india/historic-inflation/cpi-inflation-india-2011.aspx

http://business.rediff.com/report/2010/mar/04/budget-2010-the-shocking-picture-of-inflation-in-india.htm

http://www.indexmundi.com/India/inflation_rate_%28consumer_prices%29.html