Presented By:

Rishi Vyas (BM-014059)

• Inflation is defined as a sustained increase in the general level of prices for

goods and services. It is measured as an annual percentage increase.

• As inflation rises, every rupee you own buys a smaller percentage of a good or

service.

• The value of a rupee does not stay constant when there is inflation.

• The value of a rupee is observed in terms of purchasing power, which are the

real tangible goods that money can buy.

• When inflation goes up, there is a decline in the purchasing power of money.

• For example, if the inflation rate is 2% annually, then theoretically a Re1 pack

of gum will cost Rs1.02 in a year.

• After inflation, your rupee can't buy the same goods it could beforehand.

Deflation is when the general level of prices is falling. This is the opposite of

inflation.

Hyperinflation is unusually rapid inflation. In extreme cases, this can lead to

the breakdown of a nation's monetary system. One of the most notable examples

of hyperinflation occurred in Germany in 1923, when prices rose 2,500% in one

month!

Stagflation is the combination of high unemployment and economic stagnation

with inflation. This happened in industrialized countries during the 1970s, when

a bad economy was combined with OPEC raising oil prices.

Economists wake up in the morning hoping for a chance to debate the causes

of inflation. There is no cause that's universally agreed upon, but at least two

theories are generally accepted:

Demand-Pull Inflation - This theory can be summarized as "too much

money chasing too few goods". In other words, if demand is growing faster

than supply, prices will increase. This usually occurs in growing economies.

Cost-Push Inflation - When companies' costs go up, they need to increase

prices to maintain their profit margins. Increased costs can include things such

as wages, taxes, or increased costs of imports.

It is rightly acknowledged in the literature that inflation has a non-

linear impact on

growth. While below a threshold level, inflation has a positive effect;

it will have an

adverse effect on growth once it crosses the threshold. Prima facie,

such a non-linear

relationship exists for Indian data.

DETAILS 2010 2011 2012 2013 2014

Real GDP Growth

10.26 6.64 4.74 5.02 5.63

Consumer price index

12.11 8.87 9.30 10.92 6.42

Wholesale price index

8.1 6.3 6.8 7.58 4.86

Fiscal balances as a percentage of GDP

Current account balance (%of GDP)

-7.4

-3.2

-7.4

-3.3

-7.5

-4.9

-7.1

-4.7

-6.5

-5.8 ( 2015)

-1.7

The GDP in India expanded 5.3 % in the third quarter of 2014 over the same

quarter of the previous year. GDP annual growth rate in India is averaged at

5.82 % from 1951 until 2014. It reached an all time high of 11.4% in the first

quarter of 2010 and a record low of -5.20 % in the fourth quarter of 1979.

• Inflation can cause unemployment when:

• The uncertainty of inflation leads to lower investment and

lower economic growth in the long term.

• Inflationary growth is unsustainable leading to a boom and

bust economic cycle.

• Inflation leads to decline in competitiveness and lower export

demand, causing unemployment in the export sector

(especially in a fixed exchange rate).

• There is no direct link between unemployement but often we

see a trade-off e.g. in a period of strong economic growth and

falling unemployment, we see a rise in inflation.

• One argument is that a period of high and volatile inflation discourages

firms from investing. Because inflation is high, firms are less certain

investment will be profitable. It is argued that countries with higher

inflation rates tend to have lower investment and therefore lower

economic growth. Therefore, if there are poor levels of investment this

could lead to higher unemployment in the long term.

• It is argued that countries with low inflation rates, such as Germany

have enabled a long period of economic stability which helps to attain a

long term low unemployment rate. Low inflation in a country like

Germany also helps them to become more competitive within the

Eurozone, which also helps create employment and reduce

unemployment.

The impact of food inflation on the economic system may be

classified into kinds

• Effects on production:

Inflation has a favorable effect on production when there are under-

utilized or under-employed resources in existence in an economy.

Rising prices breed optimistic expectations within the business

community, in view of increasing profit margins, because the price

level moves up at a faster rate than the cost of production.

• Effects on Income distribution

All producers, traders and speculators gain during inflation becauseof the windfall profits which arise, because prices rise at a faster andhigher rate than the cost of production. During inflation, thedistribution of shares to the profiteers increases more than that of thewage earners or fixed-income earners, such as the renterclass. Prices of all factors do not rise in the same proportion. Sincethe effects of inflation varies depending upon the earnings it hasserious social consequences.

• Changing diets

More people becoming rich, people eat more of fruits andvegetables which take more energy and land and meat consumptionhas gone up (5 tons of grain to produce 1 ton of pork)

• The Bank rates are increased which curtails the money supply in

the economy.

• Reserve ratios : CRR and SLR are increased .

• Repo rate is the rate at which

banks borrow funds from the RBI to meet the gap between the

demand they are facing for money (loans) and how much they

have on hand to lend. If the RBI wants to make it more expensive

for the banks to borrow money, it increases the repo rate;

similarly, if it wants to make it cheaper for banks to borrow

money, it reduces the repo rate.

• Reverse repo rate

• RBI uses this tool when it feels there is excess money supply in

the economy. It offers a lucrative rate of interest to the bank.

• During inflation government imposes new taxes and increases

the rates of existing taxes there by effective demand can be

minimized. Government will think about new saving schemes

by providing attractive interest rates on deposits there by

people would like to come forward to save money in the bank.

Thereby the hoarding will be discharged.

• In this project, the co integration and error correction models

have used to empirically examine long-run and short-run

dynamics of the inflation-economic growth relationship in

India using annual data. The main objective was to examine

whether a relationship exists between economic growth and

inflation and, if so, its nature. The interesting results found in

this exercise is that the, inflation and economic growth are

negatively related. Second, the sensitivity of inflation to

changes in growth rates is larger than that of growth to

changes in inflation rates. These findings have important

policy implications.

•http://en.wikipedia.org/wiki/Inflation_in_India (2013)

•Pratima Singh, Inflation in India: An empirical Analysis, ISAS Institute of South

Asian studies, No.128 - 10 may (2011)

•Gaurav Sharma, Inflation concerns for the Indian economy: Assocham Research

Bureau, (2009)

•Ila Patnaik, Ajay Shah, Giovanni Veronese., How to measure inflation in India,

NIPFP-DEA, Research Program on Capital Flows and their Consequences National

Institute of Public Finance and Policy New Delhi Working Paper 2011-83 (2011)

•Anuradha Patnayak, Study of Inflation in India: A Co integrated Vector Auto

regression Approach, Journal of Quantitative Economics, 8(1) (2010)