ECONOMICS

PROJECT

TOPIC- INFLATION IN
INDIA

COMPILED BY-
MOHAMMAD AAZAM
BALLB (HONS)
SELF FINANCED
The annualised inflation rate in India was 3.78% as of August 2015, as per the Indian Ministry of
Statistics and Programme Implementation. This represents a modest reduction from the previous annual
figure of 9.6% for June 2011. Inflation rates in India are usually quoted as changes in the Wholesale Price
Index (WPI), for all commodities.
Many developing countries use changes in the consumer price index (CPI) as their central measure of
inflation. India used WPI as the measure for inflation but new CPI(combined) is declared as the new
standard for measuring inflation ( April 2014) CPI numbers are typically measured monthly, and with a
significant lag, making them unsuitable for policy use. India uses changes in the Consumer Price
Index(CPI) to measure its rate of inflation.
Provisional annual inflation rate based on all India general CPI (Combined) for November 2013 on point
to point basis (November 2013 over November 2012) is 11.24% as compared to 10.17% (final) for the
previous month of October 2013. The corresponding provisional inflation rates for rural and urban areas
for November 2013 are 11.74% and 10.53% respectively. Inflation rates (final) for rural and urban areas
for October 2013 are 10.19% and 10.20% respectively.
The WPI measures the price of a representative basket of wholesale goods. In India, this basket is
composed of three groups: Primary Articles (20.1% of total weight), Fuel and Power (14.9%) and
Manufactured Products (65%). Food Articles from the Primary Articles Group account for 14.3% of the
total weight. The most important components of the Manufactured Products Group are Chemicals and
Chemical products (12%); Basic Metals, Alloys and Metal Products (10.8%); Machinery and Machine
Tools (8.9%); Textiles (7.3%) and Transport, Equipment and Parts (5.2%).
WPI numbers were typically measured weekly by the Ministry of Commerce and Industry. This makes it
more timely than the lagging and infrequent CPI statistic. However, since 2009 it has been measured
monthly instead of weekly.
Issues
The challenges in developing economy are many, especially when in context of the monetary policy with
the Central Bank, the inflation and price stability phenomenon. There has been a universal argument these
days when monetary policy is determined to be a key element in depicting and controlling inflation. The
Central Bank works on the objective to control and have a stable price for commodities. A good
environment of price stability happens to create saving mobilization and a sustained economic growth.
The former Governor of RBI C. Rangarajan points out that there is a long-term trade-off between output
and inflation. He adds on that short-term trade-off happens to only introduce uncertainty about the price
level in future. There is an agreement that the central banks have aimed to introduce the target of price
stability while an argument supports it for what that means in practice.
Optimal inflation rate
It arises as the basis theme in deciding an adequate monetary policy. There are two debatable proportions
for an effective inflation, whether it should be in the range of 1-3 per-cent as the inflation rate that persists
in the industrialized economy or should it be in the range of 6-7 per-cents. While deciding on the
elaborate inflation rate certain problems occur regarding its measurement. The measurement bias has
often calculated an inflation rate that is comparatively more than in nature. Secondly, there often arises a
problem when the quality improvements in the product are in need to be captured out, hence it affects the
price index. The consumer preference for a cheaper goods affects the consumption basket at costs, for the
increased expenditure on the cheaper goods takes time for the increased weight and measuring inflation.
The Boskin Commission has measured 1.1 per cent of the increased inflation in USA every-annum. The
commission points out for the developed countries comprehensive study on inflation to be fairly low.
Money supply and inflation
The Quantitative Easing by the central banks with the effect of an increased money supply in an economy
often helps to increase or moderate inflationary targets. There is a puzzle formation between low-rate
of inflation and a high growth of money supply. When the current rate of inflation is low, a high worth of
money supply warrants the tightening of liquidity and an increased interest rate for a moderate aggregate
demand and the avoidance of any potential problems. Further, in case of a low output a
tightened monetary policy would affect the production in a much more severe manner. The supply shocks
have known to play a dominant role in the regard of monetary policy. The bumper harvest in 1998-99
with a buffer yield in wheat, sugarcane, and pulses had led to an early supply condition further driving
their prices from what were they in the last year. The increased import competition since 1991 with
the trade liberalization in place have widely contributed to the reduced manufacturing competition with a
cheaper agricultural raw materials and the fabric industry. These cost-saving driven technologies have
often helped to drive a low-inflation rate. The normal growth cycles accompanied with the international
price pressures has several times being characterized by domestic uncertainties.
Global trade
Inflation in India generally occurs as a consequence of global traded commodities and the several efforts
made by The Reserve Bank of India to weaken rupee against dollar. This was done after the Pokhran
Blasts in 1998. This has been regarded as the root cause of inflation crisis rather than the
domestic inflation. According to some experts the policy of RBI to absorb all dollars coming into the
Indian Economy contributes to the appreciation of the rupee. When the US dollar has shrieked by a
margin of 30%, Reserve Bank of India had made a massive injection of dollar in the economy make it
highly liquid and this further triggered off inflation in non-traded goods. The RBI picture clearly portrays
for subsidizing exports with a weak dollar-exchange rate. All these account for a
dangerous inflationary policies being followed by the central bank of the country. Further, on account of
cheap products being imported in the country which are made on a high technological and capital
intensive techniques happen to either increase the price of domestic raw materials in the global market or
they are forced to sell at a cheaper price, hence fetching heavy losses.
Factors
There are several factors which help to determine the inflationary impact in the country and further help
in making a comparative analysis of the policies for the same. The major determinant of the inflation in
regard to the employment generation and growth is depicted by the Phillips curve.
Demand factors
It basically occurs in a situation when the aggregate demand in the economy has exceeded the aggregate
supply. It could further be described as a situation where too much money chases just few goods. A
country has a capacity of producing just 5500 units of a commodity but the actual demand in the country
is 7000 units. Hence, as a result of which due to scarcity in supply the prices of the commodity rises. This
has generally been seen in India in context with the agrarian society where due to droughts and floods or
inadequate methods for the storage of grains leads to lesser or deteriorated output hence increasing the
prices for the commodities as the demand remains the same.
Supply factors
The supply side inflation is a key ingredient for the rising inflation in India. The agricultural scarcity or
the damage in transit creates a scarcity causing high inflationary pressures. Similarly, the high cost of
labor eventually increases the production cost and leads to a high price for the commodity. The energies
issues regarding the cost of production often increases the value of the final output produced. These
supply driven factors have basically have a fiscal tool for regulation and moderation. Further, the global
level impacts of price rise often impacts inflation from the supply side of the economy.
Consensus on the prime reason for the sticky and stubbornly high Consumer Price Index, that is retail
inflation of India, is due to supply side constraints; and still where interest rate remains the only tool with
The Reserve Bank of India. Higher inflation rate also constraints India's manufacturing environment.
Domestic factors
Developing economies like India have generally a lesser developed financial market which creates a weak
bonding between the interest rates and the aggregate demand. This accounts for the real money gap that
could be determined as the potential determinant for the price rise and inflation in India. There is a gap in
India for both the output and the real money gap. The supply of money grows rapidly while the supply of
goods takes due time which causes increased inflation. Similarly Hoarding has been a problem of major
concern in India where onions prices have shot high in the sky. There are several other stances for the
gold and silver commodities and their price hike.
External factors
The exchange rate determination is an important component for the inflationary pressures that arises in
the India. The liberal economic perspective in India affects the domestic markets. As the prices in United
States of America rises it impacts India where the commodities are now imported at a higher price
impacting the price rise. Hence, the nominal exchange rate and the import inflation are a measures that
depict the competitiveness and challenges for the economy.
Value
The inflation rate in India was recorded at 6.2% (WPI) in August 2013. Historically, from 1969 until
2013, the inflation rate in India averaged 7.7% reaching an all-time high of 34.7% in September 1974 and
a record low of -11.3% in May 1976.
The inflation rate for Primary Articles is currently at 9.8% (as of 2012). This breaks down into a rate
7.3% for Food, 9.6% for Non-Food Agricultural, and 26.6% for Mining Products. The inflation rate for
Fuel and Power is at 14.0%. Finally, the inflation rate for Manufactured Articles is currently at 7.3%