Inflation
Unit V[ Part1/2]
• CPT General Economics
Chapter - 6 Select Aspects of Indian Economy
• CA. Dipti Lunawat
Learning Objectives
Meaning & Types of Inflation
Price Trends in India
Causes of Inflation In India
Measures to check Inflation
Meaning of Inflation
Persistent Upward
movement in
General price Level. Decline of Purchasing
Power
Types of Inflation
Inflation
Demand – Cost – Push
Stagflation
Pull Inflation Inflation
Demand Pull Inflation
Demand Pull Inflation
More Demand
Excess
money Increased for Goods
Demand
Chases Money & Services
Relative
Less Expenditure more than
to Supply
Quantity Supply
Cost – Push Inflation
Growing Factor Cost
Factors of production try to increase their share, by Rising Prices
Increase in Total cost of production
Inflation once set in motion in one industry spreads throughout the economy
Demand Pull & Cost Push Inflation
Cost push
Demand Pull
Inflation is more
precedes Cost
difficult than
Pull Inflation
Demand Pull
Stagflation
Demand
Cost Push
Pull Stagflation
Inflation
Inflation
Stagflation
Economic Stagnation
Low rate of Growth, Rise in General Price Level
Occurs More in Developing Countries
Inflationary pressure may result Galloping [40% or 100%
p.a increases in price]
Stagflation in India
Slow rate of Economic Growth
High Rate of Inflation
Causes of Stagflation in India
Large Budget Deficit
Increase in Procurement price
of Food Grains
Slow Growth Rate of Industry &
Economic
Meaning of Deflation
Persistent Fall in
General price Level. Purchasing Power
Increases
Opposite of Inflation
Price Trends in India
Variation in Price
Consumer Price Index [CPI] Whole Sale Price Index
Whole Sale Price Index
Price of Representative basket of Wholesale Goods
Earlier Weekly Updating, now Monthly
Basket comprises of 676 item
Measures Headline Inflation
It does not include Services & Non- tradable
Commodities
In India, WPI series base of 2004-05 is used at assess
price changes
Consumer Price Index
Change in Price level of consumers goods and
services purchased by households
Cost of Living for homogeneous group of
Consumers
Real Inflationary Pressure
More Realistic Measure than WPI, India main
focus is on WPI
CPI Indices
CPI for Industrial
Workers
CPI for Agriculture
Workers
CPI for Rural labour
CPI for Urban Non-
Manual Employees
Inflation 50’s & 60’s
During Fifties, average rate of Inflation was low
at 1.7%
During Sixties, above rate was 6.4%
Maximum Inflation in Sixties was 14% in 1966-67
Inflation in 60’s
Reasons For High Inflation in 60’s
Unsatisfactory Famine
Chinese War Pakistan War
Supply Condition in
in 1962 in 1965
Position 1965-67
Inflation in 70’s
Average rate is 9%
Reason
Twice Undue Hike in Petrol Prices once in
1972-73 & 1979
Inflation in 80’s & 90’s
Fiscal Imbalances
80’s Average
rate of
Inflation 8% Shortage of
Petroleum
Products
90’s Average Tight Position of
rate of Balance of
Inflation Payments
12%
Supply Demand
Imbalances
Inflation in 20’s
Next 3 years, the rate of Inflation is 10 %
• Growth in Wholesale & Retails Price is as follows
1996-2000 5%
• 2001-2004 4%
Low inflation rate
• Stable Price of Manufactured Goods
• Good Monsoons
Inflation in 2009-2010
The average rate of Inflation is lowered
down by 3.8 %
Low inflation rate
• Global recessionary trends
• Stable prices of manufactured products
• Fall in crude oil prices.
Inflation in 2010
A new WPI series with 2004-05 base was released in 2010
The new series has more items and is more
representative of the prices prevailing in the wholesale
market
The new series, the ten year average of headline WPI
inflation was around 5.3 per cent from 2000-2010
The ten year average inflation, in fuel was around 8.9 per
cent, in primary articles 6.4 per cent and in manufactured
products 4 per cent.
High Inflation in 2010
Erratic and delayed monsoon
Hardening of international prices of crude oil, minerals
and related products
Shortfall in domestic production vis-a-vis domestic
demand,
Hardening of international prices of primary products like
wheat, pulses, edible oils, fruits, vegetables and spices
Inflation in 2010 - 2011
Year 2010-11 9.6%
Year 2011-12 9.1%
High food inflation i.e. higher prices of primary
articles like vegetables, eggs, meat, fish, etc. due
to changing dietary pattern of consumers;
Increasing commodity prices in global market
resulting in higher prices of manufactured
goods and
Persistently high international crude petroleum
prices
WPI & CPI
Year WPI CPI
2009-10 3.8% 12.4%
2011-12 9.14% 8.4%
Central Statistics Office (CSO) with a new series on CPI
with base 2010 = 100.
Reflect the actual movement of prices at the micro-level
Consumer Price Index combined for urban and rural was
7.65%, CPI (urban) was 7.38% and CPI rural was 8.25% in
January 2012
Causes of Inflation in India
Increase in Public Expenditure
Deficit Financing
Erractic Agriculture Growth
Agriculture Price Policy of Government
Inadequate Rise in Industrial Production
Upward Revisions of Administered Prices
Other factors
Increase in Public expenditure
Purchasing power
Increased From 18.6% of in Hands of
GDP 1961 to 27% in Employees
2011-12
42% of Govt. expenditure Increase in
is on NON- Development Demand
Activities
Supply cannot be
Increased
Inflation
Deficit Financing
Financing of Budget
Inflationary Trends
Deficits ( shortage)
Borrowing From banks Money injections,
or printing of More Without creating Real
Currency Resources
Erratic Agriculture Growth
Agriculture Depends on Monsoons
Crops Failure Due to Drought
Scarity of Food Grains
General Price Level Increases
Agricultural Price Policy of
Government
Price Policy Support to Agriculturists
Minimum Price to Farmers
Benefits to farmer
General Price Level Increases
Inadequate Rise in Industrial
Production
Period 1965 to 1985, Performance
was disappointing
Over 20 Years, Growth at a modest
rate of 4.7%
Performance of Consumer Goods
was Disappointing
Demand Increased, Production not
Inflationary Pressure
Upward Revision of Administered
Prices
Price Level Administered by
Government
Many Commodities Produced in
Public Sectors
Raising of Price to cover losses
Inefficient & Unimaginative Planning
Cost Push inflation
Other Factors
Hoarding of
Government High Capital
Essential
Failure Output Ratio
Commodities
Increasing Shortage of
Black
Income of Essentials Raw
Marketing
people Materials
Increasing
Large Scale Tax Infrastructural
Reliance
Evasion Bottleneck
Indirect Tax
Measures To Check Inflation
Inflation is a Phenomenon where
Money Income rising faster than Real
Goods, Services.
Check by Control on Increase in Money
or Make Growth of Real Goods &
Services
Measures To Check Inflation
Monetary Fiscal Control Over Other
Measures Measures Investments Measures
Monetary Measures
Check Supply of Currency &
Credit
Quantitative
Measures
Qualitative
Measures
Quantitative Measures
Bank Rate Policy
Open Market
Operations
Variable Reserve
Requirements
Bank Rate Policy
Rate at which Central bank discounts the bills of Commercial banks
Increased Bank Rate, Increase in Cost of Borrowings of Commercial banks
Higher rate of Interest From Borrowers
Price of Credit Increase
Discourage to Borrowers
Open Market Operations
Direct Sales or Purchase of Securities and
bills in Market by Central Bank
Sale Purchase
Increase in Cash
Reduction in Cash Reserve
Reserve of Commercial
of Commercial banks
banks
Credit Reduced Credit Expands
Variable Reserve Requirements
Cash Reserve Statutory
Ratio Liquidity Ratio
Portion of Total Deposits of
Portion of Total Deposits of
Commercial Bank to keep
Commercial Bank with Central
with itself in form of Liquid
Bank
Assets
High CRR, Credit Reduced High SLR, Credit Reduced
Repo Rate & Reverse Repo Rate
Reverse
Repo Rate
Repo rate
Rate at which Commercial Rate at which RBI borrow
banks borrow money from money from Commercial
RBI banks
High Repo Rate, Credit High Reverse Repo Rate,
Reduced Credit Reduced
Quantitative Measures
Measure to Control
Contraction of credit Expansion of Credit
Credit
Bank Rate Policy Increase Bank rate Decrease Bank rate
Open Market Sale of securities in Purchase of securities
Operations open market in open market
Variable Reserve Decrease both SLR,
Increase both SLR, CRR
Requirements CRR
Reverse & Repo Increase rate Decrease rate
Qualitative Measures
Securing loan regulation by fixation of
margin requirements
Consumer Credit Regulation
Issue of directives
Rationing of Credit
Moral Suasion
Direct Action
Fiscal Measures
Measures With Regard to Taxation, Expenditure & Public Borrowings
Tax Determine Size of Disposable Income in Hands of Public
Higher Rate of Tax, Low Disposable Income
Price of Credit Increase
Discourage to Borrowers
Control Over Investments
Multiplier Effect
Large Income
Increase in Demand for Consumers Goods and Capital Goods
Increasing Inflation
Controlling Investment
Other Measures
Short Term Long Term
Measures Measures
Measures in Public Distribution of
Accelerating Economic
Scare Resources through Fair Price
Growth
Shop
Control Over Movement of Wage Goods having direct
Commodities from one state to impact on General Price
another Levels & Cost of Livings
Import to Tackle shortage of basic
Restrictions on Consumption
goods.
Rationing of essentials goods in
times of Shortage
