INFLATION-PATTERN OVER 1991-2011 REASONS AND IMPACT (INDIA)

The term inflation is from the Latin term inflare, meaning to blow up or inflate, and it was first used in a monetary sense to describe an increase in the amount of money. In1838 the concept of inflation was first used.

Definition
Inflation can be defined as the rise in overall price level in the economy, i.e. rise in prices of all the goods and services. When prices rise,it erodes the purchasing power of money. Inflation is a situation in which there is a persistent and appreciable increase in general level of prices.

Inflation is the gravest economic concern which has gripped India into its jagged tentacles. India has been plagued by the disease of inflation since the 1950s but it has started showing its prominently harmful symptoms and ill effects since 1991, post liberalization. Kick started by the fiscal crisis of 1991, marked by deficits in government finances and devaluation of the rupee, a whopping inflation of 13.66 per cent took its toll on the Indian economy.

METHODS TO MEASURE

Measuring
A chief measure of price inflation is the inflation rate. It is measured by: 1.Change in price index a)Consumer Price Index(CPI) b) Wholesale Price Index (WPI) 2. Gross National Product Deflator (GNP Deflator).

Change in price index

Rate of change in inflation can be measured through change in price index

where,P0 is current average price level

P-1 is the price level a year ago

Consumer Price Index(CPI)

A consumer price index measures changes in the price level of consumer goods and services purchased by households. A CPI can be used to index (i.e., adjust for the effect of inflation) the real value of wages, salaries, pensions, for regulating prices and for deflating monetary magnitudes to show changes in real values.

Wholesale Price Index(WPI)

The Wholesale Price Index or WPI is the price of a representative basket of wholesale goods. The Indian WPI figure is released every 10 days and influences stock and fixed price markets. The Wholesale Price Index focuses on the price of goods traded between corporations, rather than goods bought by consumers, which is measured by the Consumer Price Index. The purpose of the WPI is to monitor price movements that reflect supply and demand in industry, manufacturing and construction. In India WPI is the indicator for inflation rate.

GNP DEFLTOR

GNP deflator is not obtained directly like CPI and WPI. It is measured as follows:

where, nominal GNP= GNP at current prices Real GNP= GNP at constant prices

Types of Inflation
There are different types inflation which are explained below: Creeping Inflation: This is also known as mild inflation or moderate inflation. This type of inflation occurs when the price level persistently rises over a period of time at a mild rate. When the rate of inflation is less than 10 per cent annually, or it is a single digit inflation rate, it is considered to be a moderate inflation.

Galloping Inflation: If mild inflation is not checked and if it is uncontrollable, it may assume the character of galloping inflation. Inflation in the double or triple digit .Indian economy has witnessed a galloping inflation .It causes economic distortion and disturbances

Hyperinflation: It is a stage of very high rate of inflation. While economies seem to survive under galloping inflation, a third and deadly strain takes hold when the cancer of hyperinflation strikes. Nothing good can be said about a market economy in which prices are rising . Hyperinflation occurs when the prices go out of control and the monetary authorities are unable to impose any check on it. Germany had witnessed hyperinflation in 1920s. Stagflation: It is an economic situation in which inflation and economic stagnation or recession occur simultaneously and remain unchecked for a period of time. Stagflation was witnessed by developed countries in 1970s, when world oil prices rose dramatically. Deflation: Deflation is the reverse of inflation. It refers to a sustained decline in the price level of goods and services. It occurs when the annual inflation rate falls below zero percent (a negative inflation rate), resulting in an increase in the real value of money. Japan

What is inflation rate???.......

The rate at which the prices of everything go up is called the "rate of inflation". For example, if the price of something is Rs.100 this year and next year the price becomes approximately Rs.104 then the rate of inflation is 4%. If the price of something is Rs.80 then after a year with a rate of inflation of 4% the price go up to (80 x 1.04) = 83.2
So, when you make an investment, make sure that your rate of return on the investment is higher than the rate of inflation in your country. In our county India, for the year 2005-2006 the rate of inflation was 4% (Which is really low and amazing!). This rate keeps changing every year. The finance minister generally gives the official statement on the inflation rate of the country for a particular year.

REASONS OF INFLATION IN 1990S

The 1990s is widely described in general as a price stability era all over the globe, barring some external factors like bouts of: Increase in international oil price and Natural disasters like drought or flood, showed an ebbing trend.

The opening up of the Indian economy in the early 1990s had increased Indias industrial output and consequently has raised the India Inflation Rate. While inflation was primarily caused by domestic factors (supply usually was unable to meet demand, resulting in the classical definition of inflation of too much money chasing too few goods).

REASONS FOR INFALTION IN EARLY 20TH CENTURY

The first half of India's fiscal 2002-03 (beginning April 1, 2002) witnessed uptrend in inflation largely due to: Increase in oil prices twice during the period Adverse impact of drought on agri - products leading to increase in prices particularly of oilseeds and edible oils. The efficient handling of supply management helped inflation eased in the second half of the fiscal. As a whole at the end of the fiscal 2002-03 inflation was up 3.3 percentage points. In the light of overall variation in wholesale price inflation, the inflation in fiscal 2002-03 was dominated by non-food items unlike preceding years, according to a RBI report

EASE OF INFLATION:

The efficient handling of supply management helped inflation eased in the second half of the fiscal. As a whole at the end of the fiscal 2002-03 inflation was up 3.3 percentage points. In the light of overall variation in wholesale price inflation, the inflation in fiscal 2002-03 was dominated by non-food items unlike preceding years, according to a RBI report

Causes of inflation
1-Cost push inflation. 2-Rising imported raw materials costs. 3-Rising labor costs. 4-Higher indirect taxes imposed by the government. 5-Demand pull inflation. 6-Black money.

1.Over-expansion of money supply i.e. excess liquidity in the economy leads to inflation . 2. Expansion of Bank Credit . 3. Deficit Financing: The high doses of deficit financing which may cause reckless spending. 4. A high population growth leads to increase in demand and money income and cause a high price rise. 5. Excessive increase in the price of fuel or food products due to political, economic or natural reasons .

2. western economies like us are consuming on a massive scale leading to huge trade imbalance. 3. As government has reduced protection and subsidies on agriculture that results into high cost of energy which directly translates into high cost of cultivation and therefore high prices of output. . 4. The problem of inflation is directly linked to the price of crude oil imported by our country. Indias 70% oil needs are fulfilled through imports. As of now the price of one barrel of crude oil is over $140.

Effects of inflation on prices

1. Over-expansion of money supply i.e. excess liquidity in the economy leads to inflation . 2. Expansion of Bank Credit . 3. Deficit Financing: The high doses of deficit financing which may cause reckless spending. 4. A high population growth leads to increase in demand and money income and cause a high price rise. 5. Excessive increase in the price of fuel or food products due to political, economic or natural reasons

Effect of inflation on different industries

Effect on bank
1-The RBI may go for further monetary tightening in the light of rising inflation 2-Yields are rising, compelling the banks to raise interest rates, which will hamper their business growth 3-Inflation concerns remain high with finance ministry officials indicating the rate could go up to 13 per cent in the near term

Effect on airline industry

1-One major issue is cost of Aviation Turbine Fuel 2-Prefer paying parking charges of Rs 50,000 per hr rather than keeping a flight in air which costs Rs 3,50,000.00 per hr 3-Job cuts in airline industries on a rise

Effect on automobile industries in india

1-The automobile sector is also suffering because of soaring raw material price. 2-The two-wheeler sector is especially suffering, as banks are not willing to lend fearing delinquency.

Effect on IT companies
1-Patni computers has handed the pink slip to over 400 employees for non performance. 2-TCS other companies warns its employees that non performance wont be tolerated. 3-Companies like wipro and sutherland may cut down on incentives and other perks

Effect on sensex
1- A huge 6.5 % fall in Reliance Industries & 4.5 % fall in Bharti, Airtel was responsible for the benchmark Sensex to close at 14590.16 points, down 498 points. 2- For the first time in 2008, the Sensex dipped from the psychological level of 15,000 points 3-Investors confidence is dented by the rising inflation.

EFFECTS ON STOCK MARKET

1-A huge 6.5 % fall in Reliance Industries & 4.5 % fall in Bharti Airtel was responsible for the benchmark Sensex to close at 14590.16 points, down 498 points. 2-For the first time in 2008, the Sensex dipped from the psychological level of 15,000 point. 3-Investors confidence is dented by the rising inflation.

MEASURES TO CONTROL INFLATION

MEASURES TO CONTROL INFLATION

Government has reduced import duty on skimmed milk powder, petrol and diesel and customs duty on crude oil. As part of the monetary policy review stance, the RBI has taken suitable steps with 11 consecutive increases in policy rates and related measures to moderate demand to levels consistent with the capacity of the economy to maintain its growth without provoking price rise. Headline inflation, as measured by Wholesale Price Index (WPI), has been above the 9 per cent mark since December, 2010, and stood at 9.22 per cent in July . Food inflation stood at 9.80 per cent in mid-Year. The government has been under attack from various quarters over sustained inflationary pressure. In its Annual Report the RBI said inflation is likely to stay elevated at least till the third quarter of the current fiscal, before falling to 7 per cent by March, 2012.

Here are broadly two ways of controlling inflation in an economy Monetary measures and fiscal measures. There are broadly two ways of controlling inflation in an economy: 1). Monetary measures and 2). Fiscal measures I).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. Bank rate policy is used as the main instrument of monetary control during the period of inflation. When the central bank raises the bank rate, it is said to have adopted a dear money policy. The increase in bank rate increases the cost of borrowing which reduces commercial banks borrowing from the central bank. Consequently, the flow of money from the commercial banks to the public gets reduced. Therefore, inflation is controlled to the extent it is caused by the bank credit. Cash Reserve Ratio (CRR) : To control inflation, the central bank raises the CRR which reduces the lending capacity of the commercial banks. Consequently, flow of money from commercial banks to public decreases. In the process, it halts the rise in prices to the extent it is caused by banks credits to the public.

Open Market Operations: Open market operations refer to sale and purchase of government securities and bonds by the central bank. To control inflation, central bank sells the government securities to the public through the banks. This results in transfer of a part of bank deposits to central bank account and reduces credit creation capacity of the commercial banks.

II) Fiscal Measures

Fiscal measures to control inflation include taxation, government expenditure and public borrowings. The government can also take some protectionist measures (such as banning the export of essential items such as pulses, cereals and oils to support the domestic consumption, encourage imports by lowering duties on import items etc.).

Others Measures:
(a) Price support program (b) Provision of subsidies (c) Arrangements of easy availability of goods on hire purchase to stimulate demand. (d) Imposing direct control on prices of essential items. (e) Rationing of essential consumer goods in case of acute emergency holding of Friday and Sunday markets.

Future predictions`
Reserve Bank of India (RBI) Governor D Subbarao has said that inflation will come down by March on the back of strengthening agrobased economy in the country. "Inflation will come down because the production and agriculture sectors will boost up the rural agro-based economy of the country," Subbarao said at a RBI Financial Outreach Programme in Dungabori in central Assam's Morigaon district. According to the RBI Governor, the Indian economy is stable and will grow despite the global economic slow down.

Inflation widening gap between rich and poor

Inflation in country creates a breeding ground for social upheavals .Inflation redistributes income and wealth in favor of rich and black marketers . The rich and business class get ample chances of making profit while poor indirectly suffer the social sins done by rich.

RBI's Role:

The Reserve Bank of India has tightened liquidity by raising the interest rate. The repo rate has been raised by 350 basis points during this time in a series of small steps from March 2010. It currently stands at 8.5 per cent.

The RBI takes into account the important concern of balancing the targets of controlling inflation and keeping up growth and employment generation.
The fiscal deficit as a percentage of GDP was 6.4 per cent in 2009-10. In 2010-11 this was brought down to 4.7 per cent. This year we have set ourselves a target of 4.6 per cent. This is a difficult target, given the deterioration in the global economy and its impact on India over the last 3 to 4 months. We have to be careful not to over-do ourselves in reaching this target since that can have an excessive slowing down impact on growth.

Suggestions on alternative source of fuel?

More usage of bio fuels Need for focus on the crops that will yield these oils The problem of huge oil import bill and price uncertainty can be mitigated by cultivating bio fuel crops on over 60 million hectares of waste land available in the country.

Government role:
Liberalization of imports and cutting of excise and custom duties Has directed RBI to take monetary measures and to put down interest rates to control inflation State governments have taken initiative to provide lower priced ration goods for the bpl(below poverty line) .

Bibliography
http://www.economywatch.com/inflatio n/economy/stock-market.html http://www.tradingeconomics.com/indi a/inflation-cpi http://www.wikipeia.com