3.

Case: The Indian economy: Dealing with inflation

Question (a)
The question intends to examine the factors that were responsible for the inflationary
trend in India in early 2007.
The answer clearly explains the factors like increase in the domestic food prices, increase
in the international prices of wheat, increase in the demand for food items, sharp increase
in the agricultural prices and prices of manufactured products increase in the money
supply and high economic growth which were responsible for the inflationary trend in
India in early 2007.
However the answer could have discussed the other factors such as increase in the forex
inflows which also led to the inflationary trend in India in early 2007.
Question (b)
The question intends to analyze the measures taken by the Indian Government and the
RBI to control inflation and the impact of dealing with inflation through monetary means
on the economic growth.
The answer explains various monetary measures taken by the Reserve Bank of India to
control inflation such as increase in repo rates, cash reserve ratio etc. The answer also
discusses various other policy measures taken by the government of India to control
inflation such as reducing import duties for rice, wheat, pulses, cooking oils and cement
and other products, banning future trade of wheat, rice and pulses, raising taxes on all
products covered under excise, customs and service tax including education cess,
reducing import duties on non-agricultural products etc. The answer also discussed the
increasing repo rates and CRR rates by the Reserve Bank of India would affect the small
and medium enterprises (SMEs) and ultimately hamper the employment opportunities in
the country.
However, the answer could have discussed how higher interest rate in the economy
would affect various sector of the economy such as banking, automobiles and textiles etc.