Macro Economics

Final Project Inflation In India

Presented To,
Sir Talal Khalid

Presented By,
Nadeem Ahmad (BBA02101032) Majid Ashraf (BBA01091043)

MEANING AND DEFINITION OF INFLATION

Inflation means a situation of substantial and rapid general increase in the level of prices and consequent deterioration in the value of money over a period of time. The behaviour of general prices is measured through price indices. The trend of price indices reveals the course of inflation or deflation in the economy. As Lerner says, a price rise which is unforeseen and uncorrected is inflationary Another definition of inflation, according to Pious, Inflation exists when money income is expanding more than in proportion to increase in earning activity. Inflation is a situation of too much money chasing too few goods. Inflation is a persistent and appreciable rise in the general level or average of prices. In simple words it can be said that in this situation in which the volume of purchasing power is persistently more than the goods and services available to consumer. Thu prices of goods rise and value of money falls because inflation is arise in the general level of prices; it is intrinsically linked to money. In the other words, inflation means things getting more expensive. It is when the price rise is persistent that the phenomenon is called inflation. Economists categorise inflation into broad categories: price inflation and money inflation. Whenever the term inflation is referred, it implies price inflation. The two have cause and effect relationship; often price inflation is the effect of money inflation that is when money supply increases persistently, it causes price inflation too. A moderate of inflation is considered to be desirable for the economy. Inflation is a rise in consumer prices, increasing the cost of living. Some inflation is caused because the country has printed too much money very huge financial disaster, causing its currency to more than metal weight. One may think that any price rise in excess of 2-3% in the developed and 4-5% in the developing economies can be called inflation. But every price rise is not inflation. When prices tend to rise due to change in the composition of GDP, it is not inflationary. Price rise due to qualitative change in products is not inflation. Short-rise in price due to sudden increase in demand and decrease in supply is not inflation. Price rise after depression or recession is not inflation also.

METHODS OF MEASURING INFLATION IN INDIA

In general, inflation is measured by calculating the percentage rate of change of a price index, which is called the inflation rate. The price index is an indicator of the average price movement over time of a fixed basket of goods and services. The general measure of inflation could be given as: Two different price indices are published in India: the Wholesale Price Index (WPI), and the Consumer Price Index (CPI); and a third type of index viz., the Implicit National Income Deflator (NID), can be constructed from the national income data. Therefore, inflation rate in India can be measured in terms of these three indices. The existing WPI series in India, with base year 1993-94=100, comprises 435 commodities classified under the three major groups (I) primary articles (98), (ii) fuel, power, light and lubricants (19) and (iii) manufactured products (318) with weights of 22.02 per cent, 14.23 per cent and 63.75 per cent, respectively. The total number of price quotations for these commodities was 1918. The WPI is the weighted arithmetic mean of these group indices based on the Lapsers formula2 which has a fixed base-year weighting diagram operative through the entire life span of the series. Weights used in the WPI are value weights not quantity weights as they find it difficult to assign quantity weights. The WPI is compiled and released every week by the Office of the Economic Adviser in the Department of Industrial Policy and Promotion, Ministry of Commerce and Industry. The WPI data is available on weekly frequency with a lag of two weeks from the date of release for provisional index and ten weeks lag for the final index. Currently, the OEA releases weekly WPI inflation every Thursday. The WPI is only a commodity price index and it does not capture price changes in non-commodity producing sectors viz. services and non-tradable commodities. India is the only major country that uses WPI as a measure of headline inflation. Most of the developed countries use the Consumer Price Index to calculate inflation, as this actually measures the increase in the cost of living. The CPI is a price index that tracks the prices of a specified basket of goods and services that a typical consumer purchases. In India, there are four official series on CPI that are specific to different groups of consumers, that is, CPI for Industrial Workers (CPI-IW), CPI for Urban Non-Manual Employees (UNME), CPI for Agricultural Labourers (AL), and CPI for Rural Labourers (RL). CPI-UNME is compiled by the CSO and the other three CPIs are released by the Labour Beauteous in the Ministry of

Labour. CPI-IW is the most well known of these indices as it is used for wage indexation in Government and in the organized sectors. The CPI is available on monthly basis, but with a lag of one month. The relative merit of CPI in India is that it also cover some basic services, whereas, WPI is only a commodity price index. Moreover, the CPI is more relevant in measuring inflation as it measures impact of price changes on households; however, its low coverage and quality are questioned. Consumer Price Index for Industrial Workers (CPI-IW), the most commonly quoted of the four CPI measures in India, covers only 260 commodities The CPI is a more non-transparent index and this non-transparency has encouraged mistrust of the CPI and conspiracy theories ago So, while the CPI fundamentally makes more sense than the WPI.

EFFECTS OF INFLATION
Effects on production and growth Effect on employment Effect on income distribution Effects of inflation on different sections of society Effect on distribution of wealth

INFLATIONARY TRENDS LAST FIVE YEAR IN INDIA

Last Five Year Comparison of Inflation Rates in India In this section, a review of inflationary trends in India for the last five years is presented. The data required for the analysis in the section is collected from the office of the Economic Advisor, Ministry of Commerce and Industry, Government of India, Reserve Bank of India (RBI), Labour Beaureau, Ministry of Labour, and Central Statistical Organization (CSO).The annual average inflation for the last five years is 5.2%.The supply side factors have been more instrumental in moderating the inflationary trend this period.

India uses WPI to gauge the headline inflation in the country, this can however be justified only if it is a reliable predictor of the CPI inflation. We need to verify empirically whether the WPI inflation is a good predictor of CPI inflation. Inflation trends and impact of monetary policy 2003-In this year the inflation trend is highly volatile .It increases from 3.5% in January to 6.6% in april.It then declines to 3.8% in august, and again increase to 5.86% in December. This is the last time Bank Rate was changed. It was lowered to 6% in March. Reverse Repo Rates was changed 2 times. It was lowered from 5.5% to 4.5% in August. Repo Rate was changed two times. It was lowered from 7.5% to 7.0% in March.CRR was changed once. It was lowered from 4.75% to / 4.5% in June. All commodities change percent was 6.5% in this year, primary articles changed with 6.1 %, fuel group changed with 10.8% and manufacturing products changed with 5.1% in this year. 2004- In this year the Inflation was again volatile as seen in2003. It declined from 6.5% to 4.3% in April. It again rose to touch 8.7% in August, and then declined to 6.5% in December. Bank rate did not change. Reverse rates were changed once and were increase to 4.75% in October. Repo rate were also changed once and are lowered to 6% in October, and CRR rates were changed twice. It was increased to 4.75% in September and 5% in October. All commodities were changed with 4.6%, primary articles changed with 1.6%, fuel group was changed with 2.5%, and mfg. Products change with 6.7%. 2005- In this year the inflation rate was declined from 6% in January to 3.6% in August. It again increased to 4.6% by December, in Bank rate did not changed, reverse repo rates were changed twice. Both times it was increase to 5% in April and 5.25% in October. Repo Rate changed once and increases to 6.25% in October.CRR was not changed. All commodities were changed with 5.1%, primary articles were changed with 1.3%, fuel group was changed with 10.5%, and Mfg. Products were changed with 4.6%. 2006-In this year the inflation rate was declined to touch 3.7% levels in April and then rises persistently to touch near 6% by December, Bank rate was not affected, Reverse Repo Rate were changed thrice. Increased by 25% in January, June and July and was noted at 6%. The repo rates are changed 4 times. Increased by 25% in January, June, July and October. It was noted at 7.25%.CRR increased once to 5.25% in December. All commodities were changed with 4.1%, primary articles were changed with 5.4%, fuel group was changed 8.9%, and

Mfg.products changed with 1.7%. 2007- The inflation increased initially and touched 6.5% in March. It then declined to touch around 3.8% by December. Bank rate was same; Reverse Repo Rate was also not changed. Repo rate was changed two times. Increased to 7.5% and 7.75% in January and March respectively.CRR was changed 7 times. Increased from 5.25% in January to 7.50% in November. All commodities were changed with 6.5%, primary articles were changed with 11.7%, fuel group was changed by 1.2%, and Mfg. Products were changed with 6.7%.

Current Inflation Rate

Years
2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2000 1999

Average Inflation (%)

9.8 8.9 11.7 10.9 8.3 6.4 5.3 4.2 4.2 3.8 5.4 5.4 6.7

CONCLUSION
Inflation means increase in the level of price. The Indian inflation is measured by WPI.The follow based year to 1993-94.Aftert the measuring of inflation and analysing the trend of inflation last five year we found that the average inflation for the last five year was 5.2%.In 2003 the inflation rate was increase from 3.5% in January and 6.5% in April, then declines 3.8% in august and again increased to 5.8% in December. Bank rate was changed. Repo rate was changed two times, reverse repo rate also changed. All commodities changed 6.5% in this year. In 2004 the interest rate was decline from 6.5% to 4.3%. Reverse repo rates were increased. In 2005 inflation rate was declined and after the ends of the year increase. In 2006 interest rate also increase, bank rate was not changed. Reverse repo rate was changed thrice. In 2007 interest rate touched 6.5% in march and around 3.8% by December, bank rate was same, reverse repo rate was also not change,CRR was changed seven times. After that RBI taken many steps on inflation. Central bank planned pause of tightening the monetary system by which the inflation rate will be reduce.RBI increase in CRR. Financial market had been expecting arise in CRR. For the tackle of inflation RBI change the interest rate. RBI was rise the repo rate and CRR and reduction in rate of interest. RBI also buys dollar from foreign banks. Aftterthat we find that inflation rate was ups and down in last five year and RBI taken steps on this and try to controlled the inflation but the all steps were not good for our india.

Recommendations
For the india inflation can be controlled throgh these policies: Monetary Measures Credit Control: For this purpose, it raises the bank rates, sells securities in the open market, raises the reserve ratio, and adopts a number of selective credit control measures, such as raising margin requirements and regulating consumer credit. Demonetization of Currency: the monetary measures is to demonetize currency of higher denominations. Such a measure is usually adopted when there is abundance of black money in the country. Issue of New Currency: The most extreme monetary measure is the issue of new currency in place of the old currency. Under this system, one new note is exchanged for a number of notes of the old currency. The value of bank deposits is also fixed accordingly. Fiscal Measures Reduction in Unnecessary Expenditure: The government should reduce unnecessary expenditure on non-development activities in order to curb inflation. Other Measures To Increase Production Rational Wage Policy: government should freeze wages, incomes, profits, dividends, bonus, etc. But such a drastic measure can only be adopted for a short period and by antagonizing both workers and industrialists. Price Control: the maximum prices fixed by law and anybody charging more than these prices is punished by law. Rationing: Rationing aims at distributing consumption of scarce goods so as to make them available to a large number of consumers. It is applied to essential consumer goods such as wheat, rice, sugar, kerosene oil, etc.