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011 Soham BBA Minor Project
011 Soham BBA Minor Project
011 Soham BBA Minor Project
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ACKNOWLEDGEMENT
SOHAM ADHIKARI
01116701721
BBA (2ND
SEM) (A)
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DECLARATION
I SOHAM ADHIKARI hereby declare that the project titled “CAUSES OF INFLATION
IN INDIA” is my own work and efforts which is completed under the supervision of MS.
CHITRA JHA MAM.
SOHAM ADHIKARI
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CERTIFICATE
CERTIFIED BY:
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CERTIFICATE
CERTIFIED BY:
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TABLE OF CONTENT
PAGE NO.
EXECUTIVE SUMMARY……………………………………………………………………… 8
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CHAPTER – 2 ………………………………………………………………………………….. 46 – 52
OBJECTIVE OF THE PROJECT ……………………………………………………………… 47
RESEARCH METHODOLOGY ………………………………………………………………… 48
LITERATURE REVIEW ……………………………………………………………………….. 49
LIMITATIONS ……………………………………………………………………………………. 50
STATEMENT OF THE PROBLEM ……………………………………………………………… 51 – 52
CHAPTER – 3 …………………………………………………………………………………… 53 – 58
CHAPTER -4 …………………………………………………………………………………….. 59 – 62
CONCLUSION ………………………………………………………………………………….. 60
RECOMMENDATION ………………………………………………………………………….. 61 – 62
REFERENCES ………………………………………………………………………………….. 63 – 64
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EXECUTIVE SUMMARY
Inflation is unpredictable phenomena and has its presence in every economy in different form.
It is impossible to forecast its presence and shocks in true sense. It moves with growth and
decline of economy. It is impossible to find out the real reason of inflation. It’s presence in
nation economy is a sign of growing economic activities. It acts as a two-side sword, from one
side it increases the general cost and from other side reduce the savings. It is necessary to
control inflation for balance growth and development. Nations with large population below
the poverty line need to be very careful in taming inflation. It is obscure tax on lenders and
comm on man. Inflation and exchange crises move together with competitive pace. If it grows
above to eligible limit and continued for long, then it became weapon of mass deterioration
and manufacturing collapse. Its long presence sabotages the growth of the nation. Thus, this
study is carried out to find the real reasons and impacts of inflation on Indian economy. For
the purpose of study data of different time period has been taken and trend been analyzed. In
last finding, conclusion and recommendation has been given.
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CHAPTER – 1
INTRODUCTION
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INTRODUCTION
1. WHAT IS INFLATION?
Inflation is the rate at which the price of goods and services in each company rises.
Inflation occurs when prices rise as manufacturing expenses, such as raw materials
and wages, rise.
Inflation can result from an increase in demand for products and services, as people
are ready to pay more for them.
Increase in inflation indicates a decrease in the purchasing price of the economy.
Inflation can be viewed positively or negatively depending on the individual
viewpoint and the rate of change.
Those with tangible assets, like property or stocked commodities, may like to see
some inflation as that raises the value of their assets.
Example:
Let us consider we can buy 1 liter of milk for Rs. 50 at the current time. Exactly, 1
year ago 1 liter of milk cost us Rs. 40.
Here there is an increase of Rs. 10 per liter of milk or the purchasing power of Rs.
40 has reduced from buying 1 liter of milk to 800 ml of milk in 1 year.
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1.2 TYPES OF INFLATION
Causes:
III. Government Spending- When the government spends more freely, prices
go up.
V. More Money in The System- An expansion of the money supply with too
few goods to buy makes prices increase.
Example:
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Car market, as manufacturers will need to pay more to complete vehicles.
These developments lead to higher costs for the finished product or service and
work their way into rising consumer prices. For instance, when the
expansion of the money supply creates a speculative boom in oil prices the
cost of energy of all sorts of uses can rise and contribute to rising consumer
prices, which is reflected in various measures of inflation.
Causes:
II. Wage Inflation- Increased labor costs can create cost-push inflation such
as when mandatory wage increases for production employees due to an
increase in the minimum wage per worker. A worker strike due to stalled
contract negotiations might also lead to a decline in production, and as a
result, lead to higher prices.
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Although not all natural disasters result in higher production costs and
therefore, wouldn’t lead to cost-push inflation.
Example:
Example:
It occurs when the workers expect their salaries or wages to increase when
Prices of goods and services increase to help maintain their living cost. It
can be viewed as a double-edged sword. As labors demand higher pay, the
cost of production increases, which can raise the cost of living.
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1.3 CAUSES OF INFLATION IN INDIA
Deficit Financing-
When the government is unable to raise adequate revenue for its expenditure, it resorts to
deficit financing. During the sixth and seventh plans, massive doses of deficit financing had
been resorted to. It was Rs. 15,684 crores in the sixth plan and Rs. 36,000 crores in the seventh
plan.
But there are years of crop failure due to droughts. In the years of scarcity of food grains not
only the prices of food articles increased, but the general price level also rose. Failure of crops
always encouraged big wholesale dealers to indulge in hoarding which accentuated scarcity
conditions and pushed up the price level. Performance of the industrial sector, particularly in
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the period 1965 to 1985, has not been satisfactory. Over the 15 years period from 1970 to
1985, industrial production increased at a modest rate of 4.7% per annum. Our
industrial structure, developed based on heavy industry-led growth, is not suitable to meet the
current demand for consumer goods.
Rising Taxes-
To raise additional financial resources, government is depending more and more on indirect
taxes such as excise duties and sales tax. These taxes invariably raise the price level.
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RBI’S POLICY STANCE OVER THE YEARS
The evolution of the RBI’s monetary policy over the years is set out in 2010.
Until the 1980s, the RBI relied on controlling credit for inflation-prone
commodities to prevent speculations in them and to influence their
production. In 1985, a committee set up by the RBI to examine monetary
policy recommended that the RBI target money supply to keep inflation under
control. This was the RBI’s policy until the late 1990s, although the RBI was
flexible in its approach and made concessions for feedback loops between
monetary and real variables. Following the financial sector reforms of 1991, it
became increasingly difficult for the RBI to meet its monetary targets. At the
same time, most major central banks were abandoning monetary targeting for
interest-rate targeting. In 1998, the RBI formally abandoned money-supply
targeting in favor of a “multiple-indicator approach” because “the
experiences with monetary targets in other countries following financial
deregulation, and India’s own limited success in meeting its announced targets,
raised doubts about the continued usefulness of the monetary target”. The
multiple-indicator approach entails looking at the movement of various
variables, such as GDP growth, exchange rates, industrial production, while
framing monetary policy, but emphasizes the interest rate channel of
monetary policy. Earlier, this year, the RBI formally adopted inflation-targeting,
as mentioned earlier. The RBI continues to have purely monetarist tools, such as
the cash reserve ratio and the statutory liquidity ratio, at its disposal, although it
now claims it uses these only for liquidity management. It also conducts open
market operations (OMOs) to manage liquidity in the system. However, given
that all liquidity operations also influence short-term interest rates, it is
difficult in practice to distinguish between liquidity and monetary operations.
The RBI’s operational target is the overnight call money rate which banks charge
each other in the interbank market. The call money rate moves in a corridor
between the RBI’s repo rate and the reverse repo rate. The repo rate is the rate at
which the RBI lends funds to banks overnight against the collateral of
government bonds, while the reverse repo rate is the rate at which banks park
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funds with the RBI. The corridor between the repo rate and the reverse repo rate
is fixed at 100 basis points. How changes in short-term rates influence long-
term rates and, consequently, investment and consumption decisions is
beyond the scope of this paper.
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The four main autonomous increases in costs which generate cost-push
inflation have been suggested:
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Import Price Shock-
These days currencies of most countries of the world are flexible, that is, determined by
demand for and supply of a currency and they can appreciate or depreciate every month in
terms of the US dollar. For example, when the Indian Rupee depreciates, more rupees are
required to buy one US dollar and therefore in terms of rupees, imports become costlier.
The Indians who import raw materials for industries such as petroleum products, coal,
machines and other equipment, oilseeds, fertilizers, Indian consumers who imports gold, cars
and other final products must pay higher prices in terms of rupees when Indian rupee
depreciates against US dollar.
This raises the cost of production of the producers who in turn raise the prices of final products
produced by them. This inflation is the result of import price shock. Thus, depreciation of
rupee causes cost-push inflation. For example, in the month of June 2013, there was sharp
depreciation of the Indian rupee. The value of rupee fell by about 9.5% in this single month
from about Rs. 56 to a US dollar in the first week of June 2013 to around Rs. 61 to a dollar in
the last week of June 2013.
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WHOLESALE PRICE INDEX (WPI)
India is among very few countries, which uses the Wholesale Price Index (WPI) to calculate
or to decide the inflation rate in the economy. Most developed countries use the Consumer
Price Index (CPI) to calculate inflation, also called as Retail Price Index. The WPI is said to
have been first published in 1902 and was one of the most referred economic indicators
available to policy makers worldwide, until it was replaced in most developed countries by the
Consumer Price Index in the 1970s. WPI is the index that is used to measure the change in the
average price level of goods traded in wholesale market. In India, a total of 676 items, data on
price level is tracked under the WPI which is an indicator of movement in prices of
commodities in all trade transactions. It is also the price index which is available on a weekly
basis for reference at the shortest possible time lag i.e., only two weeks. The Indian
government uses WPI as an indicator of the rate of inflation in the economy.
In India, WPI is extensively used for short term policy interventions because it is the only
index that is available on a weekly basis with a two-week lag only. In principle, inflation
requires to be managed with respect to changes in prices of final goods or consumer prices.
So, now it is also under consideration to substitute WPI by CPI in India as well.
This index (WPI) is the most widely and officially used as the inflation indicator for most of
the policy decisions in India and is regularly published by the Office of Economic Adviser,
Ministry of Commerce and Industry. All important monetary and fiscal policy decisions of the
government are based on WPI movements. In India it is use since 1939 and is being published
since 1947. With the changing scenario and changes in consumption pattern, the composition
and the base year of WPI has been revised several times. The current series of Wholesale Price
Index has 2004-05 as the base year and 676 items for calculating index. Latest version of WPI
has been done by shifting base year from 1993-94 to 2004-05 on the recommendations of the
Working Group set up with Professor Abhijit Sen, member, panning commission as chairman
for revision of WPI series and has been launched on 14th September 2010 in the country. A
brief on the historical development of this WPI.
According to the International Monetary Fund (IMF) statistics, only 24 countries in the world
use WPI as the official measure to track inflation, whereas 157 countries use CPI for the same
purpose.
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CONSUMER PRICE INDEX (CPI)
As already aforesaid several consumer price indices like Consumer Price Index for Industrial
Workers (CPI-IW), for Agricultural Labourers (CPI-AL), and for Urban Non-Manual
Employees (CPI-UNME) are being compiled only on a monthly basis. The Labor Bureau of
Government of India compiles the CPI-IW. It compiles changes in the retail prices of fixed
baskets of goods and services being consumed by the target group. Based on the income and
expenditure survey being conducted by the National Sample Survey Organization of the
Central Government. (NSSO) in 78 selected centers, this index is constructed on a monthly
basis. It is constructed based on average monthly family expenditures on items of consumption
groups: food, pan, supari and tobacco, fuel and light, housing, cloth, bedding and
miscellaneous. This index is used by the government for determining the dearness allowance
to be paid to Central and State Government employees and to industrial workers besides
fixation and revision of minimum wages.
Another more comprehensive measure for inflation is the implicit price deflator of GDP. This
is an annual series, which is available with a lag of two years. More recently, the quarterly
series of GDP is also available.
The CPI measures price changes of a basket of goods and services from the perspective of the
retail buyers. So, it is the real index of prices for the common public. It reflects the actual
inflation borne by the individuals. CPI is designed to measure changes over time in the level
of retail prices of selected goods and services in the proportion, on which consumers of a
declined group spend their incomes. Till January 2012, there were only following four CPIs
compiled and released on national basis in India. In some countries like UK, Malaysia, Poland
it is termed as Retail Price Index. The four CPIs used till 2011 are for the following 4
categories of workers.
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The New Series of CPI started since 2012:
The first three indices stated here above and compiled by the Labor Bureau in the Ministry of
Labor and Employment, and the fourth one compiled by the Central Statistical Organization
(CSO) in the Ministry of Statistics and Program Implementation reflect the effect of price
fluctuations of various goods and services purchased and consumed by the specific segments
of population in the country. These indices do not reflect the true picture of the price behavior
for the country.
Therefore, now Central Statistics Office (CSO) of the Ministry of Statistics and Program
Implementation has started compiling a new series of CPIs. These are:
These indices reflect the change in the price’s levels of various goods and services consumed
by the Urban and Rural population. The new series, having 2010 as the base year, also
includes services, which are not there in the WPI series. However, this new series has become
relevant only in 2013 when the data for 2012 are available for comparison.
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1.4 HISTORY OF INFLATION
Over the dinner table, families often muse over the past. Once, my father said, “In the 70s,
when we saw the “Sholay” in the theatre, the ticket price was just Rs. 4.5”. I quickly
added, “Now, it costs Rs. 200 per ticket at the multiplex!”.
In the last 46 years, the ticket price was up by 45 times or 8.6% annually; this statistic
surprised everyone assembled for a meal.
Inflation is nothing but such a rate of rise in annual prices. And, when we hear about
consumer inflation, it is a rise in the price level as compared to a year before- of a basket
of consumer items.
After gaining independence in 1947, for the whole of the 1950s, the inflation remained
subdued- averaging less than 2%.
However, there was a lot of variation; inflation was- 12.8% in 1952-53 when there was
higher agricultural output while it went up to 13.8% in 1956-57 due to demand pressures
and measures for industrialization.
However, at the end of the decade, inflation was under control and in the range of 3-7%.
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The 1960s – War and Famine Effect:
India fought two wars- with China (in 1962) and Pakistan (in 1965) – which resulted in the
diversion of government revenues towards defense as against industrialization or economic
development.
Also, twin droughts in 1965 and 1966 created severe food shortages and stoked food
inflation. From 1964-67, prices rose at double-digit rates. By the end of the decade,
however, inflation cooled down and was even negative in 1969 aided by a bumper crop
and Green Revolution initiatives.
The 70s were perhaps the most tumultuous period in terms of inflationary uncertainty.
Inflation averaged 7.5% on average in the 1970s. International crude oil prices were up by
over 250% in 1974 amidst the first oil shock of 1973.
And for the first time since independence, inflation crossed 20% in 1973-74. Heavy
dependence on oil imports resulted in higher domestic fuel prices with its spillover effects
on other consumer products. When crude oil prices cooled, the drought of 1979-80
increased inflation rates.
In the 80s, the inflation was even higher- averaging 9.2% per annum – due to the
expansionary fiscal policies of the government and its monetization.
The central government’s fiscal deficit- the gap between the revenues and spends- widened
from 3.8% of GDP in the 1970s to 6.8% in the 1980s. And this fiscal gap was bridged by
printing more currency which in turn added to demand pressures and inflation.
Moreover, there were imbalances in the foreign account with rising current account deficit,
after international trade was partially liberalized in the 1980s.
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The 1990s – Post-Reform Effect:
During the crisis’s year of 1991, inflation was 13.9%. To counter grave economic
problems, the Government came up with a spate of economic reforms- financials, external
and industrial.
It led to large foreign capital inflows in the initial years resulting in a higher-than-normal
monetary expansion in the economy. Inflation continued to be high for a few years – from
1992-1996 – when it averaged 9.5%. Later it came down sharply (5.4%) over the next
decade (1995-2005) as structural reforms started bearing fruit. Despite the drought of
2002-03, the adequate release of surplus stock of food grains kept a check on food prices.
From 2003 onwards, when the economy started growing at 7% plus annual rates, inflation
inched up.
It culminated in the inflation rate crossing double digits in 2009 and 2010, after crude oil
prices hit an all-time of $147 per barrel in July of 2008.
Surprisingly, even the 2008 global financial crises couldn’t cool off inflation. Between
2008 and 2013, inflation averaged 10.1% per annum due to the rising global oil and metal
prices. The drought of 2009 stoked food prices while higher demand for protein- based
products like eggs, fish and milk created protein inflation of a structural nature.
To put the economy back on track, the Government announced several fiscal stimulus
packages in 2008 and 2009 which increased the fiscal deficit once again- thereby putting
pressure on prices.
However, since 2014, inflation levels were down with the economic slowdown and as
demonetization and GST measures got implemented. In 2020, amidst pandemic, inflation
increased to 6.6%. For the month of May 2021, CPI inflation was at 6.3% on the back of
a sharp rise in food, transport and fuel prices.
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1.5 THE OUTLOOK FOR INFLATION
Consumer Price Index (CPI) inflation breached the upper tolerance threshold of 6% in
May and June 2021 driven by supply-side pressures in food, fuel and core inflation. In
August 2021, inflation eased to 5.3%, added by a moderation in momentum and
favorable base effect.
Looking ahead, the three months and one year ahead median inflation expectations of
urban households fell by 50 basis points (bps) and 60 bps, respectively, in the September
2021 round of the Reserve Bank’s survey, tracking actual inflation dynamics. The
proportion of respondents expecting the general price level to increase by more than the
current rate decreased for three months about horizon but increased for one year horizon
vis-à-vis the previous round.
Manufacturing firms polled in the July-September 2021 round of the Reserve Bank’s
industrial outlook survey expect the cost of raw materials and selling prices to rise further
in 2021-22. Service sector companies participating in the services and infrastructure
outlook survey also expect further rise in input cost pressure and selling prices in 2021-22.
According to the respondents in the manufacturing and services PMIs, input and output
price pressures persisted in September 2021.
Professional forecasters surveyed by the Reserve Bank in September 2021 except CPI
inflation to ease from 5.3% in August 2021 to 4.7% in 2021-22 and subsequently move up
to 5.7% in 2021-22 before easing to 4.9% in 2022-23.
Kharif sowing had progressed satisfactorily, and food grains production is estimated to
touch a new record which, along with ample buffer stocks of food grains, should help to
contain cereal prices. Global food, oil and other commodity prices, however, remain firm.
Considering the initial conditions, signals from forward-looking surveys and estimates
from structural and other time series models, CPI inflation is projected to move from 5.6%
during 2021-22 to 5.1%, with risks broadly balanced. The 50% and the 70% confidence
intervals for headline inflation in 2021-22 are 4.4-7.2% and 3.6-8.0%, respectively. For
2022-23, assuming a normalization of supply chains on the back of improved vaccination,
a normal monsoon and no major exogenous or policy shocks, structural model estimates
indicate that inflation will move in a range of 4.5-5.2%. The 50% and the 70% confidence
intervals for 2022-23 are 2.7-6.3% and 1.7-7.2%, respectively.
There are several upside and downside risks to the baseline inflation forecasts. The upside
risks emanate from a longer-than-expected persistence of supply chain disruptions, a
further hardening of global commodity prices, especially that of crude oil, a quicker pass-
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through of input cost pressures to output prices on the back of strong pent-up domestic
demand from ebbing infections and vaccination-led consumer confidence, unseasonal
rainfall impacting crop production, and global financial market volatility from a faster US
monetary policy normalization. The downside risks arise from an earlier than expected
mending of supply chain disruptions, the persistence of weak demand and slack in the
economy, and corrections in global commodity and crude prices in the event of a
weakening of global demand over new mutants and poor vaccination coverage in low-
income countries.
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1.6 MEASUREMENT OF INFLATION
The variation in the price level in India can be measured in terms of the Wholesale Price Index
(WPI), or the Implicit National Deflator (NID) or the Consumer Price Index (CPI). The WPI
is the main measure of the rate of inflation often used in India. The WPI is available for all
commodities, and for major groups, sub-groups and individual commodities. The basic
advantage of this measure of inflation is its availability at high frequency, i.e., on weekly basis
with a gap of about two weeks, thereby enabling continuous monitoring of the price situation
for policy purposes. This index does not cover non-commodity producing sectors services and
non-tradable commodities.
The national income deflator, on the other hand, is a comprehensive measure but statistically
derived from national accounts data released by the Central Statistical Organization (CSO) as
a ratio of GDP at current prices to GDP at constant prices. Since it encompasses the entire
spectrum of economic activities including services, the scope and coverage of national income
deflator is wider than any other measure. At present, the GDP deflator is available only
annually with a long lag of over one year and hence has very limited use for the conduct of
policy.
The important measure at the point of consumption is the Consumer Price Index for Industrial
Workers (CPI-IW) which is meant to reflect the cost-of-living conditions and is computed
based on the changes in the level of retail prices of selected goods and services on which a
homogeneous group of consumers spend a major part of their income. Its coverage is broader
than the other indices of CPI like the CPI for Agricultural Labourers (AL) and the CPI for
Urban Non-Manual Employees (UNME). Besides, CPI-AL and CPI-UNME are not
considered as robust national inflation measures because they are designed for specific groups
of population with the main purpose of measuring the impact of price rise on rural and urban
poverty.
While each of the measures has its advantages as well as weaknesses, the selected measure of
inflation should broadly capture the interplay of effective demand and supply forces in the
economy at frequent intervals. This will be facilitated if the price indices have a high
periodicity of release, and it is in this sense that WPI is superior to CPI. WPI’S coverage of
commodities is also high. While services do not come under the ambit of WPI, the coverage
of non-agricultural products is better in WPI than CPI, making WPI less volatile to relative
price changes as against the CPI. The coverage of tradable items, essentially manufactured
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products are higher in the case of WPI whereas the coverage of non-tradable like services
pertaining to education, medical care and recreation are more in the case of CPI-IW. The
weekly periodicity of WPI with a lag of a fortnight often coincides with the release of banking
and money supply data on 14-day basis which in turn is available with a similar lag. The
correlation between and WPI on a relatively long-time horizon is stronger than that, a
statistical relationship that has been corroborated by several econometric studies on the
subject. In fact, some studies indicated that the long-term is close elasticity of WPI with
respect to unity. Several recent empirical works based on the long-run equilibrium analysis
have found that both these series are cointegrated to a fair extent, thus providing evidence on
the WPI being more amenable to monetary policy changes. The Report of the Working
Group on Money Supply also used WPI as inflation measure and found that the
nominal money demand equation showed a long-run price elasticity close to unity.
Finally, some internal studies in RBI indicate that, though there has been some divergence in
the annual movement of the two indices and GDP deflator over the longer term, there has not
been any secular or systematic bias. The analysis of the three measures of inflation for the
period 1950-51 to 1995-96, display broadly similar trends. A long-term time-series data of
the three indices WPI, GDP deflator, and CPI-IW reveal that there have been leads and lags
involved during certain phases, which tend to get evened-out over long time spans, but there
has not been any secular or systematic bias. The cross-correlation between the three indices
comes close to one reaffirming the belief that any one of these could be used to study the
phenomenon of inflation in the Indian economy. No doubt, there are some interesting
developments after 1995-96, but this study did not capture them.
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1.7 PRACTICAL ISSUES IN THE MEASUREMENT OF INFLATION
It is now obvious that none of the existing measures provide a truly reliable gauge of inflation
at any point of time. An index can be constructed for different baskets of goods and services,
with varying weights, to cover different sets of consumers or locations. There is thus no all-
purpose, all-inclusive, universally valid index. Operationally, there could be problems that
distort an index. For example, the basket of goods may go out of production. In any case,
change in quality of goods cannot be captured, although it is apparent that the quality of many
industrial goods has been improving. Further, the government machinery that collects the data,
even with best of efforts, would not be able to capture the offers of discounts at retail level.
The widening gap between the inflation rates based on the WPI and CPI-IW in recent periods
has raised several statistical issues, which were subjected to a sharp scrutiny. The main points
of this study are worth summarizing here. From the coverage point of view, the dissimilarity
in the baskets for CPI-IW and WPI is very prominent. As I mentioned at the beginning, the
basket for WPI includes a wide spectrum of raw materials, intermediate and final products,
which are traded in wholesale markets, but services are excluded from its scope. On the other
hand, CPI-IW covers final products and services consumed by industrial workers in retail
market. While price quotations for WPI relate to the wholesale level, those for CPI-IW pertain
to retail prices. Hence, it is not surprising that they differ to some extent. However,
consumption being the end use of all economic activities, price changes in wholesale markets
(WPI) are expected to be reflected in price change in retail market (CPI-IW). Changes in CPI-
IW may also have some cost-push impact on WPI when changes in wages occur due to
indexation of dearness allowances. Thus, despite the several differences, conceptually there
would be some cause-and-effect type relationship between the two series. At the same time,
some degrees of difference between CPI-IW and WPI may be unavoidable due to difference
in their base years.
In this background, the main concern should really be whether the gap is widening
significantly or not. For better understandings the gap is normalized by the authors after
making suitable adjustment for the rising trends in both the series. Some preliminary statistical
investigation not only indicates widening divergence between the two series since May 1995
but also seems to have raised some questions on the stability of long-term relationship between
them. The study, however, concludes that the short-term relationship between CPI-IW and
WPI based on common commodities does not appear to be disturbed. Therefore, the study
suggests that the recent disturbance in the short-run relationship between the actual CPI-IW
and WPI is mostly attributable to some peculiar price behavior of uncommon items, weighting
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diagrams, etc. This implies the need for a detailed survey of the behavior of individual
commodities in both the market segments.
At a somewhat non-technical level, there are some striking reasons why the two indices are
not representative measures of inflation. First, the coverage, especially the exclusion of
services-sector from WPI, given the rapid increase in the share of services in GDP. Second,
biases on account of the base year and weights are predominant. Third, because of currency of
the two indices for too long a period, ensuring quality and consistency in data have suffered
and led to poor representation of the phenomenon.
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1.8 INFLATION TRENDS IN INDIA
Much has been made of the divergence between the WPI and CPI in recent years. The
previous RBI Governor said the divergence posed a “major challenge to assessing short-term
inflation trends”. The divergence is even more puzzling if one were to assume that both
price gauges are influenced by the same factors, which is the premise of demand-pull
approaches, as pointed out in the literature review. In the fourth quarter of 2009, the difference
between CPI and WPI inflation was almost 12% points. Another phase of sharp divergence
between the CPI and WPI was from the first quarter of 2012 to the fourth quarter of 2013.
The last phase of divergence is from the second quarter of 2014, when WPI inflation began
to fall sharply and entered negative territory in the beginning of 2015. CPI inflation,
however, has remained above 5%.
The explanations for the demand-side factors have already been covered in the literature
review. On the supply-side, RBI research says food inflation has been stoked by the Mahatma
Gandhi National Rural Employee Guarantee Scheme (MGNREGS), a right-to-work program
that guarantees 100 days of paid work per year in rural areas. The program has boosted rural
wages, leading to an increase in consumption of protein items such as milk and meat, as it
would be deemed unacceptable to say rural Indians poor should eat less protein items to
contain inflation, the RBI argues that food inflation raises “inflationary expectations” among
the public, which could lead to a “wage-price spiral”. According to Subbarao:
That monetary policy should respond if there is inflation, meaning there is sustained increase
in the general price level, is beyond question. But high food prices often result from adverse
supply shocks or large increases in input costs…. If it is permanent, then the change in relative
prices caused by it can result in higher general inflation expectations and wage bargaining….
the direct role of monetary policy in combating food price pressures is limited, but in the face
of sustained high food inflation, monetary action may still be warranted to anchor inflation
expectations.
The output gap in the Indian economy has been negative since the October-December quarter
of 2012 according to consensus estimates, with some estimates saying than the output gap has
been negative since April-June 2011. In the presence of a sustained negative output gap, a
tight monetary policy is justified as essential to keep inflation expectations unleashed by
supply- side shocks in check.
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1.9 REVIEW OF INFLATIONARY TRENDS IN INDIA
During the sixties, the average decadal inflation edged up to 6.4%. The inflationary pressures
started mounting from 1962-63 on account of the Chinese War in 1962 and unsatisfactory
supply position. The Pakistan war in 1965, and the famine conditions during 1965-66
aggravated the situation further. The maximum inflation at 13.9% was recorded for the year
1966-67, but the minimum inflation rate of (-) 1.1% was in 1968-69 attributed primarily to the
bumper agricultural production in the preceding year.
The average inflation rate during the seventies was still higher at 9.0%. The maximum
inflation recorded in the year 1974-75 at 25.2% was mainly attributed to the failure of kharif
crops in 1972-73 as also to the hike in crude oil prices in 1973. The minimum inflation
rate for the decade at (-) 1.1% was recorded in the following year, i.e., 1975-76, in
response to the substantive anti-inflationary measures taken by the government. The year
1979-80, however, witnessed a strong resurgence of inflationary tendencies due to mainly
to poor agricultural output and the second hike in international oil prices. The decade was the
most tumultuous as far as the price situation was concerned.
During the eighties, the decadal average inflation moved down somewhat to 8.0%. What is
more significant is that variation in prices was small as compared to any of the preceding
decades. The highest inflation rate for the decade was at 18.2% in 1980-81 and the minimum
inflation rate was at 4.4% for 1985-86.
Thus, India recorded relatively satisfactory levels of inflation since, for the entire period of
analysis, i.e., 1950-51 to 1997-98, the average rate of inflation working out to 6.7% and the
modal value of distribution of inflation rates lying between 5 to 10%. The inflation rate has
also been far less volatile than in most developing countries, with standard deviation at 6.6 and
the rate having crossed the 15% mark on only four occasions during the last half a century or
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so on. Moreover, the high pressures of inflation were felt on almost all occasions, due to
exogeneous shocks like oil price hike, gulf crises, wars, etc., and domestic supply shocks such
as adverse monsoon conditions on volatility in prices is getting increasingly moderated
perhaps due to expansion of irrigated agriculture as also buffer stock operations.
Besides, the changes in administered prices had an impact on the timing of price increases in
the sense that variability could have been moderated under some circumstances. Finally, and
perhaps importantly, monetary policy did not appear to have been a major cause for the few
examples of high inflation.
In the context, some elements of caution are necessary here. First, though the average for the
entire period is 6.7%, the average for the past 30 years is much higher at 8.66%. Second,
during recent years, international inflation rates are drifting downwards. Third, though money
supply may not have started the inflationary spiral in India, passive accommodation
could have contributed to sustaining inflation at a higher rate.
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1.10 CORE INFLATION
It is against the background and in the context of inflation-targeting by some central banks,
there has been some interest in developing the concept of core-inflation, in preference to a
headline measure such as the WPI or CPI. This is particularly relevant in so far; the framework
of monetary policy is concerned. The RBI of its annual report for 1997-98 has given a brief
description of the concept, features and practices of core-inflation. The permanent component
is often called the ‘underlying’ rate of inflation or the ‘core’ rate of inflation. It is not the
current rate of inflation, comprising transient components, but the future underlying rate of
inflation, which should be the concern of monetary policy. Measurement of the underlying or
core rate of inflation, however, does involve some amount of judgment or discretion.
The box describes the economic rationale for considering the core rate of inflation in the
framework of monetary policy which is governed by the fact that it is this rate, being
permanent in nature, which is fully anticipated by economic agents and hence, incorporated
into their decision-making processes thereby making it output-neutral. Viewed from another
angle, it is the existence of the permanent component, which imparts downward rigidity to the
measured rate of inflation in the event of a positive supply shock.
Therefore, it would be valuable for the economy to ensure that permanent or core rate of
inflation is reduced. The objective of reducing the rate of inflations as the prime objective of
monetary policy should be viewed against this perspective.
On the application of core inflation in India, some research work has already been initiated in
the RBI and the latest RBI Occasional Papers, summer of 1999, has a paper. The paper
recognizes the practical issue of eliminating the noise or supply related components of
traditionally used price index-based measures of inflation. In the Indian context, exclusion-
based measures appear to be intuitively appealing. Four exclusion- based measures which
appears least volatile, according to the analysis, is the one that excludes Primary Food Articles,
primary Non-Food Articles and Administered commodities from the WPI basket. This is an
emerging issue and further research is required before arriving at any meaningful conclusions
that could satisfy both the theoretical expectations and operational parameters.
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1.11 MONEY SUPPLY AND INFLATION
In some ways, the underlying logic behind the concept of core-inflation could be utilised to
explain the so-called current puzzle of low current rate of inflation and the relatively high
growth in more supply. First, as already mentioned, supply shocks played a dominant role in
setting the inflation trend during a major part of 1998-99 and when the supplies improved in
the subsequent months, a correction followed. The bumper crop recorded in rice, wheat,
oilseeds, sugarcane, pulses, and major fruits and vegetables in 1998-99 must have led to early
supply conditions in some of these commodities driving sown their prices from the last year.
Secondly, the low primary articles inflation may also be contributing to the reduction in the
manufacturing inflation by bringing down the input cost of industries which are dependent on
agricultural raw materials.
Thirdly, increased import competition due to trade liberalisation coupled with sharp decline in
world manufacturing prices could be contributing to low manufacturing inflation through cost
saving technological innovation and reduced mark up in domestic industries.
Fourthly, positive productivity shocks in the post liberalisation period due to competitive
pressures might be contributing to improved price competition of industries in the domestic
market.
Fifthly, money and inflation relationship also need to consider the transmission lag of
monetary impulses, which can be both long and variable. Preliminary evidence in the Indian
context shows that the full impact of a monetary shock on the inflation rate can take a long
time to realise, and the lag could even exceed two years.
Sixth, the importance of money supply in explaining the long-term price movement in the
Indian economy may be appreciated from the fact of the existence of a stable money demand
function. Majority of the recent studies in the Indian context including the RBI’s Working
Group on Money Supply (1998) which threw light on this subject have found that inflation
rate over a long period is reasonably explained by growth in money supply. These studies
indicate that in the short run the price effect of money supply may deviate from the long-run
equilibrium behaviour, especially when the economy is subject to supply shocks.
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However, it is necessary to recognise that the evolving transmission mechanism consequent
upon financial sector reform would imply certain changes in the nature and magnitudes of the
underlying relationship between the growth in money supply and inflation, matters on which
further and intense research and analysis is required.
For the past 3 years, i.e., 1996-97 to 1998-99, the growth in broad money averaged 17.3% per
annum and the growth in real GDP 6.3% and the inflation rate 6.0%. The way the rural
economy is getting monetised, and the rural demand is increasing over time in the recent past,
it is not unrealistic to conjecture a slight shift in the sectoral demand for money. Keeping in
view the fact that there is excess capacity in the economy, a shift in sectoral demand for
money need not be inflationary. It can be argued that short-term deviation in the relationship
among money, output and prices ought not to be constructed as a breakdown of the inherent
linkages. Yet, there are several recent developments warranting intense research and
analysis of the evolving relationships between growth in money supply and inflation.
“Developments during the past year illustrate the dilemma faced by monetary authorities in a
situation of uncertain macro-economic outlook in respect of inflation and growth, alongside
high monetary growth. When the current rate of inflation is low, a high rate of growth in
money supply nevertheless warrants tightening of liquidity in order to dampen aggregate
demand and to avoid potential problems. However, if growth of output is also low,
tightening of money supply during a period of relatively low inflation may result in a further
loss of output. This in turn could result in lower revenue and the need for Government to
borrow further. A similar dilemma arises when inflation rate accelerates because of supply
shocks, which are expected to be temporary. This, for example, was the situation last year
when, until October, inflation was accelerating due to lower availability of a few primary
commodities. The Reserve Bank at that time chose not to tighten monetary policy in the
expectation that the price risk would reverse itself later in the year when agricultural supplies
improve. In retrospect, this judgement turned out to be correct. However, if it had not, and
inflation had accelerated further, monetary policy would have required much sharper
tightening in the subsequent months of the year.”
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1.12 INFLATION TARGETING
Attention to the possibility of inflation targeting in India has heightened recently, partly in
view of such an approach being adopted by several central banks in many industrial countries
and partly because of the analytical rigour behind the approach, as evidenced by the sixth L.K.
Jha memorial lecture given by the Governor of the Reserve Bank of New Zealand Mr. Donald
Brash in June this year. Mr. Brash focussed on the relevance of New Zealand’s experience to
developing countries particularly in the context of “fiscal dominance”, multiple objectives of
monetary policy, especially growth and exchange rate, and lack of sophistication in inflation-
forecasting, inflation-measurement and overall financial system. His main theme was that
inflation targeting was in no sense a panacea but a very sensible policy option.
In fact, some efforts to address this issue have been in evidence in India for some time. Dr. R.
Kannan’s paper on “Inflation-Targeting”. Issues and Relevance for India has recognised that
successful inflation targeting requires credibility of the enforcing agency, usually the
government and the central bank. Credibility in turn requires that the target be chosen
carefully. The article reviewed inflation targeting experience so far, analysed the issues related
to it and argued for developing an inflation model for India. The conclusion was that
operationally inflation targeting in India should wait until financial sector reform agenda is
accomplished.
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1.13 IMPLICATIONS OF INFLATION
Inflation affects lives is the consumers or the public much adversely. High prices of day-to-
day goods make it difficult for ordinary consumers to afford even the necessities of life. This
leads to poor standard of living and compel them to ask for higher income. Inflation also
makes, the exports non-competitive. Therefore, in a state of price rise, the exports of the
country decline. This creates deficit in the foreign trade, leading to current account deficit and
decline in the value of the currency i.e., of rupee in case of India. On a decline in the exchange
rate of the currency, the imports become more costly, and this leads to further price rise and
so on. If it goes on continuously, the economy may face severe crises. The central bank also
does the same.
However, a very moderate level of inflation may be called good for an economy, as it
encourages people to invest more, facilitates rise in money supply, for investment and demand
creation by enhancing enhance income level. Therefore, some rise in money supply leading to
enhanced demand, followed by increased demand and production to off-set the increase in
money supply by the higher level or supply of goods and services leads to sustained economic
growth.
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1.14 ADVANTAGES OF INFLATION
Deflation-
When prices are falling, people are reluctant to spend more money because they feel that
goods will be cheaper in the future, therefore they keep delaying purchases. Also, deflation
increases the real value of debt and reduces the disposable income of individuals who are
struggling to pay off their debt. When people take on a debt like a mortgage, they generally
expect an inflation rate of 2% to help erode the value of debt over time. If this inflation rate
of 2% fails to materialise, their debt burden will be greater than expected.
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1.15 DISADVANTAGES OF INFLATION
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CURBING INFLATION
There are several reasons why we should worry about the spike in the inflation rate. Inflation
is a tax on the poor and long-term lenders. Inflation is already too high, though it is not at
economy-wrecking levels. But it’s best to be serious about the threat it poses. Inflation has
emerged as the biggest risk to the global outlook, having risen to very high levels across the
world, levels that have not been generally seen for a couple of decades.
Currently, in India, we go through boom-and-bust cycles; sometimes GDP growth rates are
very high and sometimes GDP growth rates drop sharply. This boom-and-bust cycle is
unpleasant for every household. There is a powerful international consensus that stabilizing
inflation reduces this boom-and-bust cycle of GDP growth.
India is facing the problem of inflationary pressure because of the increase in aggregate
demand while aggregate supply is respectively constant. The inflationary pressure faced by
Indian Economy is due to demand-pull inflation i.e., aggregate demand > aggregate supply.
Thus, to curb inflation need to fill the gap between aggregate demand and aggregate supply.
For this either we need to increase aggregate supply or decrease aggregate demand that can
hamper economic development. To increase aggregate supply either there is a need to increase
production capacity of all current production units or to build new production plants.
But as quoted in a survey done by RBI that all the production plants are running at their full
production capacity thus all resources are full employed. The other way is to build new plant
but do this will take at least 18 months tot 2 years. Thus, meanwhile we need to decrease
money supply, which is opted by RBI. Increasing production of useful goods and services is
what India should focus on.
As in the short run it is not possible to meet the gap between aggregate demand and aggregate
supply thus RBI is planning to decrease liquidity by reducing money supply from market. RBI
planned the liquidity from the market can be drained by decreasing money supply and to do
so it is increasing CRR, repo rate, reverse repo rate and taking other measure like that.
CRR i.e., Cash Reserve Ratio (Liquidity Ratio) is the percentage of deposit that a commercial
bank needs to keep with RBI by which RBI control liquidity in the market and create money
supply. Repo rate is the rate at which RBI lends money to other commercial banks.
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The Reserve Bank said that such decisions had been taken to curb inflation in India. RBI is
taking positive steps to reduce the inflation since inflations rates are going up week by week.
By raising the reserve rate, a deflationary pressure can be put on the economy, since the
money multiplier has been reduced. People will therefore save more. But in this hike, there is
negative impact in terms of higher interest rates and personal loans, vehicle loans and
other loans become costly. RBI may hike the rate to reduce the money circulation in the
country, but it also decreased the sales of all loan items and further it reduces the
manufacturing activity of many industries. Now the public and private sector banks may raise
the interest rate at which they lend money to borrowers.
Produce more exports than imports than another country, then your money deflates with
respect to that currency. Exporting becomes a problem cause buyer from outside feel that the
goods are expensive, so they prefer buying some other country’s goods with cheaper rate.
Thus, money does not come in the same way, when public has more money they buy foreign
goods, thus money goes out which is bad. There is a need to encourage people to purchase
goods produced within the country.
It is important for policymakers to make credible announcements and degrade interest rates.
Private agents must believe that these announcements will reflect actual future policy. If an
announcement about low-level inflation targets is made but not believed by private agents,
wage setting will anticipate high-level inflation and so wages will be higher, and inflation will
rise. A high wage will increase a consumer’s demand and a firm’s cost, so inflation rises.
Hence, if a policymaker’s announcements regarding monetary policy are not credible, policy
will not have the desired effect.
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1.16 As Individual what we can do to stop inflation
o Firstly save!! As much of your money as possible should be saved. This will reduce the
demand on the economy and hopefully reduce inflation.
o Do not overuse daily essentials like cooking gas, electricity etc. Cut down on
inessentials when buying groceries. Look for cheaper alternatives to products that you
normally buy.
o Keep roads, highways, sidewalks, etc. beautified to help attract tourism and bring
additional monetary into a growing economy.
o Illegal activities reap the benefits of the country but don’t pay taxes.
o Invest in short term deposits and funds, commodities and property. This will help you
to slowly reach your financial goals while safeguarding your hard-earned money.
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- 45 -
CHAPTER – 2
RESEARCH METHODOLOGY
LITERATURE REVIEW
LIMITATIONS
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OBJECTIVE OF THE STUDY
The aim of the study is to empirically examine the causes of inflation in India.
As a result of the above aim, the following are the objectives of the study:
1. The core objectives of the study are to evaluate the impact of Inflation on Indian
Economy in general arising due to global financial crises, recession and inflation and
will analyse qualitative, quantitative and collective impact on various economic sectors.
5. To identify which most impacting factors are hindering the purchasing power of
customer.
6. To investigate the different economic reforms taken by the government of India that had
actions which affect the trends in inflation in India.
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RESEARCH METHODOLOGY
- 48 -
LITERATURE REVIEW
- 49 -
LIMITATIONS
Firstly, this project will not examine government policy in sectors such as food and other
institutional factors that could potentially play a substantial role in determining inflationary
trends.
Secondly, this project will restrict itself to the causes of inflation and will not examine the
effects of inflation on the broad economy. Inflation, which is the internal price of money, has
a significant impact on exchange rates and other economic variables. There is also a vast
amount of literature which looks at the connection between economic growth and inflation,
with many economists positing that low inflation is a pre-condition for sustained rapid
economic growth. In addition, inflation has developmental consequences, especially if it is
driven by high food prices. High food prices disproportionately affect the poor, who spend
proportionately more of their income on food than the better-off. However, this project will
not be looking at any of these issues.
Time constraints
Flawed Methodology
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STATEMENT OF THE PROBLEM
Standard and savings. Reduction in savings results in lower investment and capital formation.
Inflation lowers the foreign direct investment as the rising cost of materials and inputs are less
profitable to foreign investments. Uncertainty about prices and increase in production costs
also reduce production. Inflation also results in a reduction of exports because the rise in
domestic input prices makes the price of domestically produced products valuable in the
international market. Also, inflation results in increased imports because of the higher rate of
locally produced products resulted in increased demand for imports. The increase in imports
and a decrease in exports caused by inflation, resulting in an adverse balance of payments in
the country. Most importantly, inflation redistributes income from wage earners and fixed
income groups to profit recipients and from creditors to debtors. This, in turn, increases the
number of poor and on the other hand, increases the amount of costly and hence, it results in
more inequality. The living standard of urban dwellers is adversely affected by inflation in
India. Most importantly, the rise in India may misallocate resources form productive to
unproductive sectors. According to the fundamental concept of economies, excess of the
money supply causes inflation primarily. This excess is dominant because when people
allowed offering more money for goods, the number of products cannot be balanced with the
amount of money that automatically raises the prices of goods. The cost of goods rises, not
only because the assets are scarcer than before because money is more abundant and less
valued.
The severe economic setback in the Indian economy is inflation, which hinders the economic
power of the people. Most of the people are still suffering due to inflation in India. This major
study aims to support the Government, and economists should generate better policies for the
control of inflation.
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- 52 -
CHAPTER – 3
CASE STUDY
DATA INTERPRETATION
ANALYTICAL FRAMEWORK
- 53 -
CASE STUDY
The existing literature on inflation related to India has been considerably critical of the IT
policy proposed and adopted by the RBI recently. In India, IT was presented by the Urjit Patel
Committee set up by the RBI in 2014. It has subsequently been adopted in India by former
RBI Governor Raghuram Rajan in 2016 to keep price levels in check while boosting growth.
Thus, currently India has targeted inflation at 4% (with an upper and lower limit of 6% and
2%, respectively).
Jha (2008) states that given the widespread poverty level, incomplete financial liberalization,
strong monopoly elements in the banking sector and high fiscal deficit among other issues,
India is not prepared for IT and that monetary policy should focus on higher economic growth
at least in the medium term. Kohli (2015) is of the view that the existing adverse domestic and
global macroeconomic environment poses a considerable threat to the successful
implementation of the transition to IT policies in India. An improved institutional framework
is necessary for the effectiveness of IT policies, but possible significant output sacrifices may
stand in the way of development of such a framework.
In his 2016 speech at the Tata Institute of Fundamental Research (TIFR), Raghuram Rajan
states that given the costs of high inflation, developing countries face a dilemma when setting
a target level of inflation. While double-digit inflation is generally taken to be harmful, there
is considerable confusion regarding the optimum level of single digit inflation as well. While
moderate levels of inflation, for example, 7-10%, may not jeopardize overall growth levels,
countries still prefer to set their targets at lower levels, since inflation affect different sections
of population in different ways.
Nair (2013) identifies the soaring prices of two groups, namely, food and fuel as the major
cause for persistence of high inflation in India between December 2009 and August 2013.
While the high inflation rate of minerals and mineral oils can be explained by various factors
such as volatility of global crude oil prices and domestic supply-side bottlenecks among
others, the high food inflation is surprising given the promising domestic food supply
situation and low global food prices. Rising domestic demand pressures have been cited
as one of the possible reasons for the rising prices of six high-value food commodities, that
is, pulses, milk, egg, fish, meat and edible oil in recent years. Cost escalation has been cited as
another possible reason for the high food inflation. This high food inflation rate is of the
greatest concern to the
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masses, considering the existing elevated levels of poverty, malnutrition and household
expenditure of food in India and it has serious detrimental effects on welfare.
Attempts have also been made to address the issue of diverging WPI and CPI inflation
observed in India, which poses a problem about policy formulation. According to Linga Reddy
(2016), the differences in composition between WPI and CPI in terms of products and their
weights are responsible for the increase in divergence between them. Plummeting prices of
petroleum and metals, which have larger contributions in WPI than CPI, as well as the
sluggish transmission of the falling petroleum prices to the consumers, as manifested in the
positive inflation rates of petroleum products in CPI, were responsible for the divergence.
Moreover, services with relatively high inflation rates have a weighted contribution of about
25% in CPI but negligible in WPI. While the food products group has exhibited similar
positive trends in both indices. Finally, due to relatively small sample size in case of the
former, it is observed that WPI based inflation is more volatile than CPI based inflation.
Nadhanael and Patnaik (2010) point out the scope for possible misleading inferences due to
data deficiencies in the Indian context. Also, Raj and Misra (2011), to find out an appropriate
measure of inflation to be targeted by RBI, observe that non-food manufacturing prices that
RBI uses as a measure of demand-side pressures is the only measure which satisfies all the
properties of a core measure, a means to achieve low and stable inflation by serving as a
short-term operational guide for monetary policy. Mishra and Roy (2011), on the other
hand, analysed food price inflation using a disaggregated high frequency commodity
level dataset and find that food price inflation to be consistently higher than non-food,
quite persistent, and having a significant pass-through to non-food inflation.
Given the numerous challenges facing economists and policy makers in India about the current
elevated level of inflation, Rajan argues that a pragmatic rather than a doctrinaire approach is
required to make a successful transition for high or moderate to low inflation levels. He notes
that rather than a hands-off approach, adjustments need to be made to build stable institutions
that result in sustained low inflation rates and positive real interest rates. This adjustment,
while difficult in the short run, needs to be continued since we are already making
considerable progress as evidenced by the central bank’s shift to a CPI-based inflation target,
and the setting up of an independent MPC.
At this backdrop, we estimate the relationship between price changes and other relevant
macroeconomic variables by employing cointegration and vector auto-regression (VAR).
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DATA INTERPRETATION
It is well recognised that, viewed in the light of the experience of the recent past, the year
1998-99 saw high inflation rates in most months. However, by the fiscal year-end, on a point-
to-point basis, the rise in the Wholesale Price Index showed a market deceleration. The point-
to-point inflation rate declined to 4.8% in 1998-99 from 5.3% in 1997-98. However, inflation
rate based on the average of weeks was higher at 6.9% in 1998-99 compared with 4.8% in
1997-98. The weighted contributions of major commodity groups to the total price rise during
1998-99, on an average basis, indicate that the primary articles group contributed to the
maximum with a share of 56.8% which was higher than that of 23.7% in the preceding year.
The share of fuel group declined to 6.8% in 1998-99, from 29.1% in 1997-98. The weighted
contribution of manufactured products declined to 39.5% in 1998-99 was that the weekly
annualised rate of inflation as measured by WPI consistently remained higher during a major
part of the year than that of the preceding year.
The rate of inflation measured in terms of point-to-point variation in the Consumer Price Index
for Industrial Workers (CPI-IW) registered an increase of 8.9% in 1998-99, close to the rate
of 8.3% in 1997-98. But, with the increase of CPI-IW remaining high for most part of the year
and falling towards the end of the year, consumer inflation measured in terms of average of
months of CPI-IW almost doubled to 13.1% in 1998-99 from 6.8% in 1997-98. It was also
higher than the average of 10.2% during the period 1990-91 to 1996-97. The trends in WPI
and CPI-IW revealed significant divergence between the two, with the difference between the
wholesale price inflation and consumer price inflation being in a wide range of 3-12% points
during the year.
o First, the divergence in various measures of inflation, WPI CPI and average point to
point, are significant.
o Second, the traditional villains of inflation such as war, oil price hike and failure of
monsoon were conspicuous by their absence.
o Third, there was a rapid reversal of inflationary pressures making the episode an
unusually short duration one.
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o Forth, for justifiable reasons, aspects covering the constructions of the indices were
subject to serious questioning.
As regards 1999-2000, for the week ended July 24, 1999, the annual inflation rate measured
as point-to-point variation in the WPI was 1.19%. During the financial year, i.e., up to July 24,
the rise of 1.16% in WPI on a point-to-point basis, wad lower than that of 4.78% recorded
during the same period of the previous year. The weighted contribution of major commodity
groups show that primary articles group continue to have maximum share in the price increase
during the year so far. On an average basis also, the inflation rate during the current financial
year so far at 1.19% was lower than that of 4.85% during the same period in 1998-99.
The rate of inflation measured in terms of CPI-IW increased by only 1.4% during April-June
1999, much lower than the increase of 5.0% during the first three months of 1998-99. On an
average basis, the increase was of a lower order of 1.0% as compared to 6.7% during 1998-
99.
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ANALYTICAL FRAMEWORK
The analytical framework of the study is based on the premises of the structural viewpoint
spelt out in Rakshit (2011) Since the objective is to discover the nature of inflation by testing
whether the findings indicated in Rakshit (2011) hold for the Indian economy, the study is
conducted by estimating the following three sets of relationships:
i. How the price indexes in India, namely, WPI and CPI, are explained by monetary policy
variables as well as macroeconomic variables.
ii. How or whether the different components of inflation, that is, food, fuel and core
inflation, are related to each other in order to understand the roles of food and fuel
prices in intersectoral transmission of inflationary impulses.
iii. How the fluctuating components, namely, food and fuel inflation as well as core
inflation, are explained by factors like agricultural and non-agricultural income,
exchange rate to understand the role of demand and supply to cause food inflation or
the role of exchange rate in influencing other components, apart from fuel inflation.
To estimate the relationship, multivariate time-series technique is applied. Since there are
some signs of co-movement of some of the variables, the relationships are tested for
cointegration or VAR depending on the stationarity of the combinations/sets of variables
considered. Also, since the two-way dependence between variables is possible in each of the
three contexts mentioned above, it is appropriate to consider VAR, instead of multiple
regression. The choice of variables, their theoretical justifications and the selection of the
method are described.
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CHAPTER – 4
CONCLUSION
RECOMMENDATION
- 59 -
CONCLUSION
Finally, I want to conclude that inflation plays major role, to weaken the economy. Mainly
inflation can be seen in food articles, which impact on weaker sections of the people in the
nation. Government and policy makers of the economy should think more about, how to
reduce inflation. Food is universal need for people. If inflation more in food articles, it will
harm to the country people.
Inflation should not be there in food articles because food is essential need for all categories
of the people. In Per capita income of the people is less, less per capita income of the people
surviving is very difficult with high inflation in the country.
The study is carried out on the analysis of the facts and the figures showed that the rate of
inflation, and the economy are two sides of the same coin, in the future. This project has
shown that the main cause of inflation is the inflation of food prices, which is in October of
2020, 11.07%, core inflation -5.64%, which was the highest rate in the past 30 years.
Inflation is a major influence on the lives of the middle class and the poor class, The control
of the rate of inflation is required to be a strong, powerful, and long-term policy of the
government. The rate of inflation in general and food inflation has been a persistent problem
in India over the past few years. The pandemic has caused both demand and supply shock.
Due to pandemic both wholesale and retail inflation continued to increase. The major reason
behind the inflation rise in India is the sharp rise in the commodity prices. The Government
should take protective measures in order to ensure the country’s security of supply in order to
stimulate the economy and keep the production costs low. The conduct of monetary
policy is the main tool for maintaining low inflation rate. Rising interest rates, contribute to
the reduction of the growth rate of aggregate demand in the economy. The slower growth of
aggregate demand will reduce the rate of inflation. The supply policy aimed at the
improvement of the long-term competitiveness and productivity.
Furthermore, analysis can be seen from the references, which helps to understood clear cut
picture about inflation position in India. I have taken the references for my analysis; I would
like to thank tot all authors who helped me to complete successfully. I would like to thank the
writers of the below articles who given me an idea to write an article in the topic of inflation,
up to my knowledge I analysed the things in these articles. These below all reference articles
will become only cross reference articles.
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RECOMMENDATIONS
In order to tame the inflation and to anchor the inflation expectations there is need of
prudent and effective eco – protective policies with inflation as a core. In order to
protect the economy from inflation impact policy makers of the nation must think of
nutritional security rathe than exploring the possibilities at demographic level
considering young population. It is a paramount important to arrest prices of food
products at significant level. This could be achieved by correcting imbalance of
demand and supply in agriculture sector through developing effective supply chain
system.
Government must adopt protective measures to secure energy security for the country
to promote economy and to maintain low cost of manufacturing.
An effective and protective effort must be adopted by the government to control the
energy crises and imbalances along with economizing the consumption.
Government must liberate the energy sector and adopt market related pricing to reduce
the subsidy burden of petroleum sector.
Nation policy makers must consider the fact that economy which is supply constrained
will not be stable but always be in fluctuating. In fluctuating economic condition
potential output cannot be reliable gauge for inflation threshold. Under such conditions,
firms generally operate below capacity and yet retain the power of pricing. Thus,
availability of necessary raw material and reliability of power supply is core to optimize
the industrial capacity and significant improvement in productivity.
The government and policy makers must develop and promote self sufficient economic
environment besides moderating inflation. Government must minimise dependency on
imports for which domestic capacity exists.
Government and policy makers for consolidation purpose must avoid risk of twin deficit
to manage internal and external balance.
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Government must try to keep fiscal deficit low as it encourages private investment
which is useful in maintaining stability in price.
Government and policy makers while taking preserving steps to increase the base of
financial market and addressing credit constraints must calibrate the monetary policy
with evolving growth.
Government and policy maker must develop effective mechanism to generate policy
response when supply side factor dominate the inflationary pressure which ultimately
result in generating the risks of spill over into a wider inflationary process. Thus, in
order to ease the inflation management, policy makers must develop structural supply
constant, for this they must ensure that unhinging inflation management more complex.
Government and policy makers to control the inflation in advantage limits must make
effective monetary policy, supply side policies, and exchange rate policies.
Government must keep on revising all categories inflation basket and must make them
more comprehensive in order to meet the challenges of inflationary conditions.
In last, for the betterment of nation economic growth and development government
must insure low and stable inflation. For this government must develop effective
coordination among all economic participants, significant contribution by nation’s
policy makers, Reserve Bank of India, global economic environments and other
related economic bodies.
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REFERENCES
Kannan R (1999): “Inflation targeting: issues and relevance for India”, Economic
and Political Weekly, XXXIV, 115-122
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Misra BS (2003): “Analytics of credit-output nexus in India”, Reserve Bank of
India Occasional Papers, 24, 145-171
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