International Business

Inflation rate In India

Prepared by Mohit makhija Roll no. 29

What is Inflation ? Inflation is an increase in the price of a basket of goods and services that is representative of the economy as a whole. Every week we talk about inflation and we might have to know how its calculated in India. There are several ways every country use first we will see how India calculates it . How India calculates Inflation? India uses the Wholesale Price Index (WPI) to calculate and then decide the inflation rate in the economy. What is Wholesale Price Index? 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 435 commodities data on price level is tracked through WPI which is an indicator of movement in prices of commodities in all trade and transactions. Inflation The industrial houses as well as the policy makers are all worried with the constant increase of the inflation in India since March of 2008. In economics, inflation refers a general increase in the prices measured against a general level of the power to purchase. In earlier times this term used to refer to increase in money supply. This is currently referred as monetary inflation or expansionary monetary policy. The measure of inflation is measured by comparing two sets of goods at different times. The computing for the increase in the cost which is not reflected by increase in the quality is carried out. The various measures of inflation depend on the particular circumstances. The most popularly known method is the CPI. In this method the measures

are the consumer prices, as well as the Gross Domestic Product (GDP) deflator. In this way the total domestic economy is measure. The prevalent view for economics (mainstream) is due to the interaction of the supply of money with output and interest rates. The views of the economists are broadly divided in two camps- the "monetarists" and the "Keynesians". The related concepts for calculating inflation of a country comprise deflation, disinflation as well as hyper-inflation. Deflation is in general the falling level of prices. The disinflation and the hyper-inflation are all important aspects while calculating the inflation rate of a country. Inflation rate in India The inflation rate in India was last reported to be 9.72 percent in September of 2011. Since the year of 1969 till the year of 2010, the average inflation rate in India was 7.99 percent. The inflation rate of the country reached an historical high of 34.68 percent during the month of September in the year of 1974. The lowest was recorded in the month of May in the year of 1976. It was reported to be as low as -11.31. The inflation rate in general refers to the rise in the prices measured against the purchase power at a standard level. The best known measure of Inflation is the CPI which measures the consumer prices. The GDP deflator also measures inflation in the total domestic economy.

India Inflation Rate Chart (in %)

Year Jan Feb 9.54 Mar 9.68 Apr 9.70 May 9.56 June 9.44 July 9.22 Aug 9.78 Sept 9.72 9.82 Oct 9.73 9.70 Nov 9.11 8.33 Dec 7.47 9.47

2011 9.35

2010 16.22 14.86 14.86 13.33 13.91 13.73 11.25 9.88 2009 10.45 9.63 8.03 8.70 8.63 9.29

11.89 11.72 11.64 11.49 13.51 14.97

Causes of inflation A sustained rise in the prices of commodities that leads to a fall in the purchasing power of a nation is called inflation. Although inflation is part of the normal economic phenomena of any country, any increase in inflation above a predetermined level is a cause of concern. High levels of inflation distort economic performance, making it mandatory to identify the causing factors. Several internal and external factors, such as the printing of more money by the government, a rise in production and labor costs, high lending levels, a drop in the exchange rate, increased taxes or wars, can cause inflation. Different schools of thought provide different views on what actually causes inflation. However, there is a general agreement amongst economists that economic inflation may be caused by either an increase in the money supply or a decrease in the quantity of goods being supplied. The proponents of the Demand Pull theory attribute a rise in prices to an increase in demand in excess of the supplies available. An increase in the quantity of money in circulation relative to the ability of the economy to supply leads to increased demand, thereby fuelling prices. The case is of too much money chasing too few goods. An increase in demand could also be a result of declining interest rates, a cut in tax rates or increased consumer confidence. The Cost Push theory, on the other hand, states that inflation occurs when the cost of producing rises and the increase is passed on to consumers. The cost of production can rise because of rising labor costs or when the producing firm is a monopoly or oligopoly and raises prices, cost of imported raw material rises

due to exchange rate changes, and external factors, such as natural calamities or an increase in the economic power of a certain country. An increase in indirect taxes can also lead to increased production costs. A classic example of cost-push or supply-shock inflation is the oil crisis that occurred in the 1970s, after the OPEC raised oil prices. The US saw double digit inflation levels during this period. Since oil is used in every industry, a sharp rise in the price of oil leads to an increase in the prices of all commodities. While money growth is considered to be a principal long-term determinant of inflation, non-monetary sources, such as an increase in commodity prices, have played a key role in triggering inflation in the past four decades. Inflation has become a major concern worldwide in 2008, with global prices rises in oil, food, steel and other commodities being the culprit

Inflation is caused due to several economic factors Below is listed the many reasons behind the cause of inflation in India in 2011

Inflation can be caused if the government prints notes in excess. If there is a lot of money circulating in the market then prices increase just to keep pace with the increase in currency. Sometimes a country demands more goods and services than what it actually produces. This type of inflation is known as Demands pull inflation. Sometimes the price of a finished good is strikingly high, this happens mainly if there is increase in its production and labor cost. This increase in the cost of the final product also leads to inflation. Inflation also occurs with increasing interest rates. Sometimes countries borrow money, which have high interest rates attached to it. The burden that this rate of interest causes also results in inflation. Consumer products that carry high taxes can also cause inflation. Sometimes if a commodity or product is unavailable in the market its prices tend to go up. This is known as Cost push inflation or supply shock inflation.

Inflation in India in future It is expected that the emerging markets, including India, will perform well withstanding challenges like higher inflation as well as the rising prices of the oils. It is assumed that the price of the commodity will continue to maintain the upward march since the developing countries are maintaining a very strong growth momentum motivated by the by robust consumption. The emerging markets will continue to do well. The strong growth momentum is accelerating the growth. Indian economy is expected to grow at 8 percent in this fiscal year 2011-12. The developed markets are growing at the rate of 1.6 percent. The emerging markets are experiencing the bull nature. The bear nature is short-lasting in these economies. This bull phase is going through a 20 year high. The growing price of oil in the country is the factor behind the growth of the price of all other commodities in India. It is calculated on an annual basis on the Wholesale Price Index. The Wholesale Price Index includes around 435 goods, based on which the rate of inflation is calculated. However it is only in India that the rate of inflation is calculated on the WPI in other countries the rate of inflation is calculated on the Consumer Price Index (CPI). Inflation in India 2010 - 2011 was last recorded at 8.82 percent in the month of February. Inflation in India in 2011 has already touched the 9 percent mark which is a matter of concern for the economy. The rate of inflation in January 2011 was 9.30 which came down a little in February. The rate of inflation over the last 45 years maintained an average of about 7.99 percent. The rate of inflation generally refers to rise in the prices of goods and services measured against a basic level of purchasing power of the people of the country. There are two well known instruments used to measure Inflation namely; the Consumer Price Index and the GDP deflator. The Consumer Price Index measures consumer

prices whereas the GDP deflator measures the total inflation of the domestic economy. The results of Inflation can actually be seen in Indian when we end up buying lesser goods by paying excess. Such a phenomenon mostly takes place when either there is too much money supply in the economy or there is less supply of goods and services. Over the years the one common factor of inflation has been the increase in the supply of money. In order to give a boost to the GDP during the economic slowdown that India faced two years back, the government let loose its monetary policies. The rates of Interest were lowered so that people could have more disposable incomes. To add to this the price of crude oil soar very high, this further fueled the inflationary pressure in India. Threats like building deficits, real estate bubbles and manufacturing overcapacity also add to the inflationary trends in the future. One of the most prevailing types of inflation that has been plaguing the country since decades is 'Food Inflation'. This is still one area where the government of the country is yet to take notice about. Also the fast growing population, lack of proper irrigation infrastructure, slow production capacity of land and water shortage is a matter of concern for the future. These factors put together can account for high rates of inflation in the country.