Inflation in India

1. Inflation

2. Inflation???
10/18/2021
Dr. Kavita Srivastava
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3. Definition
 Inflation is a situation in which there is a persistent and
appreciable increase in the general price level in the
country.
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4. Introduction
 Persistent inflation is perhaps as serious macroeconomic
problem confronting the world economy.
We discuss:
 Meaning , causes & effects
 Types of inflation
 Measures of inflation
 Relationship between inflation and unemployment
 Control measures
 Impact on Indian Economy
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5. Causes of Inflation
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1. Demand- Pull
2. Cost- Pull
3. Structural imbalances

6. Demand- Pull Inflation Theory
E1
D
D1
D2
D3
E2
E3
E4
Q1
P3
P2
P4
P1
Q2 Q3
S
S
Output
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7. Causes of demand pull Inflation
 Increase in Public Expenditure
 Increase in Investment
 Increase in Disposable income & MPC (marginal
propensity to consume)
 Increasing Exports
 Deficit Financing
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8. Cost Push Inflation Theory
D
E
S
Q
Q1
Q2
S
S1
S2
E1
P
E2
P1
P2
D
X
Y
O Output
Price
level
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9. Causes of Cost Push Inflation
Cost push inflation may be caused by
 Increase in wages
 Increase in profits
 Shortage in supply ( due to natural calamities or artificial
scarcity)
 Shortage of Factors of Production
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10. Measuring through PIN
 Rate of Inflation= PINt –PIN(t-1)/PIN(t -1)x100
 Where PINt and PIN t-1 are the Price index numbers in the
current and the preceding years, respectively.
 The WPI (1981-82=100) for all commodities increased from
182.7 in 1990-91 to 207.8 in 1991-92. The rate of inflation
between 1990-91 and 1991-92 can be obtained by
 Rate of Inflation = 207.8-182.7/182.7 x100=13.73%
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Price Index:
• Laspeyres
• Paasche
• Fischer

11. WPI & CPI
 Wholesale Price Index (WPI) and Consumer Price Index
(CPI)
 WPI is used to measure the general rate of Inflation and
CPI is used to measure the rise in cost of living.
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12. CPI (base year – 2012)
[Central Statistical Organisation, Ministry of Statistics and Program
Implementation]
1. Food and Beverage
2. Misc – health, Education and recreation
3. Housing – N/A in rural
4. Fuel and Light
5. Clothing and Footwear
6. Tobacco and Intoxicants
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13. CPI reforms (Feb 2015)
 Change in base year
 Assignment of Weights
 CPI –rural and urban and revision in number of items under
each
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17. WPI (676 items)(base year – 2004)
[Economic Adviser, Dept of Industrial Policy and Promotion]
 Primary articles (20%)
1. Food
2. Non-Food
3. Mineral
 Fuel (15%)
1. Mineral Oil
2. Electricity Coal
3. Coal
 Manufacturing (65%)
1. Chemicals
2. Metal
3. Food – processed
4. Textiles
5. Machine tools
6. Wood paper
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Core Inflation = Headline WPI – (food -fuel)

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19. Inflation good or bad????
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20. What is considerable rate of
Inflation?
 Depends on the desirability of inflation
 A moderate rate of inflation is considered to be desirable
and acceptable for at least three reasons:
 It keeps economic outlook optimistic, promotes economic
activity and prevents economic stagnation
 It is helpful in the mobilization of resources by increasing the
savings and investment
 Some rate of inflation is inevitable in a dynamic and
progressive economy.
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21. Effects of Inflation
Inflation and distribution of Income : The effects of inflation
on distribution of income depends on how it effects the price
received and price paid
 Price received is the income earned
 Price paid is the expenditure
 Inflation creates a divergence between total price received and
total prices paid by different sections of the society
 When wages increase proportionately to the rise in profit
incomes, the income distribution remains generally unaffected.
 When profits rise faster than wage incomes, income gets
redistributed in favour of the profit earners.
 This creates gap between rich and poor.
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22. Fixed Income Class
 Fixed income people are the badly effected by inflation.
 Their income do not increase and the purchasing power
continues to decline.
 Suppose that a person earns a fixed annual income of Rs.
100,000 and that the rate inflation is 10 %. It means that if
he spends his total income, he can buy goods and services
worth only Rs. 90,000 at the price in the current year.
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23. Borrowers and Lenders
 Borrowers gain and lenders lose during inflation
 Suppose a person borrows Rs. 5 million at 12 percent
simple rate of interest for a period of five years to buy a
house. Suppose that escalation in property prices is such
that property prices double every 5 years . After 5 years, the
borrowers would pay a total sum of Rs 8 million whereas
the price of house rises to Rs 10 million. The borrower
gains by Rs. 2 million. The lender loses by the same
amount in sense that had he bought the house himself, his
money would have risen to Rs 10 million
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24. Effects of Inflation on
Producers
 Whether producers gain or lose during inflation depends on
the rate of increase in prices they receive and the prices
they pay.
 In general, product prices rise faster than the cost of
production.
 Profit margins thus increase and producers gain.
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25. Effects of Inflation on the
Government
 Net gainer during the time of inflation
 Inflation increases tax revenue of the government
 Revenue from direct tax and corporate income tax
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26. Effects of Inflation on the
economic Growth
 Inflation has positive effect on the economic growth
 Rate of growth depends on the rate of savings and
investment.
 Whether inflation affects economic growth positively or
negatively depends on whether it affects savings and
investment positively or negatively.
 Most of economists agree that a moderate rate of inflation
is conducive to economic growth and that, in the short run,
there is a positive relationship between moderate rate of
Inflation and economic growth.
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27. Effects of Inflation on
Employment
 If inflation affects growth variables like savings, investment
and profits favorably then it affects employment favorably
too.
 Greater the rate of investment, greater is the rate of
employment.
10/18/2021
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28. Decline in inflation
 Decline in world prices of crude oil, edible oil and coal
 Abundant production (FAO)
 FCI open sale of grains
 Potato and Onion under Essential Commodities Act
 Minimum Export prices for potato and Onion
 RBI monetary policy
 Wage growth moderate
 Price Stabilisation Fund
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29. Measures to Control Inflation
 Monetary Measures:Traditional Monetary Measures
 Bank Rate Policy
 CRR
 Open Market Operations
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30. Non- Tradition Measures
• Statutory Liquidity Ratio: Statutory Liquidity Requirement:
the proportion of total deposits which commercial banks are
statutorily required to maintain in the form of liquid assets
i.e., cash reserve, gold and government bonds in addition to
CRR. To prevent the commercial banks from liquidating
their assets when CRR is raised.
• Moral Suasion
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31. • Credit Authorization Scheme: Introduced in 1965, is used
by the RBI to allow banks to give large public and private
sector borrowers
• Under this scheme, the commercial banks are required to
seek prior authorization of the RBI and to report later to RBI
with regard to large credit facilities given to large public and
private sector units
• This includes export credit, credit for fertilizer distribution
and defense related credit
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32. Fiscal Measures
 Taxation Policy
 Public Expenditure Policy
 Deficit Financing Public Debt
Fiscal or Monetary Policy?
If inflation originates in the monetary sector due to excess
money supply, then monetary policy should be more
effective and if it arises due to increase in public
expenditure then fiscal policy is more effective
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33. Other Measures
 Wage or Price Control
 Import Duty
 Fixation of Quota
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34. Video
https://www.youtube.com/watch?v=-pwincsv4E0
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