28 States Inflating Problem due To Inflation Team Name: We for the Change Tech-id TECH51306
What is Inflation ? Inflation : Inflation is defined as a rise in the general price level over a period of time. In other words, prices of many goods and services such as housing apparel, food, transportation, and fuel become dearer during inflation. Deflation : Deflation is defined as fall in the general price level over a period of time. Both Inflation and Deflation create Problems What happens during Inflation : Value of Money goes down and Prices rise High
Growth vs. Inflation: India, 1951-2011 Average annual growth rate of GDP at constant prices (%) Average annual rate of WPI inflation (%) 2005-06 to 2010-11 8.47 6.55 2000-01 to 2005-06 6.93 4.68 1995-96 to 2000-01 5.92 5.07 1990-95 to 1995-96 5.38 10.18 1980-81 to 1990-91 5.64 8.51 1970-71 to 1980-81 3.16 10.28 1960-61 to 1970-71 3.75 6.24 1950-51 to 1960-61 3.94 1.75 Period WPI - Wholesale Price Index - measured weekly in India Rate of Inflation The relative price of food is computed as the ratio of the WPI component for primary food commodities to an index of non-food manufacturing prices computed from WPI data. The Indian evidence above shows the lack of any simple unidirectional relationship between inflation and growth.
Why is Inflation a Problem in India? Price Effects : 1. Inflation makes some people worse off, but it makes others better off Ex: 1. Increase in Gasoline prices affect the Truck drivers more but barely affects people who go to there work by walk and economy vehicles 2. College tuition fees has risen almost twice as fast as average prices over the past 10 years, which hurts you a lot, but may have little impact on a married couple with no children. 3. Poultry diseases causes a rise in the prices of Non-veg food items and affect people who eats more of Non- veg food items but it barely affects people eating Veg food. 4. People in Cities get affected more than people in small towns and villages Income Effects : 1. Prices for goods and services mean income for some people. So, as some prices increase faster than other, some peoples income increase faster than others. Ex: 1.Due to increase in number of automobiles working on Gasoline increased, due to this most of the Oil companies record very high amounts of improvements in profits every year 2. Due to ever increasing in pollution, the number of people suffering from different diseases also increased which gave chance to many pharmaceutical companies to improve profits every year 3. All the retail stores working on % profits increase there income when ever there is increase in prices of goods Wealth Effects : 1. Inflation redistributes income between Borrowers and Lenders 2. Inflation benefits the borrowers and hurts the lenders Reason: As the value of money decreases at higher rate
Inflation redistributes the social conditions of people Causes of Inflation Factors on Demand side : 1. 2. 3. 4. Factors on Supply Side : Increase in Money Supply Increase in Disposable Income Deficit Financing Foreign exchange reserves 1. 2. 3. 4. Printing Of Money is never a Solution for Inflation Rise in administered prices Erratic agricultural growth Agricultural price policy Inadequate industrial growth
Factors on Demand side 2. Increase in Disposable Income 1. Increase in Money Supply If the currency in circulation increased, there would be a proportional increase in the price of goods Disposable income is total personal income minus personal current taxes. disposable income is the amount of "play money left to spend or save. If this is increased people spend money on unnecessary things and there demand increases and thus inflation 3. Deficit Financing 4. Foreign Exchange Reserves government spends more money than it receives as revenue, the difference being made up by borrowing or minting new funds, minting new funds decrease the value of money and thus inflation Foreign exchange reserves include foreign currency deposits and bonds and also adds gold reserves, which increase the circulation of money and thus inflation Factors on Supply Side 1. Rise in administered prices Prices decided by an individual producer or seller not purely by market forces, this is common when there is only one supplier and he has chance to increase the cost with out any conditions 3. Agricultural price policy Due to fluctuating prices during mid 60s during the Pakistan war APP was introduced to ensure stability in prices, so when the supply decreases they have to manage the prices in order to stabilize the cost and inflation occurs 2. Erratic agricultural growth India is country where in 60% of people still relay on farming and the weather is so uneven and prices depend on the agricultural productivity 4. Inadequate industrial growth Most of the markets in India run foreign imported products due to lack of technology and other issues, so the pieces also keep fluctuating on the other countries markets and market value and too much imports can lead to fall of value of money
Factors on Demand side Increase in Printed Money Increase in Disposable Income Due to Increase in disposable money people spend money lavishly independent of there necessity and thus there is increase in Inflation Mainly seen in IT Sector in India due to its speedy growth Deficit Financing Foreign Exchange Reserves This happens every year in India and India has a debt of 172 Billion Dollar up-to now and still unable to repay it to World bank Forex reserves increase every week due to good participation of foreign companies and latest reports from RBI says 293 Billion Dollar investment from Foreign companies
Factors on Supply Side Rise in administered prices Erratic agricultural growth Vegetable Max Cost/kg Min Cost/kg Tomato 60 5 Potato 30 14 Onion 70 20 Cauliflower 45 20 Brinjal In case of India the administer can be government or individual if it is government then it is a fixed price if it is on the individual then there is lot more variations based on ones decision costs are decided 45 20 Inadequate industrial growth Agricultural price policy Though APP was successful for in some regions but due to poor Infrastructure the food grains and vegetables stored always get spoiled and due this the demand supply would decrease GDP growth which clearly depicts Industrial Growth
They add inefficiencies in the market and make it difficult for companies to budget or plan for long term Uncertainty about the future purchasing power of money discourages investments and savings There can be negative impacts to trade from an increased instability in currency exchange prices caused by unpredictable inflation If the inflation rate in the economy of a country is higher than rates in other economys there will be huge increase in imports and decrease in exports (in terms of vaule) and hence huge fall in GDP Higher income tax rate Value of money decreases
Measures to control Inflation 1. Effective policies to control inflation need to focus on the underlying causes of inflation in the economy Ex: 1. If the main cause is excess demand for goods and services, then government policy should look to reduce the level of aggregate demand 2. If cost-push inflation is the root cause, production costs need to be controlled for the problem to be reduced Step to be taken Investment in infrastructure and human capital to ensure that desired growth does not exceed the productive capacity of the economy. 2. If Inflation is for short period of time and If not Food Inflation Step to be taken In the short-run the RBI should raise interest rates sharply to protect its anti-inflationary credibility.
3. To eradicate Erratic agricultural growth problem Step to be taken Investment and promotion of organizational innovations in agriculture to ensure that food supply does not become a bottleneck to growth and price to price (cost effectively) 4. Demonetization Of Currency Step to be taken Primarily to curb unaccounted money. The higher denomination banknotes in Rs.5000 and Rs.10000 were to reintroduced and these banknotes (Rs.5000 and Rs.10000) were to be demonetized 5. A strong Fiscal Policy Reduction in unnecessary expenditure by the government Step to be taken Expenditures on public functions and rally's and public meeting, usage high standards Infrastructure by public officials need to be decreased to certain fixed level
6. Check on the amount the government sector borrows each year 7. Moving towards greater independence for the central bank and transparency in monetary policy to stabilise inflationary expectations. 8. Increase in Savings Policy recommended for short-run What happens with fiscal Policy Fiscal consolidation to ensure that fiscal policy does not work at cross-purposes with monetary policy. A loose fiscal policy, by increasing the debt burden both directly and through its effect on interest rates, would prove to be unsustainable in the long run As the debt burden rises, the pressure to print money to finance the fiscal deficit would rise, thereby making it impossible to pursue an anti-inflationary monetary policy. These