Inflation in India

1 January 2017

General Definition: Inflation indicates the rise in price of a basket of commodities on a point-to-point basis [1]. Inflation is caused by a persistent increase in the prices of goods and services. Inflation measures the increase in the cost of living over a period of one year. For example, if a set of commodities bought in January 2000 cost Rs 100, and the same set of commodities bought in January 2001 cost Rs 110, and then the inflation rate is 10%. The Inflation rate is considered to be high if it is more than 5%.

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On the contrary if the prices of commodities decline consistently then it leads to deflation. Both inflation and deflation are detrimental to a country’s economy, and hence inflation must be kept moderate in a developing nation. 1. 2. Inflation in India: India suffers with maximum inflation compared to chief markets. From the last two years India is trying to bring down the inflation rate but all the efforts are in vain. Started with the hike in food prices, inflation now has a strong foothold in the Indian economy.

The consequence is that the hiked price is now considered as the “new normal” in an economy which has had subsidised prices since independence. To counter this Reserve Bank of India (RBI) has raised lending rates numerous times since March 2010. The rate of inflation is measured by The Wholesale Price Index (WPI) [1] in India. The WPI is accessible for all types of commodities which help to keep a check on price conditions. The RBI formulates policies in terms of WPI. 1. 3. Influence of Inflation in Normal Day-to-Day Life:

The rise in inflation results in the increase in economic uncertainty. Compared to the developed economies, the cost may rise up more in India because of inflation. The impact of inflation is more on the society the lower class and the middle class. This is further aided by the disturbance in the global economy. The fall in global economy results in the decline of the market price which has a negative effect on the Indian market. These effects combined with certain external factors discussed in the causal loop diagram results in a growth restraining environment, even if the inflation is low. . 4. Possible Mitigations: * The uncertainties in inflation can be reduced by actively implementing policy responses to mitigate inflation growth. * The factors driving inflation must be clearly shared across the general public to rationalize the public view on inflation.

Given the importance of food and energy in India’s priced index calculation, publishing information on these items as well as exchange rate, inflation rate in major trading partners, projections of important import and export prices, etc. would be beneficial. Awareness about inflation issues and forecasts must be delivered to the general public. This helps the general public to understand the monetary policies and inflation forecasts of the RBI and improves the public view on the transparency of RBI. * Most countries use Consumer Price Index as a measure of inflation as it is unlikely to be subjected to revisions, accurate and widely accepted. However in India the RBI (inflation-computing agency) uses WPI as a measure of inflation. CPI could be used to measure inflation accurately.

There are many events that could lead to a rise in inflation. There are two main types of factors that can cause inflation, the demand-side factors and the supply-side factors. Demand-Side Factors * If a country’s government increases the money supply by printing excess money, then the prices of commodities are bound to increase to balance the increase in money supply. The increase in money supply increases inflation. * If people having black money spend lavishly, it increases the demand.

As there is no corresponding increase in supply the prices soar and it causes inflation. * When countries repay the public debts it increases the money supply and therefore results in inflation. * Privatisation of industries creates new employment opportunities. This gradually increases the income and causes inflation. * The unnecessary public expenditures of the government in non-developmental projects increase the aggregate demand which ultimately leads to inflation. * The increase in disposable income of people increases the demand for commodities and hence contributes to inflation. The economic growth of other countries in the world has a great influence on inflation in a country.

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