Inflation Unit V[ Part1/2]

Size: px

Start display at page:

Download "Inflation Unit V[ Part1/2]"

Lydia Allison
5 years ago
Views:

1 Inflation Unit V[ Part1/2] CPT General Economics Chapter - 6 Select Aspects of Indian Economy CA. Dipti Lunawat

2 Learning Objectives Meaning & Types of Inflation Price Trends in India Causes of Inflation In India Measures to check Inflation

3 Meaning of Inflation Persistent Upward movement in General price Level. Decline of Purchasing Power

4 Types of Inflation Inflation Demand Pull Inflation Cost Push Inflation Stagflation

5 Demand Pull Inflation Demand Pull Inflation More money Chases Less Quantity Excess Demand Relative to Supply Increased Money Expenditure Demand for Goods & Services more than Supply

6 Cost Push Inflation Growing Factor Cost Factors of production try to increase their share, by Rising Prices Increase in Total cost of production Inflation once set in motion in one industry spreads throughout the economy

7 Demand Pull & Cost Push Inflation Cost push Inflation is more difficult than Demand Pull Demand Pull precedes Cost Pull Inflation

8 Stagflation Demand Pull Inflation Cost Push Inflation Stagflation

9 Stagflation Economic Stagnation Low rate of Growth, Rise in General Price Level Occurs More in Developing Countries Inflationary pressure may result Galloping [40% or 100% p.a increases in price]

10 Stagflation in India Slow rate of Economic Growth High Rate of Inflation

11 Causes of Stagflation in India Large Budget Deficit Increase in Procurement price of Food Grains Slow Growth Rate of Industry & Economic

12 Meaning of Deflation Persistent Fall in General price Level. Purchasing Power Increases Opposite of Inflation

13 Price Trends in India Variation in Price Consumer Price Index [CPI] Whole Sale Price Index

14 Whole Sale Price Index Price of Representative basket of Wholesale Goods Earlier Weekly Updating, now Monthly Basket comprises of 676 item Measures Headline Inflation It does not include Services & Non- tradable Commodities In India, WPI series base of is used at assess price changes

15 Consumer Price Index Change in Price level of consumers goods and services purchased by households Cost of Living for homogeneous group of Consumers Real Inflationary Pressure More Realistic Measure than WPI, India main focus is on WPI

16 CPI Indices CPI for Industrial Workers CPI for Agriculture Workers CPI for Rural labour CPI for Urban Non- Manual Employees

17 Inflation 50 s & 60 s During Fifties, average rate of Inflation was low at 1.7% During Sixties, above rate was 6.4% Maximum Inflation in Sixties was 14% in

18 Inflation in 60 s Reasons For High Inflation in 60 s Chinese War in 1962 Unsatisfactory Supply Position Pakistan War in 1965 Famine Condition in

19 Inflation in 70 s Average rate is 9% Reason Twice Undue Hike in Petrol Prices once in & 1979

20 Inflation in 80 s & 90 s 80 s Average rate of Inflation 8% 90 s Average rate of Inflation 12% Fiscal Imbalances Shortage of Petroleum Products Tight Position of Balance of Payments Supply Demand Imbalances

21 Inflation in 20 s Next 3 years, the rate of Inflation is 10 % Growth in Wholesale & Retails Price is as follows % % Low inflation rate Stable Price of Manufactured Goods Good Monsoons

22 Inflation in The average rate of Inflation is lowered down by 3.8 % Low inflation rate Global recessionary trends Stable prices of manufactured products Fall in crude oil prices.

23 Inflation in 2010 A new WPI series with base was released in 2010 The new series has more items and is more representative of the prices prevailing in the wholesale market The new series, the ten year average of headline WPI inflation was around 5.3 per cent from The ten year average inflation, in fuel was around 8.9 per cent, in primary articles 6.4 per cent and in manufactured products 4 per cent.

24 High Inflation in 2010 Erratic and delayed monsoon Hardening of international prices of crude oil, minerals and related products Shortfall in domestic production vis-a-vis domestic demand, Hardening of international prices of primary products like wheat, pulses, edible oils, fruits, vegetables and spices

25 Inflation in Year % Year % High food inflation i.e. higher prices of primary articles like vegetables, eggs, meat, fish, etc. due to changing dietary pattern of consumers; Increasing commodity prices in global market resulting in higher prices of manufactured goods and Persistently high international crude petroleum prices

26 WPI & CPI Year WPI CPI % 12.4% % 8.4% Central Statistics Office (CSO) with a new series on CPI with base 2010 = 100. Reflect the actual movement of prices at the micro-level Consumer Price Index combined for urban and rural was 7.65%, CPI (urban) was 7.38% and CPI rural was 8.25% in January 2012

27 Causes of Inflation in India Increase in Public Expenditure Deficit Financing Erractic Agriculture Growth Agriculture Price Policy of Government Inadequate Rise in Industrial Production Upward Revisions of Administered Prices Other factors

28 Increase in Public expenditure Increased From 18.6% of GDP 1961 to 27% in % of Govt. expenditure is on NON- Development Activities Purchasing power in Hands of Employees Increase in Demand Supply cannot be Increased Inflation

29 Deficit Financing Financing of Budget Deficits ( shortage) Inflationary Trends Borrowing From banks or printing of More Currency Money injections, Without creating Real Resources

30 Erratic Agriculture Growth Agriculture Depends on Monsoons Crops Failure Due to Drought Scarity of Food Grains General Price Level Increases

31 Agricultural Price Policy of Government Price Policy Support to Agriculturists Minimum Price to Farmers Benefits to farmer General Price Level Increases

32 Inadequate Rise in Industrial Production Period 1965 to 1985, Performance was disappointing Over 20 Years, Growth at a modest rate of 4.7% Performance of Consumer Goods was Disappointing Demand Increased, Production not Inflationary Pressure

33 Upward Revision of Administered Prices Price Level Administered by Government Many Commodities Produced in Public Sectors Raising of Price to cover losses Inefficient & Unimaginative Planning Cost Push inflation

34 Other Factors Government Failure Hoarding of Essential Commodities High Capital Output Ratio Increasing Income of people Black Marketing Shortage of Essentials Raw Materials Large Scale Tax Evasion Increasing Reliance Indirect Tax Infrastructural Bottleneck

35 Measures To Check Inflation Inflation is a Phenomenon where Money Income rising faster than Real Goods, Services. Check by Control on Increase in Money or Make Growth of Real Goods & Services

36 Measures To Check Inflation Monetary Measures Fiscal Measures Control Over Investments Other Measures

37 Monetary Measures Check Supply of Currency & Credit Quantitative Measures Qualitative Measures

38 Quantitative Measures Bank Rate Policy Open Market Operations Variable Reserve Requirements

39 Bank Rate Policy Rate at which Central bank discounts the bills of Commercial banks Increased Bank Rate, Increase in Cost of Borrowings of Commercial banks Higher rate of Interest From Borrowers Price of Credit Increase Discourage to Borrowers

40 Open Market Operations Direct Sales or Purchase of Securities and bills in Market by Central Bank Sale Purchase Reduction in Cash Reserve of Commercial banks Increase in Cash Reserve of Commercial banks Credit Reduced Credit Expands

41 Variable Reserve Requirements Cash Reserve Ratio Statutory Liquidity Ratio Portion of Total Deposits of Commercial Bank with Central Bank Portion of Total Deposits of Commercial Bank to keep with itself in form of Liquid Assets High CRR, Credit Reduced High SLR, Credit Reduced

42 Repo Rate & Reverse Repo Rate Repo Rate Reverse Repo rate Rate at which Commercial banks borrow money from RBI Rate at which RBI borrow money from Commercial banks High Repo Rate, Credit Reduced High Reverse Repo Rate, Credit Reduced

43 Quantitative Measures Measure to Control Credit Contraction of credit Expansion of Credit Bank Rate Policy Increase Bank rate Decrease Bank rate Open Market Operations Sale of securities in open market Purchase of securities in open market Variable Reserve Requirements Increase both SLR, CRR Decrease both SLR, CRR Reverse & Repo Increase rate Decrease rate

44 Qualitative Measures Securing loan regulation by fixation of margin requirements Consumer Credit Regulation Issue of directives Rationing of Credit Moral Suasion Direct Action

45 Fiscal Measures Measures With Regard to Taxation, Expenditure & Public Borrowings Tax Determine Size of Disposable Income in Hands of Public Higher Rate of Tax, Low Disposable Income Price of Credit Increase Discourage to Borrowers

46 Control Over Investments Multiplier Effect Large Income Increase in Demand for Consumers Goods and Capital Goods Increasing Inflation Controlling Investment

47 Other Measures Short Term Measures Measures in Public Distribution of Scare Resources through Fair Price Shop Control Over Movement of Commodities from one state to another Import to Tackle shortage of basic goods. Long Term Measures Accelerating Economic Growth Wage Goods having direct impact on General Price Levels & Cost of Livings Restrictions on Consumption Rationing of essentials goods in times of Shortage

Inflation/deflation is the percentage change in the valuable goods and services on a year-on-year basis with respect to a base year.

All About Inflation Inflation/deflation is the percentage change in the valuable goods and services on a year-on-year basis with respect to a base year. Inflation is the increase in prices of goods and