Impact of Inflation on Indian Economy
What is “ECONOMY”?
An economy consists of the economic system of a country or other area,
the labor, capital and land resources, and the economic agents that socially participate in
the production, exchange, distribution, and consumption of goods and services of that area. A
given economy is the end result of a process that involves its technological
evolution, history and social organization, as well as its geography, natural resource endowment,
and ecology, as main factors. These factors give context, content, and set the conditions and
parameters in which an economy functions.
GDP
The GDP - Gross domestic product of a country is a measure of the size of its economy. The
most conventional economic analysis of a country relies heavily on economic indicators like the
GDP and GDP per capita. While often useful, it should be noted that GDP only includes
economic activity for which money is exchanged.
A negative GDP trend indicates that the economy is not productive and not enough money is
changing hands. If the trend continues (for at least two consecutive quarters) it could signal a
condition known as recession. During recession jobs are lost and incomes shrink as there are not
enough goods and services produced to support job creation. As more jobs are lost, spending
slumps (as there are fewer people with money to spend) thereby shrinking the economy further
until recession turns into depression. Depression is usually accompanied by mass poverty and
low morale in the general public. With nowhere to turn, people (and businesses) usually look to
the government for assistance but such a large demand could (and usually does) rapidly
deplete government reserves, leading it into bankruptcy and finally causing a total economic
shutdown. At this point the country could fall into utter disarray and it could take the economy
and country decades to recover. If you think this could never happen, take a look at the year 1929
when the US, almost overnight, plunged from a seemingly prosperous economy into the claws of
economic calamity. The decade that followed (known as the Great Depression era) perhaps was
one of the most grueling times this nation has ever faced.
On the other side of the scale, an overheated economy, indicated by large upward GDP moves,
could lead to equally severe repercussions. A fast moving economy sees a rapid rise in demand
for products and services, causing prices to balloon. To keep up with higher demand, companies
ramp up their purchase of raw materials (at higher prices) and add to their work force, depleting
the pool of available workers. As unemployment reaches new lows, wage demand reaches new
highs since employees now have the bargaining power. With more money available to them,
people continue to buy more, driving the prices even higher this scenario is called as inflation.
Impact of Inflation on Indian Economy
What is Inflation?
Inflation is a sustained rise in overall price levels. Moderate inflation is associated with
economic growth, while high inflation can signal an overheated economy.
Inflation is commonly understood as a situation of substantial and rapid general increase in the
level of prices and consequent deterioration in the value of money over a period of time. In other
words inflation usually refers to a persistent and rapid rise in the general price level, which
reduces the value of money or its purchasing power over a period of time.
Definition
According to Crowther, “Inflation is a state in which the value of money is falling i.e. prices
are rising.”
How to Measure Inflation
If the price level in the current year is ‘P1’ & in the previous year is ‘Po’, then inflation for the
current year is :-
Impact of Inflation on Indian Economy
TYPES OF INFLATION
Inflation is often classified on three different criteria. Firstly, one might distinguish between
various types of inflation on the basis of speed at which the general price level rises. Secondly,
one way distinguishes between open and suppressed inflation. Finally, as we find in the modern
macroeconomic theory, inflation is classified on the basis of the factors, which induce it. On the
criterion of the rate at which the general price level rises, we have the following types of
inflation:-
1. Creeping Inflation
2. Walking Inflation
3. Running Inflation
4. Galloping or Hyper-Inflation
5. Cost-Push Inflation
6. Demand-Pull Inflation
7. Built-in Inflation
8. Chronic Inflation
9. Core Inflation
10. Headline inflation
11. Stealth Inflation
12. Assets inflation
1. Creeping Inflation
An extremely mild form of inflation is often characterized as creeping inflation. In this case
prices rise at a rate of around 2 percent per annum. In case the rate of inflation does not register
further increase, those a mild does of inflation may not have any adverse effects on the economy.
Creeping inflation sometimes provides necessary inducement to investors. The debatable
question about the creeping inflation however, is whether it would not eventually gather
momentum and thereby creates distortions in the economy. The world has witnessed both types
of situations. Certain countries have lived with mild inflations over long periods and their
economies in these periods have registered rapid economic growth. In other countries, creeping
inflation eventually accelerated and caused the collapse of the economy.
2. Walking Inflation
The walking inflation in terms of degree of prices rise is an intermediate situation between the
creeping and running inflations. The rate of inflation in this case is distinctly higher than that in
the case of the creeping inflation. Since the walking inflation does not invite widespread protests,
Impact of Inflation on Indian Economy
the monetary authorities do often not take it seriously and they don’t undertake timely corrective
measures. It also sometimes leads to balance of payments problems because on the one hand it
induces imports and, on the other discourages exports.
3. Running Inflation
The running inflation is considered to be a stage between walking inflation and hyper-inflation.
Since the hyper-inflation is often defined as a situation in which prices rise at a rate of at least 40
percent per month. When prices rise at a rate exceeding 4-5 percent per month the situation
becomes alarming. This inflation redistributes income to the disadvantages of the fixed income
groups such as workers, pensioners and salary earners,
it is considered to be highly unjust. Further a running inflation also creates conditions of
uncertainty. If prices rises from 10-12 percent than the economy will be collapsed and there will
be no monetary measures to prove effective.
4. Hyper Inflation
The hyper-inflation refers to a situation in which prices rise at an alarming rate of 40 percent per
month or even more. The most notable examples of hyper-inflation are to be found in the
economic histories of Germany, Austria, Russia, Poland, Greece, Hungary and China. In hyper-
inflation money loses its importance as a store of value as no one holds it for precautionary and
speculative purposes. In fact, a hyper-inflation invariably leads to a monetary collapse and
national catastrophe. However, it is important to recognise the fact that hyper-inflation does not
arise abruptly. It is always a result of wrong policies of the government. Whenever in some
country the government indulges recklessly in unproductive expenditures, which are largely
financed by borrowing from the Central Bank of the Country, a process of inflation begins which
often culminates in hyper-inflation.
5. Cost-Push Inflation
Aggregate supply is the total volume of goods and services produced by an economy at a given
price level. When there is a decrease in the aggregate supply of goods and services stemming
from an increase in the cost of production, we have cost-push inflation. Cost-push inflation
basically means that prices have been “pushed up” by increases in costs of any of the four factors
of production (labour, capital, land or entrepreneurship) when companies are already running at
full production capacity. With higher production costs and productivity maximized, companies
Impact of Inflation on Indian Economy
cannot maintain profit margins by producing the same amounts of goods and services. As a
result, the increased costs are passed on to consumers, causing a rise in the general price level
(inflation).
6. Demand-Pull Inflation
Demand-pull inflation occurs when there is an increase in aggregate demand, categorized by the
four sections of the macro economy households, businesses, governments and foreign buyers.
When these four sectors concurrently want to purchase more output than the economy can
produce, they compete to purchase limited amounts of goods and services. Buyers in essence
“bid prices up”, again, are causing inflation. This excessive demand, also referred to as “too
much money chasing too few goods”, usually occurs in an expanding economy. The term
demand-pull inflation is mostly associated with Keynesian economics.
7. Built-in Inflation
Built-in inflation is an economic concept referring to a type of inflation that resulted from past
events and persists in the present. It thus might be called hangover inflation.
At any one time, built-in inflation represents one of three major determinants of the current
inflation rate. In Robert J. Gordon's triangle model of inflation, the current inflation rate equals
the sum of demand-pull inflation, supply-shock inflation, and built-in inflation. "Demand-pull
inflation" refers to the effects of falling unemployment rates (rising real gross domestic product)
in the Phillips curve model, while the other two factors lead to shifts in the Phillips curve.
Impact of Inflation on Indian Economy
8. Chronic Inflation
Chronic inflation is characterized by much higher price increases than ordinary inflation, at
annual rates of 10% to 30% in some industrialized nations and even 100% or more in a few
developing countries. Chronic inflation tends to become permanent and ratchets upwards to even
higher levels as economic distortions and negative expectations accumulate. To accommodate
chronic inflation, normal economic activities are disrupted Consumers buy goods and services to
avoid even higher prices; property speculation increases; businesses concentrate on short-term
investments; incentives to acquire savings, insurance policies, pensions, and long-term bonds are
reduced because inflation erodes their future purchasing power; governments rapidly expand
spending in anticipation of inflated revenues; exporting nations suffer competitive trade
disadvantages forcing them to turn to protectionism and arbitrary currency controls.
9. Core Inflation
Core inflation is a measure of inflation which excludes certain items that face volatile price
movements e.g. food. The preferred measure by the Federal Reserve of core inflation in the
United States is the core Personal consumption expenditures price index. This is based on
chained dollars.
10. Headline Inflation
Headline inflation is a measure of the total inflation within an economy and is affected by areas
of the market which may experience sudden inflationary spikes such as food or energy. As a
result, headline inflation may not present an accurate picture of the current state of the economy.
This differs from core inflation which excludes factors, such as food and energy costs.
11. Stealth Inflation
Stealth Inflation is the term used to describe charges and fees created by business to gain extra
profit and revenue from its customers. The stealth part of the term is that business will often use
Impact of Inflation on Indian Economy
miscellaneous fees to charge customers without the customers consciously knowing the fees
existed, even though they may have agreed then signed a contract for the goods and services the
fee is hidden in a mirage of words and policies. The inflation part of the term relates to the up
charging of the service without actually providing anything additional. Since most companies
charge a fee to accept payment a portion gets built into profit and revenue. A big example of
stealth inflation can be overdraft fees from banks surcharges from Telco providers, processing
fees and installation fees.
12. Assets Inflation
Assets inflation is an economic phenomenon denoting a rise in price of assets, as opposed to
ordinary goods and services. Typical assets are financial instruments such as bonds, shares, and
their derivatives, as well as real estate and other capital goods.
13. Agflation
Agflation, a term coined in the late 2000s, describes generalised inflation led by rises in
Agricultural commodity prices. In the United States, agricultural prices are not generally factored
into core inflation figures. The term describes a situation in which "external" (ie Agricultural)
price rises drive up core inflation rates. It has been claimed that the term was invented by
analysts at Merrill Lynch in early 2007.
14. Stagflation
Stagflation is a macroeconomics term used to describe a period of inflation combined with
stagnation (that is, slow economic growth and rising unemployment), generally including
recession
Impact of Inflation on Indian Economy
CAUSES OF INFLATION
For controlling the rates of commodity, we must know why these rates are rising i.e. inflating
which means what are the reasons or causes behind inflation. There are various factors which
causes inflation in the economy which is as follows-
A) Monetary Factors
B) Non-monetary Factors
C) Structural Factors.
A) MONETARY FACTORS
1. Expansion of Money Supply
This is the basic factor, which causes inflation. Due to increase in expansion of money
supply, there is increase in demand of luxurious commodities. Credit facilities allotted by
bank are also the result of inflation. Deficit financing also contribute to the growth of
inflation.
2. Increase in Disposable Income
When the disposable income of people increases, demand for real goods and services
increases, causing a rise in price leading inflation.
3. Increase in Consumer Spending
As the income of the consumers rises, they spend more due to expenditure consumption or
demonstration effect, which raises the aggregate demand causing inflation.
4. Development and Non-Development Expenditure
The expenditure for the development of huge plants and projects will increase the demand
for factors of production resulting in inflation. On the other way, the expenditure for the
non-development like defence expenditure will create shortages of consumption goods
resulting inflation.
5. Indirect Taxes
Due to high indirect taxes, sellers increase the price of their products to recover the tax
from the consumers, which indirectly leads to inflation.
Impact of Inflation on Indian Economy
6. Demand for Foreign Commodities When the demand for the foreign
commodities increases, the supply for the home commodities decreases which leads to
increasing the price.
B) NON-MONETARY FACTORS
1. Rising Population
As population of the economy increases, demand for better goods increases,which causes
inflation. So, rising population is the foremost non-monetary factor resulting inflation.
2. Natural Calamities
Due to the occurrence of natural calamities like floods, famines, bad weather, etc results in
crop failure, which leads to rising price.
3. Speculation and Black Money
Speculation, hoarding and black money also causes inflation, as such unearned money is
spend lavishly by people, creating unnecessary demand for goods and services.
4. Unfair Practices by Monopoly Houses
The monopoly houses prefer to restrict outputs of their products and raise their prices to
enjoy excess profits leading to inflation.
5.Bottlenecks and Shortages
Bottlenecks i.e. blockages and shortages of various kinds destruct the process of the
economic development. As a result of shortages, price rise.
Impact of Inflation on Indian Economy
C) STRUCTURAL FACTORS
1. Capital
Shortage This is due to a very low rate of capital formation in a poor country where
vicious circle of poverty exists.
2. Infrastructural Bottlenecks
Power shortages, inefficient transport, underutilization of capacities and resources, etc are
obstruction to the economic growth of the country, which leads to the price rise and
finally inflation.
3. Limited Efficient Entrepreneurs
Entrepreneurs do not possess spirit to undertake risky projects. Investments are generally
made in trade and unproductive assets like land, gold etc. Hence when supply of money
is increased, output of real goods and services does not increase which leads to inflation.
4. Lack of Foreign Capital
The unfavourable terms of trade and deficit in balance of payments have further
increased the problem of rising prices.
5. Imperfections of the Market
Immobility of factors, rigid prices, ignorance of market conditions etc all these does not
allow the resources to utilize properly so rising prices due to increase in supply and
without increase in real output.
TRACE THE EFFECTS OF INFLATION
Economic Effects of Inflation :-Inflation is a very unpopular happening in an economy.
Inflation is the most important concern of the people as it badly affects their standard of living.
Some America presidential candidates called ‘Inflation As Enemy Number One’ High rate
inflation makes the file of the poor very miserable. It is therefore described as anti-poor. Inflation
not only disrupts the economy but also prepares ground for social and political upheavals. The
effects/consequences of inflation are as followers –
Impact of Inflation on Indian Economy
1. EFFECTS ON PRODUCTION
The condition or fact of being operative or in force on production can be divided into two
categories the stimulating or effect and the disastrous effect.
(A) Stimulating or Favourable Effect
Because of the effects on production it has been observed that mild inflation or gently rising
prices have a stimulating or a tonic effect on the economy. When price rise profits increases,
investment increases that generates income and creates employment as a results output
expands. This process continues up to the point of full employment
(B) Disastrous or Unfavourable Effects
If money supply increases beyond the point of full employment, it would lead to a galloping
or hyperinflation and results in disastrous effects on the economy. a] Uncontrolled inflation
leads to discouragement in savings due to falling value of money. b] Energies of business
community are diverted to speculation and making quick profits rather than genuine
production i.e. encourages speculation. c] Inflation encourages the hoarding and black
marketing d] Inflation also affects Misallocation of Resources e] Flight of capital is
encouraged due to fall in money the investors prefer to invest abroad. f] Consumers suffers as
seller’s market will be developed if price of all type of goods rise of any quality. g]
Distortions and Maladjustments in the production dispute the working of the price systems in
the system in the economy.
2. EFFECTS OF INFLATION ON INCOME DISTRIBUTION Inflation is socially undesirable.
It redistributes wealth in favour of the rich at the cost of poor it makes the rich richer and poor
poorer. The people whose real incomes erode during inflation are the victims of inflation. a] As
the value of money falls the burdens of debt is reduced and debtors gain creditor suffer because
in real sense they receive less during inflation. b] Fixed income groups like salaried class and
pensioners are hit hard during inflation. c] Business community welcomes inflation as they earn
super normal profits. d] Investors in shares benefit during inflation small savers, small investors
and class lose during inflation. e] Farmers gain in inflation by prices of agriculture prices
commodities rise and costs paid them lag behind prices.
Impact of Inflation on Indian Economy
3. EFFECT OF INFLATION ON CONSUMPTION AND WELFARE
Inflation reduces the economic welfare of the fixed income groups as the price raises the
purchasing power of money falls hence the people get a smaller amount of goods services or low
quality for the same amount of money. As a result their consumption would fall and the standard
of living. Hence galloping inflation is the ‘Cruelest tax of all’.
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4. EFFECTS OF INFLATION ON FOREIGN TRADE
Inflation affects adversely the Country’s balance of payments situation when prices are
raising foreign demand for our goods will fall and exports declined due to high prices
domestic consumers buy foreign goods and imports rise hence unfavourable balance of
payments.
5. SOCIAL AND POLITICAL
EFFECTS
a] The antisocial elements get rewarded and the masses suffer during inflation.
b] Inflation disrupts social life by favouring rich and black market.
c] The standard of business morality go down during inflation.
d] People lose faith in democratic government due to inflation.
6. EFFECTS ON MANUFACTURERS
Inflation is harmful to trade. Manufacturers generally sell goods on credit. When they seek
repayment they find that the money they receive is less than they expected. They therefore
become reluctant to trade.
Impact of Inflation on Indian Economy
MEASURES TO CONTROL INFLATION
These are the following actions taken to control inflation
1) Monetary Measures
2) Fiscal Measures
3) Other Non-monetary Measures
(1) MONETARY MEASURES
(A) Quantitative Methods
1. Raising the Bank Rate To control inflation the central bank increases the bank
rate. With this the cost of borrowing of commercial banks from central bank will
increase so the commercial banks will charge higher rate of interest on loans. This
discourages borrowings and thereby helps to reduce the money in circulation.
2. Open Market Operations During inflation, the central bank sells the bills and
securities. These cash reserves of commercial banks will decrease as they pay
central bank for purchasing these securities. Thus the loan able funds with
commercial banks decrease which leads to credit contraction.
3. Variable Reserve Ratio The commercial banks have to keep certain percentage
of their deposits with the central bank in the form of cash reserve. During
inflation, the central bank increases this cash reserve ratio this will reduce the
lending capacity of the banks.
(B) The Qualitative Methods
1. Fixation of Margin Requirements Commercial banks have to maintain certain
fixed margins while granting loans. In inflation central bank raises the margin to
contract credit and reduce the price level.
2. Regulation of Consumer Credit For purchase of durable consumer goods on
instalment basis rules regarding payments are fixed. During inflation and initial
payment is increased and the number of instalments are reduced. These results in
credit contraction and fall in prices.
3. Control through Directives Certain directives are issued by central bank to
commercial banks and they are asked to follow them while lending. This keeps in
check the volume of money.
4. Rationing of Credit The central bank regulates the amount and purpose for
which credit is granted by commercial banks.
5. Moral Suasion This refers to request made by central bank to commercial
banks to follow its general monetary policy.
Impact of Inflation on Indian Economy
6. Direct Action Direct action is taken by central bank against commercial banks if
they do not follow the monetary policy laid by it. 7. Publicity The central bank
undertakes publicity to educate commercial bank and public about the trends in
money market. By undertaking these measures the central bank can control the
money supply and help to curb inflation.
(2) FISCAL MEASURES
1. Taxation The rates of direct and indirect taxes may be raised and new taxes
may be imposed. This policy will reduce the disposable income in the hands of the
people and their expenditure.
2. Public Expenditure During inflation, the government should reduce its
expenditure. This would reduce the income in the hands of some people. Hence
the effective demand would decrease.
3. Public Borrowing The government may resort to voluntary and compulsory
borrowing. This policy reduces the income in the hands of some people. Hence
the effective demand would decrease.
4. Over Valuation of Domestic Currency Over valuation of domestic currency
makes exports costlier and there is a fall in the volume of exports. Imports also
become cheaper and there is an increase in money supply causing a fall in prices.
5. Inducement to Save The government should induce savings through incentives.
This will reduce the supply of money and purchasing power of the people causing
a fall in prices.
6. Public debt management The public debt should be handled in such a way that
there is no increase in the supply of money. Hence the surplus in the budget
should be used to repay the public debts.
(3) NON –MONETARY MEASURES/OTHER MEASURES
1. Increase in output Every country suffering from inflation should take steps to
increase the output of scarce goods and services. The production of essential
goods at the cost of luxury goods can also serve as an anti-inflationary measure.
2. Price control and rationing Price control must be introduced in respect of
essential commodities. Also rationing should be introduced for equitable
distribution of essential commodities. The supply of essential goods can be
undertaken through public distribution system to keep the prices in check.
Impact of Inflation on Indian Economy
3. Imports Imports of food grains and other essential goods which are in short
supply should be allowed.
4. Legal action Legal action should be taken against hoarders and black
marketers.
5. Wage-rate During inflation, the rise in wage rate should be linked to rise in
labour productivity. This will help to control inflation.
6. Check on population growth It is essential to check the growth of population
by adopting effective family planning devices.
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Above all, an efficient and honest administration and good discipline among
people are essential. The various measures stated above have to be combined in
a proper manner depending on the situation of the country.
Impact of Inflation on Indian Economy
Inflation in India
Inflation is the gravest economic concern which has gripped India into its jagged tentacles. Inflation can be defined as
the rise in overall price level in the economy, i.e. rise in prices of all the goods and services. When prices rise, each
rupee buys less goods and services than it had been before, consequently eroding the purchasing power of money. It
is measured through inflation rate- the annualized percentage change in a general price index (ConsumerPrice Index
and Wholesale Price Index) over time.
History:
India has been plagued by the disease of inflation since the 1950s but it has started showing its prominently harmful
symptoms and ill effects since 1991, post liberalization. Kick started by the fiscal crisis of 1991, marked by deficits in
government finances and devaluation of the rupee, a whopping inflation of 13.66 per cent took its toll on the Indian
economy. Though later controlled, average inflation rate has been stubborn at a 9.3 per cent per year till the end of
the 19th century. Since last year’s global meltdown somewhat crippling the Indian economy, the inflation rate has
been steadily rising to surpass the double digits. At present, it is around 11 per cent.
Causal Factors:
The puzzle haunting the Indian economists is simply this- Why is inflation rate in India so high as compared to the
other emerging and overheating market economies, like China, Korea and Indonesia where inflation just touches a
mere 3 per cent?
There are a couple of explanations for this-
Firstly, India has been very much underinvested as compared to China whose rate of investment for the year 2009
was 45 per cent as compared to India’s 37 per cent. This has been the key to China’s development, (currently fastest
in the world) free from all scars of inflationary pressure.
India has always been subject to uncertainty of the monsoons, particularly last year, which led to a sharp fall in
agricultural produce, declining supply and thus shooting up the prices. This is called the Supply shock factor or the
cost push inflation.
Another reason, intuitively named as the Policy Shock is responsible for inflation. Hike in fuel prices, subject to the
discretion of OPEC, increases the manufacturing cost of a number of industries, which in turn shoots up the prices of
their respective commodities.
Apart from the above, there is another explanation, namely overheating: the supply capacity falls short of demand.
Now, overheating in India is a serious cause of worry because it certainly implies that the economy’s current growth
rate of 8.4 per cent surpasses its potential or trend growth rate. In this scenario, how can anyone in India dream of
China-type-double-figure growth rates unless and until infrastructure development is given some serious thought?
Microeconomic distortions causing an increase in land prices accompanied by various macroeconomic factors such
as surging capital inflows in the real estate and housing sector are very much responsible for the rising cost of
production in the economy. Apart from agriculture and manufacturing, service sector which contributes the highest
(54 per cent for 2009-2010) also bears dire consequences of galloping prices of land.
Excess of short-term borrowings and speculative activities are majorly responsible for a steady inflation in the Indian
economy. Highly volatile, these short term borrowings lead to a vicious cycle of speculation, which ends up causing
serious depression in the economy, sometimes insolvency. Increase in speculative activities leads to a rise in
Impact of Inflation on Indian Economy
domestic price, thus making the exports expensive. This ensues in the deficit in the balance of payments which
forces the government to pump in money into the economy by printing currency notes. This, along with the
adjustment of the BOP, plays havoc with the demand capacity of the economy. Since people own more money now,
their demand for goods and services accelerates like anything and this further leads to a rise in prices.
Consequences:
The dire consequences of this phenomenon are levied upon the aam admi. Of course somebody like you and me, or
someone less well off than us cannot be considered as aam aadmi. Aam aadmi clan is that 70 per cent of the
population of India who spend less than Rs 20 on themselves every day. Right from the rickshawallas in Delhi, to the
daily wage earners in Bihar, these people struggle to make ends meet. Prices of food items like vegetables, fruits,
pulses, oil, wheat, rice, etc, conveyance, education and healthcare have soared up to no extent, thus causing the
cost of living to increase.
The RBI has been implementing the only monetary strategy it knows, increasing the interest rates to squeeze
liquidity. According to the forecasts of the Bloomerag News survey, the RBI will increase both the repurchase and the
reverse repurchase rates by a quarter points each. This has led to an upsurge in agitation among the opposition
parties who are stubborn against any rise in interest rates.
However, the government needs be careful lest it ends up hampering the growth of the economy with such a tight
credit policy. A balance needs to be maintained between the credit liberty for growth on one hand and tightening
liquidity for tackling inflation on the other.
Wages, in the country are on a high rise these days. World leading mobile phone supplier Nokia Pvt Limited and IT
companies such as Wipro and Infosys have taken a step ahead and raised the wages of their employees to retain
them.
Future Predictions:
The RBI predicts that it will be able to pull down inflation rate up to 6 per cent by the end of this year.
If in future inflation is not curbed, it will not only deprive the aam admi of basic amenities but along with it, also
deprive the Indian economy of its growth of all the sectors.
The history of inflation in india
A peek into the past shows that prices have never really fallen in our country. From the 1950s, most
spurts in inflation have been triggered by setbacks in agricultural production due to poor monsoons.
Things have worsened when prices of industrial raw materials have increased. Since the 1960s, large
fiscal deficits, the subsequent injection of money into the economy, and the hoarding of essential
commodities by speculators, have been other factors causing inflation.
Bad monsoons and harvests triggered inflation in the mid-'50s. In the mid-'60s, decelerating industrial
output, setbacks in agricultural production, and the devaluation of the rupee were responsible for high
inflation from 1964-65 to 1967-68. The international oil crisis of 1973 coincided with inflation above 16 per
cent. It was only during the Emergency inflation came down to zero (in 1975-76) because of good
Impact of Inflation on Indian Economy
agricultural production and a crackdown on speculation in commodities.
But the trend was reversed with Charan Singh's 1979 budget, which fuelled price hikes through higher
indirect taxes on some essential commodities. This eased a bit in 1985-86, when foodgrain production
was a record 150 million tonnes. But it was back to square one the following year and in subsequent
years, as agricultural production suffered.
The '90s have been marked by high inflation. The tone was set by the fiscal crisis of 1991, when high
deficits in government finances and devaluation of the rupee caused galloping inflation of 13.66 per cent.
It was later controlled, but the average rate of inflation over seven years of liberalisation has been a
substantial 9.3 per cent per year.
INFLATION IN BANK
The RBI may go for further monetary tightening in the light of rising inflation
Yields are rising, compelling the banks to raise interest rates, which will hamper their business
growth
Inflation concerns remain high with finance ministry officials indicating the rate could go up to 13
per cent in the near term
EFFECTS ON INFLATION ON AUTOMOBILE COMPANIES IN INDIA
The automobile sector is also suffering because of soaring raw material prices
The automobile sector is also suffering because of soaring raw material prices
The automobile sector is also suffering because of soaring raw material prices
The two-wheeler sector is especially suffering, as banks are not willing to lend fearing delinquency.
EFFECT ON STEEL AND RUBBER INDUSTRIES
Steel prices have hardened almost 21 in the current calendar year during 2008,
aluminium has risen by 16 in the current calendar year.
Rubber and plastic prices have also gone up substantially by 17 in the current calendar year and 24
in the current calendar year respectively
INFLATION IN AIRLINE INDUSTRY
One major issue is cost of Aviation Turbine Fuel
Companies prefer to ground flights
Impact of Inflation on Indian Economy
Prefer paying parking charges of Rs 50,000 per hr rather than keeping a flight in air which costs Rs
3,50,000.00 per hr
Job cuts in airline industries on a rise
INFLATION IN IT COMPANIES
Patni computers has handed the pink slip to over 400 employees for non performance.
TCS other companies warns its employees that non performance wont be tolerated.
Companies like wipro and sutherland may cut down on incentives and other perks
INFLATION IN CEMENT INDUSTRY
Higher input costs, low market valuations and scaled up capacity amidst reduced demand is likely to
take its toll on the cement industry.
The growth rate of the industry is projected to drop below 10 % for the current fiscal.
High inflation and home loan rates have slowed down the growth trajectory of the real estate
sector, which accounts for 60 % of the total cement demand.
Small shops affected
Kirana stores have started feeling the heat .
Some small shops have shut and others are considering getting into new businesses
Prices of products or rice and pulses have gone up
Inflation has hit low income group which has taken its toll on small retail stores and businesses
Impact of Inflation on Indian Economy
