This type of inflation it doesn’t harm the economy of the country , the government can easily overcome the few damages fast. 1. 2. 2. Hyperinflation In this situation the price level rise up every minute and there is no upward limit to which the price level may arise in the course of time. This type of inflation causes major damages and can harm the economy, the government will take a long period of type to come over the damages. 1. 3 Causes of inflation When we say excess money supply causes inflation and also that demand pulls prices up.
Increase in money supply increases demand and so the prices go up. Excess demand causes prices to move up which forces workers to ask for more wages and the cost also goes up which increases the price. There are three types of inflation and each has its cause. Demand pull inflation it occurs when there is an increase in aggregate demand means that the it occurs when the total demand for goods and services exceed total supply. Cost pulls inflation is caused by the fall in aggregate supply because of the increased prices of inputs. 1. 4 Measure of inflation.
There are many ways inflation can be measured : Price Index (PI), Consumer Price Index (CPI), Gross Domestic Product (GDP) deflator it represents the ratio of nominal GDP to real GDP. India uses a Whole price index (WPI) to measure its inflation rate. In India the wholesale price index is more closely observed than the consumer price index (CPI) because it includes a higher number of products . WPI measures the average of the changes of goods and services faced on the basis of wholesale price. It is also the price index which is available on the weekly basis with the shortest possible time lag of only 2 weeks. . 0 India’s economy , history of inflation and inflation rate. India a country in the south of Asia bounded by the Indian ocean in the south, Arabian Sea in the west and the Bay of Bengal on the south east and bordered to Pakistan, Nepal, Bangladesh, China, Bhutan and Burma. It’s the 7th largest country by area and 2nd largest by population after china. The population of India according to the July 2012 census is 1. 22 billion. ( indiaonlinepager. com). Appendix 1 elaborates the increase in population size from 2002 -2012.
India has the fastest and largest economy in the world but it’s one of the poorest country in the world due to its large population it has. CIA The World Fact states that the agriculture provides 52% of jobs, industry 14% and other services provides 34% of the jobs. Today India is growing and this can be well understood from the fact that the GDP per capital has increased to $822 in 2011 from $468 in 2002. , hence there is no doubt that India’s economy and affluence is growing. In December 2010 India had a high rate of inflation which was 16. 21%, in July 2011 the inflation in India was reported as 8. 43%.
From December 2011 the inflation rate started dropping to 6. 49%. But after February 2012 the inflation rate started to rise from 7. 57% and in 2012 may the inflation rate has raised to 10. 16%. appendix 2 shows the inflation of India from the 2008-2012 . The significant upward contribution in December 2010 came from higher prices of food, house rent, and diesel. Appendix 3 talks about the India’s history of inflation. 2. 1 Causes of inflation in India The main cause of inflation in 2007 the main cause of high inflation was due to high rise in global prices of fuel, the rise in the price of the food. . 1. 1 Shortage of food In 2010 the food inflation reached as high as 19. 9%. It happened because there was shorter supply of edible oil, pulses, sugar. And the cereal prices increased because of the economic recovery prices which led to rise in the retail prices as well. It was also argued that the sharp rise in food prices in 2009 and early months of 2010 was possibly caused by the drought of 2009, which led to decline in food grain production 2. 1. 2 Population rise. The population of India is increasing every day as birth rates are going up and death rates are going down leading to over population.
Since the economic producers are unable to meet the demand comfortably so they have no choice but to increase the price of the all the goods and services and also the increase in the CPI. India is being social welfare country, the government has to invest a lot of money in health and safety to protect the people from dangerous diseases leading to a high cost on the working population that make them to have a lower disposable income. When the disposable income is low the price rise due to less money and causes inflation and high unemployment.
Disposable income is the amount of income left to an individual after taxes have been paid, available for spending and saving. 2. 1. 3 Weak Indian rupee. The weak Indian rupee is one cause of inflation in India, because it imports more than it exports due to a lot of monetary reasons which also contribute to a fall in the value if Indian rupee (INR) the cause of the fall in Indian rupee value is because of , the investors withdraw their investments from the economy to invest in other economy investors, it directs to a fall in demand for the INR it is considered as depreciation by the Central bank. 2. Impact of inflation in India 2. 2. 1 Lower standard of living In times of rising inflation this also means that the cost of living increases is much higher for the populace. Cooking gas prices have increased by 20% in 2008 and also the prices of vegetable edible oil are increasing so the standard of living is getting low. So the workers are demanding for their wages to be increased to maintain the standard of living. Due to the rise in the prices of the goods and services many people are suffering from lack of food and water and also the people are suffering from many diseases like malaria and cholera.
As the cost of living is high many people are homeless in India they sleep on the roadside and they are suffering from malnutrition. The low standard of living leads to social cost , inflation demotivates the people so, the very people cannot afford to buy food so to survive they start stealing to feed their empty stomach. 2. 2. 2 High transportation cost As the fuel price increased in 2012 May to Rs 78. 57 per liter the price increased by Rs. 7. 5 per liter, which caused the transportation prices to increase.
The increase in the of petrol had a high impact on the automobile companies as well on the Operating margin. Ramping up diesel capacity required significant capital expenditure. That investment meant a large capital expenditure, operating margin put pressure in the short term. The tight liquidity and high interest rates and a falling rupee . Gave the domestic market the possibility of higher borrowing costs , whether it be a local or foreign currency. Appendix 4 shows the rise in the petrol prices from 2002 to 2011. 2. 2. 3 High interest Rate
In 2010 the reserve bank of India ( the central bank) raised its interest rate 13 times to 8. 5% from 4. 75%, which caused slow investments due to the high rate of interest and also the rupee had fallen from 4% against the US dollar, 53. 80 Rupee for 1 US dollar causing the imports to be very expensive. Higher interest rates also made the foreign investors to pull out $10 million from the Indian stocks. As interest rates in 2008 increased Jet airways laid off 1000 employees to save cost and it also led to unemployment. (Hindustan times, 2008) . 2. 4 Unemployment. The population of India is increasing by leaps and bounds. However jobs and profit avenues cannot be created in the same proportion, therefore large sections of the people are left unemployed. Every year thousand and thousand of graduates pass out of schools and colleges remain unemployed and it is also wastage of skills as they are not employed. India is one country in the world where highly educated people don’t get employed. In short we can say there are no enough jobs compared to the population size.
The high employment levels could lead to increased inflations, which in turn lead to lower wages and therefore companies will start paying higher taxes leading to a lower interest rate of foreign companies investing under such situation. The exports of the country will also fall back drawing along the GDP. The appendix 5 shows the rate of unemployment from 2006 -2012 2. 3. 5 Import and export As the Indian rupee state’s fall against the US dollar, the price of the goods and services became expensive. The fall in rupee affects the import and export in India.
India is heavily dependent on the middle east for its energy needs. India imports 70% of its fuel from the middle east. Due to the fall in the rupee India has to pay a lot of the middle east countries to get fuel . But it also makes a profit by selling the fuel to Mauritius. India exports chemicals, pharmaceutical products, vehicles, iron and steel and its main exports are in USA, China, UK, Singapore. The falling in rupee India’s export boosts India’s exports making them more competitive against china in sectors like software, leather goods and garments. India exports 20% of GDP.
When the exchange rates are imposed, India makes its exports more expensive which weaken the balance of trade. India’s balance of trade is becoming worse from the past 10 years. In december2002 the negative trade balance was $-1200 million and in my 2012 it was $- 13,500 million. India’s heavy reliance on imports of oil and coal to offer energy needs has lead to increasing trade deficits only increasing every year. 3. 0 Steps taken by the government to control inflation. There are 2 main policies the government uses to control inflation Monetary policy and Fiscal policy. . 1 Monetary policy. The most important and generally used method to control inflation is monetary policy of the central bank, central bank use high interest rates as a way to prevent inflation. The central bank of India is the reserve bank of India. The measurements for monetary policy are bank rate policy, cash reserve ratio and open market operations. Refer to Appendix 6 for more information about the measure of monetary policy. In 2011 the reserve bank of India increased the policy rates by 50 basis points taking the interest to 7. 25%.
Interest is the rate at which the central bank leads money to other commercial bank in the nation. An increase in the interest rate made it difficult for the companies to raise capital. Borrowing from the commercial banks will reduce as there is a high rate of inflation and saving will increase as Borrowings from the commercial banks will reduce as there is a high rate of inflation and savings will increase as savers will get a high rate of return while saving with high interest rate. This effect of lower spending in the economy will put the output gap lower and inflationary pressure will reduce.
The policy rates for 2012 and 2013 are changed by the reserve bank of India. Repo rates are reduced by 50 basis points to ( bps) 8%, reverse repo rate and marginal standing facility (MSF) rate reduced by 50bps at 7% and 9% correspondingly auxiliary, RBI increased borrowing under MSF from 1% of net demand and time liabilities ( NDTL) to 2% NDTL. So banks with excess Statutory Liquidity Ratio (SLR) can also borrow under MSF. CRR remains untouched at 4. 75% of NDTL. CRR remains unaffected at 4. 75% of NDTL. Appendix 7 shows more information. 3. 2fiscal policies.
Fiscal measures to control inflation include taxation, government expenditure and public borrowing. The government can also take some protectionist measures ( such as banning the export of essential items such as pulses, cereals, and oil to support domestic consumption, encourage imports by lowering duties on import items etc. ) In 2011 the government reduced the import prices to zero on rice, wheat pulses, edible oils (crude) and onions. This means that the products were being sold at the cost price the import tax and extra duties was not added to the cost price.
The government puts ban on export of edible oils and pulses, suspension of futures trading in rice, cereal and extension of stock limit orders in case of pulses and rice. And reduced import duty on skimmed milk powder, petrol and diesel and customs duty on crude oil. This led to the lower current expenditure , high capital expenditure and decrease in debt interest this means the government had more money in hand that were used for other purposes such health care and correcting the deficit of the country and amending the inflation rate f India . Also it influences the real wages since more money , the people would be able to use it for other purposes raising also the productivity and government expenditure. 4. 0 Recommendations. 4. 1 Open market operations Refers to the sale and purchase of government securities and bonds by the central bank. To control inflation, the central bank sells government securities to the public through banks. This results in a transfer of part of bank deposits and bank accounts and reduce credit creation capacity of commercial banks.
When the cash reserves are reduced, banks cannot give loans to the public without difficulty as they have lesser money in their reserves and they have to be very cautious. This will decrease the spending of persons and firms and therefore increase the consumption of goods and services which will lead to decline in the inflation rate. 4. 2 Population control and Urbanization and Industrialization. Population detonation is the main obstruction to the smooth development of the Indian economy. Since this problem is getting intense steadily, it is apparent to take suitable measures to keep it under control by lowering the birth rate.
To reduce the birth rate, family planning facilities are offered only in the city centers and semi-urban areas of India. So poor people in rural areas are not getting these facilities easily.. As a result, family planning centers with trained workforce should be set up in rural areas to establish this facility at their access. This can very much help in lowering the birth rate. The Indian government should also raise the minimum age for marriage in order to control the birth-rate. In India the society has joint family systems which encourages a high birth rate.
Therefore this joint family has to be replaced by nucleus family. A nucleus family is normally found in an urbanized and industrialized economy. As a result the efforts should be to industrialize and urbanize the economy to reduce high birth rate. 4. 3 Reduce the interest rate The government should reduce the interest rate so that it can attract more foreign investors it will increase trade which will raise export which will eventually lead to increase in production and decrease unemployment.
The reduction in the rate of inflation it will also appreciate the value of the Indian currency According to the Philips curve when the unemployment is low, inflation is high and when unemployment is high inflation is low i. e. there is an inverse relationship. When the inflation at point B was 6% the rate of unemployment was 3% when reducing the inflation rate to 2% at point A the unemployment rises to 5%. Under the Indian context when the inflation is reduced it will automatically increase the unemployment. Refer to Appendix 8 5. 0 Conclusion.
To conclude , we have analyzed the Indian economy , the consequences and effects of inflation in the country we have also noticed that we cannot solve the inflation and unemployment . Also steps have been taken to solve the inflation rate by applying the fiscal and monetary along with recommendations on how to solve it. (2791 words) Appendix appendix 1 shows the population increase from 2000- 2012 source: http://www. tradingeconomics. com/india/population appendix 2 rate of inflation from 2008-2012 source: http://ycharts. com/indicators/india_inflation_rate ppendix 3 alks about history of india’s inflation from India has seen both elevated and low inflation, and deception the graph shows inflation since 1953 to 2011. source: http://capitalmind. in/2011/08/page/2/ In 2010-11, inflation was at 9. 6% which makes it the highest since 1994-95, when it was 12. 6%. Higher inflation in 16 years is still only a partial pointer, since India uses WPI to calculate inflation, rather than the more suitable CPI which included Rent and salary. In 1956 Indian inflation stayed at controlled under 10%, since no one could set their own prices for the goods and services.
As everything was under government. In the 60’s India faced a sharp inflation as it hit the financial system it was due to the Chinese was which was in 1962 and then the war with Pakistan in 1965. The prices of wholesale goods increased and after that India devalued its currency. In the 70’s the high rise in the oil price increased the inflation beyond the limits in the 10 years. Inflation spiked again in the 90s as India devalued its currency and went through operating cost calamities. The liberalization of the early 90s helped it to keep inflation at a low rate .
The 2008 oil price rise saw inflation temporarily rises to a double digit and interest rates increased by 9%. appendix 4 the increase in price of the petrol source:http://motoroids. com/news/chance-of-petrol-prices-to-be-hiked-by-rs-0-65litre/ appendix 5 rate of unemployment from 2006-2012 source. http://www. tradingeconomics. com/india/unemployment-rate appendix 6 measures of monetary policy bank rate policy- is used as the main implement of monetary control during the inflation. As the bank rates increase, it will increase the cost of borrowing which reduces the commercial banks from borrowing from the central bank. s a result flow of money from commercial banks to the public gets reduced, hence inflation is controlled to the extent it is caused by the bank credit. Open market operations refer to the sale and purchase of government securities and bonds by the central bank. To control inflation, the central bank sells government securities to the public through banks. This results in a transfer of part of bank deposits and bank accounts and reduces credit creation capacity of commercial banks. Cash Reserve Ratio (CRR)- To control inflation, the central bank raises CRR which reduces the lending capacity of the commercial banks.
Thus, the flow of funds from commercial banks to the public decreases. In the process, it halts the rise in prices to the extent it is caused by bank loans to public. appendix 7 MSF rate was introduced by the Reserve bank of India in the monetary policy on 3rd may 2011. it is introduced for the banks to borrow money from the RBI at 8. 25%. SLR (Statutory Liquidity Ratio): It refers to the amount that the commercial banks require to preserve in the appearance of cash or cash equivalents comprising gold or government. accepted securities before providing credit to the customers.
By accepted securities it means that the bond and shares of different companies. Statutory Liquidity Ratio is determined and maintained by the Reserve Bank of India. repo rate. according to Anshul Dixit Metallurgical Engineer from NIT Jaipur, repo rate or repurchase rate is the rate at which banks borrow money from the central bank for a short period by selling their financial assets to the central bank with an agreement to repurchase it at a future date at prearranged price. appendix 8 Philips curve source: www. economicsonline. co. uk References
Stanford, J. (2008) UNDERSTANDING AND MEASURING INFLATION. [e-book] canada: Canadian Centre for Policy Alternatives,. p. 1-2 http://www. economicsforeveryone. ca/files/uploads/How_To_Inflation. pdf [Accessed: 11 september 2012]. Allbankingsolutions. com (2011) Define CRR, SLR, Bank Rate, Cash Reserve Ratio, Marginal Standing Facility, MSF. [online] Available at: http://www. allbankingsolutions. com/repo. htm [Accessed: 24 Sep 2012]. Collins, A. (2012) Indian Government – Current Monthly and Annual Inflation Rate. Teqm Work, [blog] 18 sept 2012, Available at: