Meaning, Measures and Impact on Indian Economy
Bandel Bholanath Ghosh
Institute Of Engineering & Management
PGDM 1ST YEAR
In a broad sense, inflation is that state in which the
prices of goods and services rise on the one hand and
value of money falls on the other
When money circulation exceeds the production of
goods and services, then inflation takes place in the
Features of Inflation
It is a continuous process.
It refers to a rise in prices in general.
It involves a considerable increase in prices.
It causes a decline in the purchasing power of
Demand Pull Inflation
The demand for goods and services increases and production
remains the same or does not increase as fast. The excess demand
results in prices being “pulled up”.
Demand pull inflation occurs when total demand for goods and
services exceeds the total supply.
This type of inflation happens when there is an inflationary gap
Cost Push Inflation
Caused by an increase in the cost of
production. Increased costs “push up” the price
Cost push inflation can result from change in
The two main sources of change in aggregate
supply are increase in wage rate and price of
Consequences of inflation
Inflation impacts negatively on economic growth.
Inflation brings about uncertainty in the economy.
Savings and investment are discouraged.
Inflation affects the distribution of income.
Redistributes income from people with fixed incomes to
those with flexible incomes.
Redistributes income from private individuals to the
Consequences of inflation
Causes fiscal drag and bracket creep: salary increases
move people into higher tax brackets and they could
be effectively worse off.
Inflation has an adverse effect on a country’s balance
If India’s rate of inflation is higher than that of our
trading partners the result is a loss of international
Inflation can cause a decrease in the real money
value of savings.
Measures to control Inflation
Increase direct taxes.
Increase indirect taxes.
Reduce government spending.
Introduce measures to increase productivity, e.g.
Increase interest rates of banks.
Decrease money supply.
Decrease availability of credit from banks.
Decrease currency control.
Freeze prices and wages.
Implement a wage restraint policy.
Encourage personal savings.
Implement control measures for consumer credit.
Import control: make competing imported goods
Introduce price indexation: linking all prices to a
particular index, e.g. CPI.
Empirical evidence of Inflation rate in India
The inflation rate in India was recorded at 5.96
percent in March of 2013,which is reported by the
Ministry of Commerce and Industry
In India, the wholesale price index (WPI) is the
main measure of inflation.
The WPI measures the price of a representative
basket of wholesale goods.
In India, wholesale price index is divided into
three groups: Primary Articles (20.1 percent of
total weight), Fuel and Power (14.9 percent) and
Manufactured Products (65 percent).