Challenge faced by indian economy


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Challenge faced by indian economy

  2. 2. Definition  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, it erodes the purchasing power of money.  Inflation is a situation in which there is a persistent and appreciable increase in general level of prices.
  3. 3. Inflation in India  Inflation is the greatest economic concern which has gripped India into its jagged tentacles.  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.
  5. 5. MEASURING 1.Change in price index a)Consumer Price Index(CPI) b) Wholesale Price: A chief measure of price inflation is the inflation rate. It is measured by: Index (WPI) 2. Gross National Product Deflator (GNP Deflator).
  6. 6. What is Inflation Rate ?  The rate at which the prices of everything go up is called the "rate of inflation". For example, if the price of something is Rs.100 this year and next year the price becomes approximately Rs.104 then the rate of inflation is 4%. If the price of something is Rs.80 then after a year with a rate of inflation of 4% the price go up to (80 x 1.04) = 83.2.  So, when you make an investment, make sure that your rate of return on the investment is higher than the rate of inflation in your country. In our county India, for the year 2005-2006 the rate of inflation was 4%.
  7. 7. Inflation Rate 1992-1995
  8. 8. Inflation Rate 1997-2000
  9. 9. Inflation Rate 2001-2004
  10. 10. Inflation Rate 2005-2008
  11. 11. Inflation rate 2008-2011
  12. 12. CPI Inflation rate in 2012 Months
  13. 13. CPI Inflation rate in 2013 Months
  14. 14. Reasons for Inflation in 1990s  The 1990s is widely described in general as a price stability era all over the globe, barring some external factors like bouts of:  Increase in international oil price and  Natural disasters like drought or flood showed an ebbing trend.
  15. 15. Continued…  The main problem of inflation came to head in August 1990.  When Iraq invaded Kuwait the prices of oil doubled in international market.  Trade deficit (import exceeding exports) in 1991 rose to 15600 cores therefore,  India borrowed funds from International Monetary Fund(IMF).
  16. 16. Reasons for inflation in early 2000s  The first half of India's fiscal 2002-03 (beginning April 1, 2002) witnessed uptrend in inflation largely due to:  Increase in oil prices twice during the period.  Adverse impact of drought on Agricultural products leading to increase in prices – particularly of:  Oilseeds and Edible oils.
  17. 17. Continued…  At the end of the fiscal 2002-03 inflation was up 3.3 percentage points. In the light of overall variation in wholesale price inflation, the inflation in fiscal 2002-03 was dominated by non-food items unlike preceding years, as per a RBI report  Defence expenditures (official) skyrocketed, also four times, from Rs 16,347 cores to Rs 65,000 cores in the budget of 2002/03.
  18. 18. Reasons for inflation in 2004- 2007  2004-2005  weak monsoon  sharp increase in oil prices  2006-2007  overheating in real estate and labour markets  salaries of skilled workers rising  The Public Distribution System has virtually collapsed and the means that were available at least in theory to protect poorer sections of society have disappeared.
  19. 19. Reasons for Inflation in 2007- 2009  2007-2008  Increase in the prices of coal and crude-oil  Rise in the prices of diesel and petrol  2008-2009  Global financial meltdown and economic recession in developed economics major factors in India's economic slowdown and therefore Inflation.
  20. 20. Reasons for Inflation at present  Increase in money supply  Deficit financing  Increase in government expenditure  Inadequate agricultural and industrial growth  Rise in administered prices  Rising import prices  Rising taxes
  21. 21. Inflation in different sectors
  22. 22. YEAR ANNUAL RATE OF INFLATION(%) 1990-1991 13.81 1991-1992 11.88 1992-1993 6.31 1993-1994 10.24 1994-1995 10.22 1995-1996 8.98 1996-1997 7.25 1997-1998 13.17 1998-1999 4.84 1999-2000 4.02 YEAR ANNUAL RATE OF INFLATION(%) 2001-2002 3.8 2002-2003 3.4 2003-2004 5.4 2004-2005 6.4 2005-2006 4.4 2006-2007 5.3 2007-2008 4.7 2008-2009 12.44 2009-2010 10.2 2010-2011 9.4 Inflation rate 1990-2000Inflation rate 2001-2011
  23. 23. India:WPI Inflation by Component
  24. 24. Causes of Inflation 1. Cost push inflation. 2. Rising imported raw materials costs. 3. Rising labor costs. 4. Higher indirect taxes imposed by the government. 5. Demand pull inflation.
  25. 25. Effect of Inflation
  26. 26. Lifestyle Inflation
  27. 27. How a Currency value is decided ?  When Demand > Supply, Currency becomes more valuable and vice versa.
  29. 29. Recession in developed economies like US made big institutions to pull out their money from India  Institutional investors investing in India are directly impacted by the global market uncertainty. In 2008 India had a net outflow of $14billion of FIIs and INR drastically. A volatile currency is never good for a foreign investor as it increases the transaction risk. Though RBI has intervened through open market operations to arrest the downfall of INR (managed float) but the reserves of $290billion don’t provide enough room to make a significant impact.
  30. 30. Default concerns of European nations has resulted in loss of confidence in the Euro and appreciation of dollar  Owing to uncertainty prevailing in Europe and slump in international market, investors prefer to stay away from risky investments. This has significantly affected the portfolio investment in India. Credit rating agency’s downgrade of India to BBB- has not helped the cause. Any outward flow of currency or decrease in investment will put a downward pressure on exchange rate.
  31. 31.  Trade deficit has widened by 40,000 crores in the last quarter. This has resulted in increased imports and spike in dollar demand  The fiscal deficits continue to remain high. The government projected a fiscal deficit target of 4.6% for 2011-12 but is likely to be much higher on account of higher subsidies. The markets questioned the fiscal deficit numbers just after the budget and projected the numbers could be much higher. This indeed has become the case. As highlighted above, persistent fiscal deficits play a role in shaping expectations over the currency rate as well.
  32. 32. Expecting current account deficit to settle at 3.0-3.1% of GDP by March 2012
  33. 33. IMPACT OF RUPEE DEPRECIATION  Economic recovery will get delayed as...  The Reserve Bank of India will not be able to cut rates for fear of causing more outflow..  Weaker rupee will make capital imports expensive, forcing companies to delay investments..  Impact on inflation and higher fuel prices will affect consumer sentiment..  Foreign investors will postpone investments till things stabilise
  34. 34. Bibliography   inflation-on-your-money/   te/ind.asp   k-market.html   