CHALLENGES FACED BY
INDIA OVER A DECADE IN
THE FIELD OF ECONOMY
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
Inflation is a situation in which there is a persistent
and appreciable increase in general level of prices.
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.
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:
2. Gross National Product Deflator (GNP Deflator).
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
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
The main problem of inflation came to head in
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
Reasons for inflation in early
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 –
Oilseeds and Edible oils.
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.
Reasons for inflation in 2004-
sharp increase in oil prices
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
Reasons for Inflation in 2007-
Increase in the prices of coal and crude-oil
Rise in the prices of diesel and petrol
Global financial meltdown and economic
recession in developed economics major
factors in India's economic slowdown and
Reasons for Inflation at present
Increase in money supply
Increase in government expenditure
Inadequate agricultural and industrial growth
Rise in administered prices
Rising import prices
Recession in developed economies like US
made big institutions to pull out their money
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
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
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.
Expecting current account deficit to
settle at 3.0-3.1% of GDP by March
IMPACT OF RUPEE
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
Impact on inflation and higher fuel prices will
affect consumer sentiment..
Foreign investors will postpone investments till