Inflation and India - Post Reforms

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  • 1. A Presentation on Inflation and Trend Analysis in the IndianContext Post-Reforms 1991-92 Compiled and Presented by: Dhananjay Ghei 09HS2023 Deepant Kandoi 09HS2024 Sneha Chilivery 09HS2002 Ila Tiwari 09HS2001
  • 2. INFLATION : An Overview
  • 3. What is Inflation?In economicterms, inflationis a rise in thegenerallevel of prices ofgoods andservices in aneconomyover a period oftime .
  • 4. Causes of InflationDemand Pull Inflation Cost Push Inflation AD Curve shifts rightwards AS curves shifts leftwards due due to favorable demand to adverse supply shocks in shocks in the economy. the economy. Output increases resulting in more of employment in the Output does not increase. economy.
  • 5. General Effects• Decrease in the purchasing power of the currency• Lenders or depositors who are paid a fixed rate of interest on loans or deposits will lose purchasing power from their interest earnings, while their borrowers benefit• No effect on the real values of commodities, gold, real estate
  • 6. Negative effects of inflation• Hoarding of goods• Social unrest and revolt• Hyperinflation• Shoe leather costs• Menu costs
  • 7. Inflation In India : Analysis• Taking the base year as 1993-94 we have done analysis on the inflation rate in India and then we have found out various causes and reasons for inflation and the various measures government has taken to curb inflation at various years.• We also try to see the trade off between inflation and unemployment in the Indian context.
  • 8. Inflation In India : AnalysisWe have used WPI index in our calculations everywhere.Why we chose WPI for our analysis?• wider commodity coverage• available on weekly basis• computed at all-India basis
  • 9. Year WPI (All Commodities)1993-1993-94 1001994-1994-95 112.61995-1995-96 121.61996-971996- 127.21997-1997-98 132.81998-1998-99 140.71999-1999-00 145.32000-2000-01 155.72001-2001-02 161.32002-2002-03 166.82003-2003-04 175.92004-2004-05 187.32005-2005-06 195.52006-2006-07 206.12007-2007-08 215.92008-2008-09 233.92009-2009-10 242.7
  • 10. Average Inflation in India After ReformsAverage Inflation = (12.6+9.0+5.6+5.6+7.9+4.6+10.4+5.6+5.5+9.1 +11.4+8.2+10.6+9.8+18+8.8)/16 (in percent)Average Inflation in India after reforms = 8.92%
  • 11. Inflation Trend over the Years
  • 12. Inflation… Why???The earlier crisis, 1973-75 and 1979-81 were the result of:-• War• Oil prices• Drought What government did???• Temporary decrease in food production• Food Rationing• Increase in imports• Petroleum production
  • 13. Crisis of 1990-91Major reasons:-• flawed policies during the preceding years• The mini oil shock following the outbreak of the Gulf War only• Galloping Fiscal Deficit• Continuous increase in the price of food articles• Low industrial growth sector
  • 14. Government Reaction Action Plan of Government Economic RecoveryInstead of just crisis management:-• attempt to bring about a more fundamental or a paradigm shift in macroeconomic management• The change in BOP.• New Economic Policies• Increment in Foreign Exchange
  • 15. Changes in BOP• Till 1990 reductions in the aid flow and restrictions on foreign inflows• New Policies encouraging growth in exports change in the policy towards foreign investmentResult Export growth has helped reduce the trade deficit from US $ 9.4 billion in 1990-91 to US $ 2 billion in 1994-95.
  • 16. Economic policies• Opening for international trade Investment• Deregulation• Initiation of Privatization• Tax reforms Thus moving from Socialist to Capitalist Economy
  • 17. Inflation during 2008-09• Not only high percentage but consistent• Tight money policy• Severe in food grains group• Crude Oil Price hikes
  • 18. Reasons for Inflation in 2008-2009• Crude Oil prices• Hype for inflation• New printing of money• Reduced interest rate• Increase in prices of food grains, oilseeds etc
  • 19. Reasons ( Contd.. )Shocks:• Global Commodity Price Shock – All commodity index – Food price Index • Edible oil (Palm): Net Importer • Effect on India: Primary food & edible oils – Iron Ore: Net exporter – Mineral Oil: Net Importer
  • 20. India : Unemployment Rate Data from 2002-2010Year Unemployment Rate in India( in % )2002 8.82003 8.82004 9.52005 9.22006 8.92007 7.82008 7.22009 6.82010 10.7
  • 21. Philips Curve in context of India in the short run
  • 22. Conclusions• In India, post reforms there has been inflation mostly because of global scenarios which maybe recession or rising crude oil prices that led to tremendous increase in the general price level.• With the introduction of reforms like Globalization in India, the economy has been affected to a larger extent because of changes happening in the outside world in both the times whether good or bad.
  • 23. Conclusions (contd..)• The Philips Short run curve holds good in the Indian context on the data of 2002-10. It shows that there is definitely a trade off between inflation and unemployment level in the economy and the role of implementing effective policies to cure either of them.
  • 24. References for Data Reserve Bank of India Website www.rbi.org.inCommerce and Industry Ministry Website www.commerce.nic.inGovt. of India Ministry of Labour Website www.labour.nic.in