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  • 1. International Business Inflation rate In India Prepared by - Mohit makhija Roll no. 29
  • 2. What is Inflation ? Inflation is an increase in the price of a basket of goods andservices that is representative of the economy as a whole.Every week we talk about inflation and we might have to knowhow its calculated in India. There are several ways every countryuse first we will see how India calculates it .How India calculates Inflation? India uses the Wholesale Price Index (WPI) to calculate andthen decide the inflation rate in the economy.What is Wholesale Price Index? WPI is the index that is used to measure the change in theaverage price level of goods traded in wholesale market. In India,a total of 435 commodities data on price level is tracked throughWPI which is an indicator of movement in prices of commoditiesin all trade and transactions. InflationThe industrial houses as well as the policy makers are all worriedwith the constant increase of the inflation in India since March of2008. In economics, inflation refers a general increase in theprices measured against a general level of the power to purchase.In earlier times this term used to refer to increase in moneysupply. This is currently referred as monetary inflation orexpansionary monetary policy. The measure of inflation ismeasured by comparing two sets of goods at different times. The computing for the increase in the cost which is not reflectedby increase in the quality is carried out. The various measures ofinflation depend on the particular circumstances. The mostpopularly known method is the CPI. In this method the measures
  • 3. are the consumer prices, as well as the Gross Domestic Product(GDP) deflator. In this way the total domestic economy ismeasure. The prevalent view for economics (mainstream) is dueto the interaction of the supply of money with output and interestrates. The views of the economists are broadly divided in twocamps- the "monetarists" and the "Keynesians".The related concepts for calculating inflation of a countrycomprise deflation, disinflation as well as hyper-inflation.Deflation is in general the falling level of prices. The disinflationand the hyper-inflation are all important aspects while calculatingthe inflation rate of a country.Inflation rate in IndiaThe inflation rate in India was last reported to be 9.72 percent inSeptember of 2011. Since the year of 1969 till the year of 2010,the average inflation rate in India was 7.99 percent. The inflationrate of the country reached an historical high of 34.68 percentduring the month of September in the year of 1974. The lowestwas recorded in the month of May in the year of 1976. It wasreported to be as low as -11.31. The inflation rate in generalrefers to the rise in the prices measured against the purchasepower at a standard level. The best known measure of Inflation isthe CPI which measures the consumer prices. The GDP deflatoralso measures inflation in the total domestic economy.
  • 4. India Inflation Rate Chart (in %)Year Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec2011 9.35 9.54 9.68 9.70 9.56 9.44 9.22 9.78 9.72 9.732010 16.22 14.86 14.86 13.33 13.91 13.73 11.25 9.88 9.82 9.70 8.33 9.472009 10.45 9.63 8.03 8.70 8.63 9.29 11.89 11.72 11.64 11.49 13.51 14.97
  • 5. Causes of inflationA sustained rise in the prices of commodities that leads to a fall inthe purchasing power of a nation is called inflation. Althoughinflation is part of the normal economic phenomena of anycountry, any increase in inflation above a predetermined level is acause of concern.High levels of inflation distort economic performance, making itmandatory to identify the causing factors. Several internal andexternal factors, such as the printing of more money by thegovernment, a rise in production and labor costs, high lendinglevels, a drop in the exchange rate, increased taxes or wars, cancause inflation.Different schools of thought provide different views on whatactually causes inflation. However, there is a general agreementamongst economists that economic inflation may be caused byeither an increase in the money supply or a decrease in thequantity of goods being supplied. The proponents of the DemandPull theory attribute a rise in prices to an increase in demand inexcess of the supplies available. An increase in the quantity ofmoney in circulation relative to the ability of the economy tosupply leads to increased demand, thereby fuelling prices. Thecase is of too much money chasing too few goods. An increase indemand could also be a result of declining interest rates, a cut intax rates or increased consumer confidence.The Cost Push theory, on the other hand, states that inflationoccurs when the cost of producing rises and the increase ispassed on to consumers. The cost of production can rise becauseof rising labor costs or when the producing firm is a monopoly oroligopoly and raises prices, cost of imported raw material rises
  • 6. due to exchange rate changes, and external factors, such asnatural calamities or an increase in the economic power of acertain country.An increase in indirect taxes can also lead to increased productioncosts. A classic example of cost-push or supply-shock inflation isthe oil crisis that occurred in the 1970s, after the OPEC raised oilprices. The US saw double digit inflation levels during this period.Since oil is used in every industry, a sharp rise in the price of oilleads to an increase in the prices of all commodities.While money growth is considered to be a principal long-termdeterminant of inflation, non-monetary sources, such as anincrease in commodity prices, have played a key role in triggeringinflation in the past four decades.Inflation has become a major concern worldwide in 2008, withglobal prices rises in oil, food, steel and other commodities beingthe culprit
  • 7. Inflation is caused due to several economic factorsBelow is listed the many reasons behind the cause ofinflation in India in 2011 Inflation can be caused if the government prints notes in excess. If there is a lot of money circulating in the market then prices increase just to keep pace with the increase in currency. Sometimes a country demands more goods and services than what it actually produces. This type of inflation is known as Demands pull inflation. Sometimes the price of a finished good is strikingly high, this happens mainly if there is increase in its production and labor cost. This increase in the cost of the final product also leads to inflation. Inflation also occurs with increasing interest rates. Sometimes countries borrow money, which have high interest rates attached to it. The burden that this rate of interest causes also results in inflation. Consumer products that carry high taxes can also cause inflation. Sometimes if a commodity or product is unavailable in the market its prices tend to go up. This is known as Cost push inflation or supply shock inflation.
  • 8. Inflation in India in futureIt is expected that the emerging markets, including India, willperform well withstanding challenges like higher inflation as wellas the rising prices of the oils. It is assumed that the price of thecommodity will continue to maintain the upward march since thedeveloping countries are maintaining a very strong growthmomentum motivated by the by robust consumption. Theemerging markets will continue to do well. The strong growthmomentum is accelerating the growth. Indian economy isexpected to grow at 8 percent in this fiscal year 2011-12. Thedeveloped markets are growing at the rate of 1.6 percent. Theemerging markets are experiencing the bull nature. The bearnature is short-lasting in these economies. This bull phase isgoing through a 20 year high. The growing price of oil in thecountry is the factor behind the growth of the price of all othercommodities in India.It is calculated on an annual basis on the Wholesale Price Index.The Wholesale Price Index includes around 435 goods, based onwhich the rate of inflation is calculated. However it is only in Indiathat the rate of inflation is calculated on the WPI in othercountries the rate of inflation is calculated on the Consumer PriceIndex (CPI). Inflation in India 2010 - 2011 was last recorded at 8.82 percentin the month of February. Inflation in India in 2011 has alreadytouched the 9 percent mark which is a matter of concern for theeconomy. The rate of inflation in January 2011 was 9.30 whichcame down a little in February. The rate of inflation over the last45 years maintained an average of about 7.99 percent. The rateof inflation generally refers to rise in the prices of goods andservices measured against a basic level of purchasing power ofthe people of the country. There are two well known instrumentsused to measure Inflation namely; the Consumer Price Index andthe GDP deflator. The Consumer Price Index measures consumer
  • 9. prices whereas the GDP deflator measures the total inflation ofthe domestic economy.The results of Inflation can actually be seen in Indian when weend up buying lesser goods by paying excess. Such aphenomenon mostly takes place when either there is too muchmoney supply in the economy or there is less supply of goods andservices. Over the years the one common factor of inflation hasbeen the increase in the supply of money. In order to give aboost to the GDP during the economic slowdown that India facedtwo years back, the government let loose its monetary policies.The rates of Interest were lowered so that people could havemore disposable incomes. To add to this the price of crude oilsoar very high, this further fueled the inflationary pressure inIndia.Threats like building deficits, real estate bubbles andmanufacturing overcapacity also add to the inflationary trends inthe future. One of the most prevailing types of inflation that hasbeen plaguing the country since decades is Food Inflation. Thisis still one area where the government of the country is yet totake notice about. Also the fast growing population, lack of properirrigation infrastructure, slow production capacity of land andwater shortage is a matter of concern for the future. Thesefactors put together can account for high rates of inflation in thecountry.