This case study is part of the curriculum of Macro Economics India context. The presentation will give a clear idea of what are the Factors effecting inflation, Measures for controlling Inflation, Suggetion for Revaluating Rupee for controlling Inflation.

1. A
presentation on
case study
“India in search of a way to harness the inflation
dragon”
By
NikhilGupta
12025

2. Introduction
This case deals about the inflation condition and different factors affecting the
inflation in India and the measures taken by the government with respect to the year
1991-92.
What is Inflation?
Inflation is the rate at which the general level of prices for goods and services is
rising and, consequently, the purchasing power of currency is falling. Central banks
attempt to limit inflation, and avoid deflation, in order to keep the economy running
smoothly.
Inflation is caused by the failure of aggregate supply to equal the increase in
aggregate demand. Inflation can, therefore, be controlled by increasing the supplies
of goods and services and reducing money incomes in order to control aggregate
demand.
Current inflation India (CPI India) – the inflation is based upon the Indian consumer
price index. The index is a measure of the average price which consumers spend on
a market-based "basket" of goods and services. Inflation based upon the consumer
price index (CPI) is the main inflation indicator in most countries.
The average inflation rate in January 2017 is 1.86%

3. The average inflation by year for India - the average of 12 monthly inflation rates of a calendar year

4. The annual inflation by year for India - comparing the December CPI to the December CPI of the year before

5. Q1. what are the major factors contributing to the inflation in the recent past?
How have they changed since 1991-92?
There are several factors influencing inflation in India. The following are some of
the factors contributing to inflation which are classified into three types,
Demand factors
1. Increase in public spending
2. Deficit financing
3. Rapid growth of population
Supply factors
1. Erratic Agricultural Growth
2. Agricultural Pricing Policy
3. Inadequate rise in industrial production
4. Upward revision of administered products prices
Other factors

6. Demand factors:
1. Significant increase in public expenditure
The public expenditure in the year 1991-92 constituted to 21.03% of GDP and 28%
of GDP I the year 2012-13 and continued to increase.
2. Deficit Financing
India’s external debt increased from Rs. 194.70 crore (USD 23.50 billion) in 1980-81
to Rs. 459.61 crore (USD 37.50 billion) in 1985 – 86. It went up to Rs. 1,003.76 crore
(USD 58.63 billion) in 1989-90. In 1990-91, it was Rs. 1,229.50 crore (USD 63.40
billion). It increased to $ 484.3 billion in the fourth quarter of the year 2016-17
3. Rapid growth of Population
The Indian population was 83.85 crores in the year 1991 and it increased will increase
to 134 crores by December 2017 according to census 2011 projections. So even a ten
rupees increase in the Per Capita Income will amount to 1340 crores of income,
which will directly impact on the commodities which leads to inflation.

7. Supply Factors
1. Erratic Agricultural Growth
Agriculture is mainly dependent on monsoons and thus, crop failures have been a
regular feature of agriculture. So this will result in food shortage and will cause
inflation.
2. Agricultural pricing policy
The Government of India has been pursuing a price policy to support the
agriculturists. This ensures a minimum price to the farmers. Though it is beneficial to
the farmers it has been a major contributing factor to the Inflation.
3. Inadequate rise in industrial production
There is a huge demand for industrial products due to increase of money supply in the
economy but the rise in industrial growth is inadequate, there by raising the prices of
industrial products. This has led to cost-push Inflation.
4. Upward revision of administered products prices
There are a number of commodities and services in public sectors(like bus, trains) for
which the government administers price levels. The government increases the prices
from time to time to cover losses in public sector which results in cost-push inflation.

8. Other factors
• Failure of the government to bring the increasing income of people within taxation.
• Large scale tax evasion and avoidance.
• Increasing reliance on indirect taxes.
• Unused capacity in industries.
• Shortage of essential raw materials, technology etc.
• Rising of import prices.

9. Q2.What measures do you suggest should be taken by the Government of India to
handle Inflationary Pressure?
The following are some of the suggestions which can be taken by the Government of
India to handle Inflationary pressure.
Monetary Measures
1. Credit Control
2. Demonetization of money
3. Issue of new currency
Fiscal Measures
1. Reduction in non-essential expenditure
2. Increase in taxes
3. Increase in savings
4. Surplus budgets
5. Public debt
Other measures
1. To increase production
2. Rational wage policy
3. Price control
4. Rationing

10. Monetary Measures
Monetary measures aim at reducing money incomes.
(a) Credit Control
One of the important monetary measures is monetary policy. The central bank of the
country adopts a number of methods to control the quantity and quality of credit. For
this purpose, it raises the bank rates, sells securities in the open market, raises the
reserve ratio, and adopts a number of selective credit control measures, such as raising
margin requirements and regulating consumer credit. Monetary policy can only be
helpful in controlling inflation due to demand-pull factors.
(b) Demonetisation of Currency
However, one of the monetary measures is to demonetise currency of higher
denominations. Such a measures is usually adopted when there is abundance of black
money in the country. As per the statistics of the results of the demonetization done on
NOV 8th 2017 by Prime minister SHRI NARENDRA MODI the inflation rate had
fallen down to 3.6% which was the lowest in the last two years.
(c) Issue of New Currency
The most extreme monetary measure is the issue of new currency in place of the old
currency. Under this system, one new note is exchanged for a number of notes of the old
currency. The value of bank deposits is also fixed accordingly. Such a measure is
adopted when there is an excessive issue of notes and there is hyperinflation in the
country. It is a very effective measure. But is inequitable for its hurts the small
depositors the most.

11. Fiscal Measures
Monetary policy alone is incapable of controlling inflation. It should, therefore, be
supported by fiscal measures. Fiscal measures are highly effective for controlling
government expenditure, personal consumption expenditure, and private and public
investment.
(a)Reduction in Unnecessary Expenditure
The government should reduce unnecessary expenditure on non-development
activities in order to curb inflation. This will also put a check on private expenditure
which is dependent upon government demand for goods and services. But it is not
easy to cut government expenditure. Though this measure is always welcome but it
becomes difficult to distinguish between essential and non-essential expenditure.
Therefore, this measure should be supplemented by taxation.
(b) Increase in Taxes
To cut Personal Consumption Expenditure, the rates of Personal, Corporate and
Commodity Taxes should be raised and even new taxes should be levied, but the rates
of taxes should not be so high as to discourage Saving, Investment and Production.
Rather, the tax system should provide Larger Incentives to those who Save, Invest and
Produce More.
Further, to bring more revenue into the tax-net, the government should penalise the
tax evaders by imposing heavy fines. Such measures are bound to be effective in
controlling inflation. To increase the supply of goods within the country, the
government should reduce import duties and increase export duties.

12. (c) Increase in Savings
Another measure is to increase savings on the part of the people. This will tend to reduce
disposable income with the people, and hence personal consumption expenditure. But
due to the rising cost of living, people are not in a position to save much voluntarily.
Keynes, therefore, advocated compulsory savings or what he called “DEFERRED
PAYMENT”
(d) Surplus Budgets
An important measure is to adopt Anti-Inflationary Budgetary Policy. For this
purpose, the government should give up Deficit Financing and instead have Surplus
Budgets. It means collecting more in Revenues and Spending Less.
(e) Public Debt
At the same time, it should stop repayment of public debt and postpone it to some future
date till inflationary pressures are controlled within the economy. Instead, the
government should borrow more to reduce money supply with the public.

13. Other Measures
The other types of measures are those which aim at increasing aggregate supply and
reducing aggregate demand directly.
(a) To Increase Production
The following measures should be adopted to increase production:
(i) One of the foremost measures to control inflation is to increase the production of
essential consumer goods like food, clothing, kerosene oil, sugar, vegetable oils, etc.
(ii) If there is need, raw materials for such products may be imported on preferential
basis to increase the production of essential commodities,
(iii) The policy of rationalisation of industries should be adopted as a long-term
measure. Rationalisation increases productivity and production of industries through the
use of brain, brawn and bullion,
(b) Rational Wage Policy
Another important measure is to adopt a rational wage and income policy. Under
hyperinflation, there is a wage-price spiral. To control this, the government should
freeze wages, incomes, profits, dividends, bonus, etc.
But such a drastic measure can only be adopted for a short period as it is likely to
antagonise both workers and industrialists.

14. (c) Price Control
Price control and is another measure of direct control to check inflation. Price control
means fixing an Upper Limit for the prices of Essential Consumer Goods. They are the
Maximum prices fixed by law and anybody charging more than these prices is punished
by law. But it is difficult to administer price control.
(d) Rationing
Rationing aims at distributing consumption of scarce goods so as to make them available
to a large number of consumers. It is applied to essential consumer goods such as wheat,
rice, sugar, kerosene oil, etc. It is meant to stabilise the prices of necessaries and assure
distributive justice. But it is very inconvenient for consumers because it leads to queues,
artificial shortages, corruption and black marketing. Keynes did not favour rationing for it
“involves a great deal of waste, both of resources and of employment.”

15. Q3. Evaluate the suggestion of revaluating the Indian rupee against the Dollar to
control inflation?
The Market-Linked Currency
Unlike China, where the daily exchange rate of the Yuan is fixed by the central bank,
the government in India does not control the exchange rate of the Indian currency. Since
1993, the rupee’s exchange rate has been determined by the market, which means it
depends on demand and supply forces. The Indian central bank only steps in to control
the value. So if the value of the rupee is rapidly falling against the dollar, the RBI will
sell dollars in the open market to save the domestic currency, and vice-versa.
Is Revaluation a good idea?
Many economists, including central bankers, say that India should not tinker with its
current mechanism and revalue the rupee. Not only will it have a devastating impact on
the domestic economy, it will also not help exports in the long run.
High prices of imported commodities won’t bode well for India, which is heavily
dependent on imports of oil, defence equipment and machinery. An increase in oil prices
pushes up inflation. This again will push up the cost for exporters, and won’t solve their
problem of price-competitiveness.
The central government does not have much of an incentive to Revalue the rupee right
now because not only will it lead to high inflation—which has often toppled
governments in India—but also slower growth.

16. References
• www.yourarticlelibrary.com
• www.qz.com
• www.inflation.eu
• www.investopedia.com
• www.boundless.com
• www.wikepedia.com

17. Thank
you