INFLATION AND ITS CURRENT
Gokarn Bahadur Karkee
Roll No: 13043
To study the causes and effects of inflation in the
Indian economy and analyze its trends in the past few
years and current scenario.
What is Inflation
Inflation can be defined as a rise in the general price
level and therefore a fall in the value of money.
Inflation occurs when the demand of goods and
services is higher than the output of goods and
Inflation also occurs when the costs of producing
goods and services increases.
Major reasons of Inflation in India
Rise in Crude oil prices
Rise in Food prices
Black Money/ Hoarding
Wage rate wise
Sub Prime crisis
435 commodities are used for the WPI based inflation
calculation and base year for the WPI calculation is
Current series of WPI at base 2004-05 constitutes 676
WPI is available at the end of every week (generally
Saturdays), for a period of one year ended that day
The wholesale price index comprises of the following
Formula for calculating Inflation=
(WPI in month of current year-WPI in same month of previous year)
-------------------------------------------------------------------------------------- X 100
WPI in same month of previous year
CPI for Industrial Workers (CPI-IW) based on 2001
included 120-360 items,
CPI for Agriculture Labourers (CPI-AL) and CPI for
Rural Labourers (CPI-RL) both with base year 1986-87
included 260 items.
In addition, there is now the new series of CPI-(U+R)
based on the year 2010 for both rural and urban areas
and also combined has been introduced from January
2011 and includes 456 items.
Effects of Inflation
Fixed income recipients
Increased consumption ratio
Lowers national saving
Illusions of making profits
Rising prices of imports
Causes business cycles to go out of business
Strengthen local currency e.g. Indian Rupee
The Reserve Bank of India (RBI) hikes the interest
rates and other policy rates to control inflation.
Government uses the fiscal policy to check
In 2010-11, increase in inflation was due to factors like food
inflation hike. (Supply shortage of cereals, pulses, wheat,
and rice due to drought in country)
In 2011-12, high inflation is attributed to increased prices of
fruits and vegetables (due to increase in demand) and
increase in commodity prices e.g. crude oil.
In 2012-13, high inflation is attributed to increased prices of
fruits and vegetables (due to increase in demand, hoarding
) and increase in commodity prices e.g. crude oil.
Inflation Control in India – 2013
Measures taken by Reserve Bank of India:
Headline inflation in Nov, 2013 rise to 7.50%, 14
Reserve Bank of India hiked key policy rates (repo
rate and reverse repo) by 25 basis points.
Steps taken by Government of India
It targeted the limit of revenue Account deficit below 5
percent of GDP
To increase industrial production, government liberalised
laws related to and reduced prices of necessary raw
materials and services.
Too-grain is a factor, responsible for the rise of inflation in
India, to fulfill its demand, various measures like import of
wheat, oil seeds, opening market selling of India Food
Corporation's stock of wheat and rice, regulating process
etc. are taken in recent times.
To check and curtail black market, laws have been made
Inflation continues posing a threat
Inflation has been caused by rapid growth in recent decade.
Inflation has been caused by increased prices of vegetables
and fruits, and crude oils in recent years.
Higher interest rates and other policy rates will lead to
reduction in inflation
Challenges for Indian Economy in 2013
Getting inflation under control
Spreading the growth benefits more equitably.
Completing investment projects that are essential for the long
term development of economy.
Dealing with global financial uncertainty that will make the
capital flows and exports more difficult.