The document discusses inflation, defining it as a sustained increase in the general price level of goods and services, and its negative impact on purchasing power. It outlines different types of inflation including hyperinflation and stagflation, and notes that inflation can cause unemployment by discouraging investment and leading to economic instability. The findings from a study on the relationship between inflation and economic growth in India suggest that inflation is negatively related to growth, with significant policy implications.

1. Presented By:
Rishi Vyas (BM-014059)

2. • Inflation is defined as a sustained increase in the general level of prices for
goods and services. It is measured as an annual percentage increase.
• As inflation rises, every rupee you own buys a smaller percentage of a good or
service.
• The value of a rupee does not stay constant when there is inflation.
• The value of a rupee is observed in terms of purchasing power, which are the
real tangible goods that money can buy.
• When inflation goes up, there is a decline in the purchasing power of money.
• For example, if the inflation rate is 2% annually, then theoretically a Re1 pack
of gum will cost Rs1.02 in a year.
• After inflation, your rupee can't buy the same goods it could beforehand.

3. Deflation is when the general level of prices is falling. This is the opposite of
inflation.
Hyperinflation is unusually rapid inflation. In extreme cases, this can lead to
the breakdown of a nation's monetary system. One of the most notable examples
of hyperinflation occurred in Germany in 1923, when prices rose 2,500% in one
month!
Stagflation is the combination of high unemployment and economic stagnation
with inflation. This happened in industrialized countries during the 1970s, when
a bad economy was combined with OPEC raising oil prices.

4. Economists wake up in the morning hoping for a chance to debate the causes
of inflation. There is no cause that's universally agreed upon, but at least two
theories are generally accepted:
Demand-Pull Inflation - This theory can be summarized as "too much
money chasing too few goods". In other words, if demand is growing faster
than supply, prices will increase. This usually occurs in growing economies.
Cost-Push Inflation - When companies' costs go up, they need to increase
prices to maintain their profit margins. Increased costs can include things such
as wages, taxes, or increased costs of imports.

6. It is rightly acknowledged in the literature that inflation has a non-
linear impact on
growth. While below a threshold level, inflation has a positive effect;
it will have an
adverse effect on growth once it crosses the threshold. Prima facie,
such a non-linear
relationship exists for Indian data.

8. DETAILS 2010 2011 2012 2013 2014
Real GDP
Growth
10.26 6.64 4.74 5.02 5.63
Consumer price
index
12.11 8.87 9.30 10.92 6.42
Wholesale price
index
8.1 6.3 6.8 7.58 4.86
Fiscal balances
as a percentage
of GDP
Current
account
balance (%of
GDP)
-7.4
-3.2
-7.4
-3.3
-7.5
-4.9
-7.1
-4.7
-6.5
-5.8 (
2015)
-1.7

11. The GDP in India expanded 5.3 % in the third quarter of 2014 over the same
quarter of the previous year. GDP annual growth rate in India is averaged at
5.82 % from 1951 until 2014. It reached an all time high of 11.4% in the first
quarter of 2010 and a record low of -5.20 % in the fourth quarter of 1979.

13. • Inflation can cause unemployment when:
• The uncertainty of inflation leads to lower investment and
lower economic growth in the long term.
• Inflationary growth is unsustainable leading to a boom and
bust economic cycle.
• Inflation leads to decline in competitiveness and lower export
demand, causing unemployment in the export sector
(especially in a fixed exchange rate).
• There is no direct link between unemployement but often we
see a trade-off e.g. in a period of strong economic growth and
falling unemployment, we see a rise in inflation.

14. • One argument is that a period of high and volatile inflation discourages
firms from investing. Because inflation is high, firms are less certain
investment will be profitable. It is argued that countries with higher
inflation rates tend to have lower investment and therefore lower
economic growth. Therefore, if there are poor levels of investment this
could lead to higher unemployment in the long term.
• It is argued that countries with low inflation rates, such as Germany
have enabled a long period of economic stability which helps to attain a
long term low unemployment rate. Low inflation in a country like
Germany also helps them to become more competitive within the
Eurozone, which also helps create employment and reduce
unemployment.

15. The impact of food inflation on the economic system may be
classified into kinds
• Effects on production:
Inflation has a favorable effect on production when there are under-
utilized or under-employed resources in existence in an economy.
Rising prices breed optimistic expectations within the business
community, in view of increasing profit margins, because the price
level moves up at a faster rate than the cost of production.

16. • Effects on Income distribution
All producers, traders and speculators gain during inflation because
of the windfall profits which arise, because prices rise at a faster and
higher rate than the cost of production. During inflation, the
distribution of shares to the profiteers increases more than that of the
wage earners or fixed-income earners, such as the renter
class. Prices of all factors do not rise in the same proportion. Since
the effects of inflation varies depending upon the earnings it has
serious social consequences.
• Changing diets
More people becoming rich, people eat more of fruits and
vegetables which take more energy and land and meat consumption
has gone up (5 tons of grain to produce 1 ton of pork)

17. • The Bank rates are increased which curtails the money supply in
the economy.
• Reserve ratios : CRR and SLR are increased .
• Repo rate is the rate at which
banks borrow funds from the RBI to meet the gap between the
demand they are facing for money (loans) and how much they
have on hand to lend. If the RBI wants to make it more expensive
for the banks to borrow money, it increases the repo rate;
similarly, if it wants to make it cheaper for banks to borrow
money, it reduces the repo rate.
• Reverse repo rate
• RBI uses this tool when it feels there is excess money supply in
the economy. It offers a lucrative rate of interest to the bank.

18. • During inflation government imposes new taxes and increases
the rates of existing taxes there by effective demand can be
minimized. Government will think about new saving schemes
by providing attractive interest rates on deposits there by
people would like to come forward to save money in the bank.
Thereby the hoarding will be discharged.

19. • In this project, the co integration and error correction models
have used to empirically examine long-run and short-run
dynamics of the inflation-economic growth relationship in
India using annual data. The main objective was to examine
whether a relationship exists between economic growth and
inflation and, if so, its nature. The interesting results found in
this exercise is that the, inflation and economic growth are
negatively related. Second, the sensitivity of inflation to
changes in growth rates is larger than that of growth to
changes in inflation rates. These findings have important
policy implications.

20. •http://en.wikipedia.org/wiki/Inflation_in_India (2013)
•Pratima Singh, Inflation in India: An empirical Analysis, ISAS Institute of South
Asian studies, No.128 - 10 may (2011)
•Gaurav Sharma, Inflation concerns for the Indian economy: Assocham Research
Bureau, (2009)
•Ila Patnaik, Ajay Shah, Giovanni Veronese., How to measure inflation in India,
NIPFP-DEA, Research Program on Capital Flows and their Consequences National
Institute of Public Finance and Policy New Delhi Working Paper 2011-83 (2011)
•Anuradha Patnayak, Study of Inflation in India: A Co integrated Vector Auto
regression Approach, Journal of Quantitative Economics, 8(1) (2010)