Inflation_by_prakharyadav

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INFLATION

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Inflation_by_prakharyadav

  1. 1. Nature of the Inflation Supply Shock (Cost-Push):  Agricultural production in India has not grown in proportion to the growth in Population, thus creating a supply shortage.  India has seen a rise in prices of Raw Materials and wage rates and a shortage of Natural resources This has caused the Price level (cost of goods) to increase.  Food prices rose 10.49% in April with the price of vegetables surging ahead at more than 60%.  Fuel and electricity inflation rose to 11.03% in April compared with 10.41% in the previous month.
  2. 2. Causes of Inflation in India Rise in Food Prices: In May food prices rose an annual 10.74% compared to 8.25% in the year-ago period.  Nature of the Agricultural Industry: For e.g. this year Karnataka, Maharashtra and Andhra Pradesh have had poor rains, which is crucial for the cultivation of pulses. Prices of Pulses contribute 0.72% of India’s Inflation.  Supply Bottle Necks: Inflation is often attributed to supply bottlenecks such as in food distribution, where an estimated one third of fresh produce is wasted.
  3. 3. Rise in fuel prices: Rise in petrol prices significantly effects the CPI of the country and rise in diesel prices effects inflation as a whole. Oil is our No.1 Purchase (Import), with a 31% commodity share for 2010-2011 (Economic Times, 7 July 2012). Therefore, it has a strong bearing on our trade deficit.
  4. 4. Trade deficit and the Depreciation of the rupee: Because of the steady decline of the rupee, import costs are rising. This creates the need for subsidies. Increasing subsidies adversely affects India’s fiscal deficit and makes it harder to tackle inflation. Political Instability: The Coalition government struggles to push forward with reforms in the face of a strong opposition, much to the frustration of investors who abandon the idea of investing in India. Lack of Investment, means lack of growth, further fuelling the supply shortage and rise in prices.
  5. 5. Inflation over the Past Year Wholesale Price Index (WPI) for the past one year
  6. 6. Measures in terms of Price Index  Personal Consumptions Price Index Consumer Price       Index Personal Consumptions Price Index : Average increase in prices for all domestic personal consumption. The PCE rises about 1/3% less than the CPI, a trend that dates back to 1992. This may be due to the failure of CPI to take into account substitution. Consumer Price Index : Measures prices of a selection of goods and services purchased by a “typical consumer” Formula for calculating Inflation Rate: (CPI2 – CPI1) __________ * 100. CPI1 E.g. For USA, inflation rate = (211.080 – 202.416)/202.416 = 4.28 %
  7. 7. Other Widely Used Price Indices  Cost of Living Indices  Producer price indices  Commodity Price Indices  Core Price indices Other Widely Used Price Indices  1. GDP Deflator  2. Regional Inflation  3. Historical Inflatio
  8. 8. Q2 Inflation : Structural or Monetary Causes?
  9. 9. Structural or Monetary?  Monetary Inflation: Sustained increase in the money      supply of a country. Structural Inflation: Strongly influenced by Govt’s monetary policy and economic structure. Inflation in India is more structural than monetary. India’s economy is dotted by structural imbalances in various sectors. Major sectors contributing to inflation are Agriculture, Manufacturing,services and Fuel. Bottleneck in supply side ,slump in production,decline in agriculture growth are all major causes for inflation in india.
  10. 10. • The graph shows a very high correlation between repo rate and growth in WPI and IIP. • As per the graph, the constant rise in rates has been adversely affecting the industry as the cost of borrowing has increased, investments have dried up and profit margins have taken a hit.
  11. 11. In the case of food inflation, as the repo rate is increasing, the growth rate also is increasing. • Major Contributor to food Inflation is protein rich foods like milk, pulses, eggs, fish etc.
  12. 12.  With the change in purchasing power, the trend of food consumption has shifted from carbohydrate rich foods to protein rich foods.  In the case of pulses,the problem is compounded by the fact that India is the single biggest consumer and only a handful of other countries produce in quantities that India demands.
  13. 13. Can Organized retailing in India reduce the Inflation? Q3
  14. 14. India: Goldmine for retail investors ACCORDING TO THE A T KEANEY GLOBAL RETAIL DEVELOPMENT INDEX REPORT 2011 / 2012, INDIA IS HAS A GREAT OPPORTUNITY FOR ORGANIZED RETAILING BECAUSE: • VAST POPULATION OF APPROX 1.2 BILLION WITH FAST LABOR FORCE GROWTH. • RAPID URBANIZATION • HIGH SAVINGS AND INVESTMENT RATES GIVING MORE PURCHASING POWER TO CONSUMERS • ACCELERATED RETAIL GROWTH OF 15 TO 20 PERCENT . • LOW ORGANIZED RETAIL PENETRATION OF ABOUT 5% TO 6 % INDICATING ROOM FOR GROWTH. • CHANGES IN FOREIGN DIRECT INVESTMENT (FDI) REGULATIONS FAVOURING VARIOUS INTERNATIONAL RETAILERS' ENTRY AND EXPANSION PLANS.
  15. 15. Impact of FDI : Structural/Institutional  Inclusion of 51% foreign direct investment in multi-brand retail  Attract global supermarkets, such as Walmart, Tesco and Carrefour (Min FDI - $100 million (Rs 450 crore) Impact Urban Retail Market Rural Retail Market Local Small Retailer Supply Chain Localized • Increased Competitiveness • Product Differentiation • Price Wars • Increased Penetration • Harder to of Markets Compete • Backward and Forward • Sales Based on Linkages to Kirana -Convenience Shops, Local Farmers, -Competitive Local Stores in Villages Pricing • Harder to Compete • Impetus to innovate • Brand War eminent Job Creation / Offset • Training Institutes & other ancillaries • Employment for Middle / Upper Class • Offset : Medium Size Retailer • Agriculture best practices • Transportation & Administrative Jobs • Offset : Local Supermarket store will face severe competition • Direct competitio n –impact eminent • Survival of the fittest Warehousing / PDS • Inclusion of multi brand stores will lead to localizing the supply chain & pds system will be impacted parallelly, adding best practices for supply chain • Indirect competition – minimal impact Local Big Retailer
  16. 16. IMPACT of FDI : Inflation Rate Offset of Existing Distributors SIMPLISTIC VIEW OF IMPACT OF INFLATION Increased Competition Source : India Retail Report 2011 Organized Supply Chain Middle Man Cut Out Job Creation Investment by Multi Brand Outlets Reduced Waste Increased Disposable Income Increased Income Of Farmers Increased Consumption Inflation Decrease

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