MINOR PROJECT REPORTON

A STUDY OF RISING INFLATION BRINGING INCOME INEQUALITY IN INDIA

Submitted in partial fulfillment of requirement of Bachelor of Business Administration (B.B.A) General

BBA IIIRD SEMESTER (Evening)(B)

BATCH 2013-2016

Submitted to: Submitted by:DR NITI SAXENA NITIN GULATIASSOCIATE PROFESSOR 08524501713

JAGANNATH INTERNATIONAL MANAGEMENT SCHOOL KALKAJI

ACKNOWLEDGEMENTS

A lot of effort has gone into this training report. My thanks are due to many

people with whom I have been closely associated.

I would like all those who have contributed in completing this project. First of all, I

would like to send my sincere thanks to DR NITI SAXENA for her helpful hand in

the completion of my project.

I would like to thank my entire beloved family & friends for providing me monetary as well as non – monetary support, as and when required, without which this project would not have completed on time. Their trust and patience is now coming out in form of this thesis

NITIN GULATI

CONTENTS

Description Page No.Acknowledgement (i) (i)Contents with page no. (ii)List of tables (iii)List of figures (iii)Executive Summary 4Certificate of completion 5CHAPTER IIntroduction to topic 6Objectives 11CHAPTER-II 20Literature review 38Research Methodology 37CHAPTER-IIIAnalysis & Interpretation 39Findings & Inferences 51Limitations 53CHAPTER-IV 72Recommendations and Conclusion 54Appendices 60Bibliography 61

EXECUTIVE SUMMARY

In simple language, inflation means rising prices and it shows the increase in

cost of living. In economics, inflation is explained as rise in the general level of

prices of goods and services in an economy over a period of time. With the rise

in price levels a unit of currency will buy fewer goods and services. As a result,

the purchasing power of money will be reduced with inflation. In other words the

real value of money will be lost day by day along with inflation. Inflation is

measured by the Rate of Inflation or Inflation Rate which is the percentage

change in a general price index calculated as an annualized figure.

A low inflation rate is beneficial to a country and zero or negative inflation is

considered as bad. Also, a high inflation is harmful to an economy and it affects

an economy in many ways.

High inflation distorts consumer behavior. Because of the fear of price

increases, people tend to purchase their requirements in advance as

much as possible. This can destabilize markets creating unnecessary

shortages.

High inflation redistributes the income of people. The fixed income earners

and those lacking bargaining power will become relatively worse off as

their purchasing power falls.

Trade unions may demand for higher wages at times of high inflation. If

the claims are accepted by the employers, it may give rise to a wage-price

spiral which may aggravate the inflation problem.

During a high inflation period, wide fluctuations in the inflation rate make it

difficult for business organizations to predict the future and accurately

calculate prices and returns from investments. Therefore, it can undermine

business confidence.

When inflation in a country is more than that in a competitive country, the

exports from former country will be less attractive compared to the other

country. This means there will be less sales for that country’s goods both

at home and abroad and that will create a larger trade deficit. At the same

time, high inflation in a country weakens its competitive position in the

international market.

CERTIFICATE OF COMPLETION

This is to certify that NITIN GULATI student of JAGANNATH INTERNATIONAL MANAGEMENT SCHOOL, KALKAJI, OF BBA THIRD SEMESTER, has completed this project and prepared this

report on “A STUDY OF RISING INFLATION BRINGING INCOME

INEQUALITY IN INDIA” under my Guidance. The matter embodied

in this project work has not been submitted earlier for the Award of

any Diploma to the best of my Knowledge and Belief.

DR NITI SAXENAASSISTANT PROFESSOR

CHAPTER IINTRODUCTION TO THE TOPIC

Respected dignitaries on the dais: Advocate V. R. Parnerkar, Advocate

Laxmikant Parnerkar, Shri Pradip Palnitkar, Shri Mohan Tanksale, Justice

Mhase, Dr. S. N. Pathan and Dr. Ashutosh Raravikar; Ladies and Gentlemen.

It is indeed my honour that Late Dr. Ramchandra Parnerkar Outstanding

Economics Award for 2013 has been bestowed upon me. I thank the Poornawad

Charitable Trust and its Life Management Institute for this recognition.  It is

heartening to see that over the last so many years, the Trust has taken up the

mission of people’s  welfare and is working towards enrichment of our  life

through  various social service activities, inspired by the life and mission of Dr.

Parnerkar.

Vidvat Ratna Dr. R. P. Parnerkar (1916-1980) was a great philosopher and

thinker. He recognised that human beings require incentive for action. At the

same time, they need emotional support to tie over adversities and sustain their

effort. He was a Karma Yogi. He used to say, “Only singing the praise of the God

without putting in efforts would not lead you anywhere. Master is like electricity

and disciple is like a bulb. A bulb with broken filament cannot experience the

illumination from electricity.”

Dr. Parnerkar put forth his economic and philosophical thought, which he termed

Poornawad. It says that matter and the mind are manifestations of only one and

the same reality which he called Poorna. The economic doctrine revolves around

the central idea of food as a fundamental human right. He believed that as long

as a person has to earn his food at somebody else’s wishes, humanity would

always remain in doldrums. He believed that free food will not make people

indolent as multiple other needs would make him toil.

The problems of food security, poverty and unemployment, which were close to

his heart, are the burning issues even today. The Food Security Bill as

introduced in the Parliament by the Government in a way comes close to that

dream of Dr. Parnerkar. His economic insight blended with humanism will always

remain a beacon for generations. I was wondering how best to honour Dr.

Parnerkar’s contribution? Given his deep commitment to social welfare, I thought

he would have been concerned as we have been in the Reserve Bank of India

about the current state of inflation, particularly food inflation. We have been

grappling with this for some time now.

I take this opportunity to share my thoughts on the topic of inflation which affects

one and all. Over the last three years the persistence of inflation in an

environment of falling economic growth has come out as a “puzzle”. In my

presentation I propose to address the following questions: What do I mean by a

“puzzle”? Why do we need to worry about inflation? What is the nature of the

current inflation process? How did monetary policy respond to the recent bout of

inflation? I conclude with some thoughts on the way forward to achieve price

stability.

Current inflation Puzzle?

First, let me begin by giving the context. India is a moderate inflation country. For

example, in the 62 years since 1950-51average annual inflation rate as

measured by changes in the wholesale price index (WPI) increased at a rate of

6.7 per cent per annum. That is not a very high rate considering that many

countries, both developed and developing, experienced very high inflation in their

modern development history. In fact, more recently in the 1980s and 1990s the

world inflation averaged around 17 per cent per annum. In the 2000s there was a

sharp all round moderation in global inflation.

Inflation is viewed as being undesirable because of some serious economic and

social effects. Inflation impacts on income distribution making an random

redistribution of real income. Those receiving fixed money incomes (e.g.,

pensioners, beneficiaries etc.) are usually disadvantaged because often their

incomes are not adjusted upwards fast enough to compensate for the effects of

continually rising prices. Their real incomes (i.e., the goods and services their

incomes will buy) will fall. Individuals whose incomes rise more rapidly than the

inflation rate will experience increasing real incomes. Generally, the pattern of

income distribution tends to become more unequal than it was before inflation. If

the rate of inflation is high, individuals with money tend to buy real assets such

as property, gold and antiques, which often increase in value faster than the rate

of inflation. This group will gain by increasing the size of their share of the

nation's wealth.

Inflation tends to increase spending and encourage borrowing at the expense of

savings. If prices are rising quicker than incomes, individuals will tend to buy at

current prices before goods and services become more expensive and less

affordable. Some consumers may buy using higher levels of debt (i.e., borrowing)

than otherwise might the case. Savings may be discouraged because with high

inflation when the money saved is repaid, it can be worth much less than when it

was lent and the real rate of interest may be low. The real rate of interest rates

fail to keep pace with inflation the saver loses purchasing power, i.e., their ability

to buy things falls. Rising prices are a boon to borrowers because the repayment

of interest and the sum borrowed (i.e., the principal) is with lower valued money.

Inflation reduces the real value of the amount they owe, as the sum repaid has

less purchasing power. Of course, any gain by borrowers must be weighed

against the interest they must pay.

Investment, in economics, means the creation of new capital goods. Investment

can only take place if there is saving. Inflation encourages spending and

discourages saving, so funds that might otherwise have been available for

investment tend to dry up. With lower levels of investment there is likely to be a

slowing of the rate of growth of national output (GDP). This in turn leads to a

reduction in new jobs and so can increase the level of unemployment. Inflation

can distort market price signals and the market may fail to allocate resources

efficiently. Planning and investment decisions become more difficult to predict as

firms are unsure what will happen to prices and costs during times of inflation. If

firms are unable to pass on the increase in costs to consumers this will impact on

profits possibly causing some firms to close or cut back production and

subsequent employment.

Inflation in India at a faster rate relative to our trading partners can harm

exporters and benefit importers. India firms exporting their products overseas will

find it more difficult to sell their products because they are less competitive price

wise. Local producers may find it difficult to complete in domestic markets

because of relatively cheaper foreign imports. Declining exports and increasing

imports can lead to deterioration in the balance of payments. High inflation in

India may see nations trading elsewhere while a lack of business confidence

because of the perceived higher risks may see firms investing elsewhere. This

high inflation will slow growth and employment through the dampening effects on

investment and declining exports.

OBJECTIVES

To study how inflation impact on the income inequality of India

To understand income distribution and growth in India.

To understand how company create the better product and service

how met the inflationary demand for the Indian customer and

income inequality.

To study the concept of inflation and the its impact on the economy.

CHAPTER-II

LITRATURE REVIEW

The best definition of economic inequality I've read is as follows: Economic

inequality occurs when the same input 'A' produces two different outputs 'B' and

'B*' for two separate and independent parties using the same mechanism. In this

regard time/effort is input 'A' and output 'B' is what you receive, while output 'B*'

is what they receive. Economic inequality exists at the smallest personal levels,

all the way up to the highest social levels. Truth be told, even so called

marxist/socialist/communist regimes experience an even GREATER economic

inequality than capitalist systems. While initially this looks ridiculous as socialism

is supposed to be the even distribution of output for all without regard for input, it

is in fact very fractured. Those that run/control those regimes often give in to

human emotions of greed, jealousy, etc, and since they have the power the

swing the largest portions of output their way they often do. In a capitalist regime

free market forces often prevent even the biggest players from taking too much

as the economic law of diminishing marginal returns takes effect. It is only when,

to no big surprise, you involve politics and government opinion/control into the

market do we see an ever widening income gap. So in conclusion, economic

inequality is the financial manifestation of human greed and our lust for power.

Example: A man working in the street is digging up a water main to replace a

valve, while on the tenth story of the building behind him is a man on the phone

with his contacts in Japan working out a business model. The man working in the

street is paid $25 an hour to do his job, and it takes him 3 hours to do. The man

in the office makes salary, which when broken down by average hours per week

comes to be about $45 and hour, and it also takes him 3 hours to discuss and

approve the business model. At the end of the day the guy in the street made

$75 gross income, while the man in the building made $135 gross income. While

we consider both as having equal value for there time, we as a regulated system

do not and we value each other's time differently depending upon what we

produce with it. While this creates a naturally occuring income gap (inequality) it

is often marginal at best and is made up for by the fact that both men have

completely different tastes, lifestyles and needs beyond the basic. This is where

a FREE MARKET economy would close the gap, as the man making more would

spend more, while they guy making less will likely spend less. Therefore the

UTILITY acheived by both men is nearly the same. It's the whole 'grass is

greener' concept that provides the illusion that both men are not equall because

of the difference in dollar amounts

Cyclical unemployment is unemployment associated with the up or down

fluctuations in the business cycle. This type of unemployment rises during

recessions and depressions and falls during recoveries and booms. In the

graph, the unemployment rate rose sharply during each recession period and

then fell slowly as the recession ended and business activity picked up.

Unemployment will always exist to some degree for various reasons. People who

leave their job will need time to look for another (frictional unemployment).

Business will continue to fluctuate, causing some amount of cyclical

unemployment. Technological change will continue, resulting in some loss of

jobs. Also, some work is seasonal.

The percentage of total employment is generally increasing in low-skilled and

high-skilled services. These trends seem to suggest that future employment

opportunities will be greatest in services. Employment in factory and farm work

have been declining steadily since 1960, suggesting that job opportunities in

these fields will likely continue to decline into the future. Employment in office

jobs has increased steadily until its peak around 1990, when it declined and

then leveled off. This suggests that prospects for office jobs could be flat or

slightly rising in the future.

Began looking at how prices are formed in a market economy as a first step

toward understanding how individual decisions are coordinated in markets.

Market prices reflect the interactions of two different forces: demand and supply.

The quantity demanded varies with the price of the good, the price of substitutes

and complements, expected future prices, income, tastes and population.

Holding all variables constant except the price of the good (ceteris paribus), we

decided there should be a negative relationship between price and the quantity

demanded (the income and substitution effects). Any change in price, ceteris

paribus, causes a movement along the demand curve (i.e., a change in the

quantity demanded). Any violation of the ceteris paribus assumption causes the

demand curve to shift (i.e., a change in demand).

Similarly, the quantity supplied depends on the price of the good, the price of

inputs, technology, the price of substitutes and complements (in production),

expected future prices, the goals of the firm, and the number of firms. Holding all

variables constant except the price of the good, we decided there should be a

positive relationship between price and the quantity supplied (profits). Any

change in price, ceteris paribus, causes a movement along the supply curve (i.e.,

a change in the quantity supplied). Any violation of the ceteris paribus

assumption causes a shift in the supply curve (i.e., a change in supply).

Combining the two curves shows the interaction between producers and

consumers. The market always tends to the price that equates the quantity

demanded and supplied. This is the point where the demand and supply curves

intersect. If price is above this equilibrium level, there is excess supply. This

forces price down, causing the quantity supplied to decrease and the quantity

demanded to increase. The adjustment process stops when the quantity

producers are willing to supply equals the quantity that consumers are willing to

purchase. The opposite adjustment occurs if price is below the equilibrium value,

creating excess demand. Thus, if markets are out of equilibrium (characterized

by shortages or surpluses), market forces will automatically bring the market

back into equilibrium. This is how market prices help coordinate independent

actions of individuals. Market economies will appear coordinated as long as

prices are free to adjust to their equilibrium values.

If the government wants to influence market prices, it can operate through the

market by imposing taxes or subsidies. Taxes (subsidies) increase (decrease)

the costs of production (recall taxes and subsidies are both modeled as affecting

the supply curve). This shifts the supply curve, and the market will adjust to a

new equilibrium point. Thus, taxes and subsidies can influence equilibrium price

and output, but price is free to adjust to the level that clears the market. Because

prices are free to adjust, taxes and subsidies are considered as operating

through the market.

Price CeilingsAlternatively, the government can choose to supersede the market by imposing

price ceilings or floors. Price ceilings limit prices to values below the equilibrium

level (if the limit is set above the equilibrium level, the ceiling would be

ineffective). Price floors limit prices to values above the equilibrium level. These

policies are considered as superseding the market because prices are not

allowed to adjust to their equilibrium values. As a result, price changes can not

signal consumers and producers to adjust their behavior (incentive) and prices

do not balance supply and demand (allocation).

For example, consider price ceilings (e.g., rent control, gas price controls, Nixon

and post World War II price and wage freezes, anti-price-gauging laws, etc.).

What effect does a price ceiling have on demand and supply? None. It simply

restricts price below its equilibrium value. As a result, there are chronic

shortages (see figure). Prices cannot rise, so consumers do not get the signal to

economize and producers do not get the signal to expand output.

Furthermore, there is an allocation problem that is not present when demand

equals supply. A limited supply has to be divided up between a greater demand.

Thus, we need to create some mechanism to allocate the scarce supply to

consumers. As described in the text, several allocation rules might result: first

come first serve, lottery, favoritism, discrimination, bribes, survival of the fittest,

etc. Consumers will compete to obtain a share of the limited supply, where the

rules of the competition are determined by the allocation mechanism. This

competition generally creates costs in addition to the monetary price of the good

(e.g., time waiting in line, bribes, in-kind payments, etc.). This generally

increases the total cost of the good (opportunity cost, including monetary and

non-monetary costs) above the ceiling, and even above the unrestricted

equilibrium price. Thus, price ceilings actually increase total costs above the

equilibrium level.

For example, consider ration coupons as suggested for gas in the 1970s. The

government prints one ticket for each gallon of gasoline supplied. To receive a

gallon of gas, you must sacrifice the regulated price of a gallon plus one ration

coupon. This eliminates excess demand (though there is criticism about

alternative schemes to allocate ration coupons). There are two cases: ration

coupons can be exchanged; ration coupons are non exchangeable. If ration

coupons can be exchanged, what is the market price of a ration coupon? PC =

PD - P' (see figure). If we purchase a gallon of gas with a coupon we have

purchased from someone else, what is the total cost of a gallon of gas? PD = P'

+ PC (see figure). If we purchase the gallon of gas with a ration coupon we

received for free, what is our total cost of gas? PD, because PC becomes an

opportunity cost. We forgo this value when we decide to use our own coupon

rather than selling it to someone else. What if ration coupons are not

exchangeable? Black market, siphon gas, or other method to circumvent the

restrictions. Opportunity cost will still rise by an amount close to the value when

coupons are exchangeable.

Are there differences between exchangeable ration coupons and other allocation

schemes? Exchangeable ration coupons are efficient (they ensure that the good

is allocated to consumers who place the highest value on the good). Other

schemes may be inefficient (e.g., lower valued consumers may receive the good

under first come first serve if they have a lower value of time).

Thus, ration coupons and other methods of allocating the limited supply all have

the effect of raising the total cost of the good above the ceiling, and above the

unrestricted equilibrium price. Thus, price ceilings actually have the opposite

effect intended. They raise total costs and lower output. Evidence supports this:

low occupancy in apts. under rent control, gas lines, and trekking (40% fall in

train rider-ship after price control were lifted in post World War II Europe). The

alternative allocation mechanisms that arise are generally considered inefficient,

unfair, and sometimes immoral.

India is a huge country, with a population of 1.2 billion. More than 50% of its

people are still dependent on agriculture which is growing at a rate of around 3%

for the last decade. As the country’s GDP is seen to grow at 7%, it is quite clear

that all these 50% people are lagging behind in the growth story of India.

According to the World Bank report, the Gini Coefficient had increased from 0.34

to 0.37 over the last decade. The top ten richest people in India constitute to

around 5% of the total GDP. What is this paradox? Is pulling these people out of

villages and away from agriculture the only way to reduce the income inequality?

Fortunately, the answer is absolutely no. If you look in to history, all the

developed countries have grown to what they are today, because they have

capitalized on what are their strengths. For example South Korea and Taiwan

became Technology leaders in Semiconductors and Electronics, Hong Kong

became a major center for Financial Institutions, Singapore became a logistical

nerve center for the global supply chain, Japan as an automobile exporter etc.

Then what are the strengths of India? ndia has 52% of cultivable land as

compared to the world’s average of 11%. All 15 major climatic conditions are

present in India. Forty six out of sixty soil types are present in India. India has 20

agro climatic regions. There are 10 bio-diversity regions. The hours of sunshine

and length of days are ideal for round the year cultivation. India has the largest

livestock population. India has the largest irrigated Land area in the world.

By 2020, India needs 340 million tons of food grains in view of the population

growth. The current available arable land of 190 million hectares will shrink down

to 140 or 120 million hectares by 2020. India has to work hard to increase the

productivity per hectare from 2 tons to 4 tons by 2020.

The gap between the industry and agriculture has to be reduced. Value addition

to the produce of the farmers has to be taken up on a national scale, which would

bring additional streams of revenue to these people. For every 20 acres of farm

land, a kiosk has t be installed with a computer and internet connection. If every

farmer registers himself and his farm in the computer, then the government with

its host of research institutions should advise the farmers in knowing the soil

conditions, weather conditions, type of crops to be grown and fertilisers to be

used.

Once provided with this kind of assistance, the farmers should be encouraged to

sell his products at the prevailing market rates through direct participation in the

commodity exchanges. For this, mid night oil has to be burnt by the local village

administration and various ministries. But this is the only way to increase their

efficiency.

The branded agricultural products have only 1% of the market share. There is a

huge market lurking out there in the branded food products like pulses, rice,

wheat, vegetables, fruits etc. The corporates like Tatas and Birlas should put up

the processing and packaging units of them in these interior areas and provide

alternate employment to these people in a recession proof industry. Even we can

export these processed products instead of exporting raw materials which shall

boost our foreign exchange earnings in the long run. Under the MGNREG

(Mahatma Gandhi National Rural Employment Generation Scheme), roads are to

be built connecting every 10 villages to the nearby town. This shall allow the

farmers to transport their produce to the markets and sell them at remunerative

tariffs. All these initiatives does not any  incremental investment from the

governments, but only aligning  the existing programmes towards aiding

infrastructure building. With this initiative, urban migration can be avoided and

urban facilities can be provided in rural areas to improve the quality of life. India

is the world's largest democracy, with a population of more than 1.2 billion

people. Despite making substantial financial gains since the introduction of

market-based economic reforms in the early 1990s, India continues to struggle

with several major problems, including poverty, inadequate infrastructure and

economic inequality. Although much progress has been made to tackle the social

causes of poverty in India, millions of children face an uncertain future.

A Double-Edged Sword

The same regulatory reforms that enabled India's economy to grow so rapidly

during the past 20 years have also had a serious impact on the nation's poorest

citizens. According to a 2011 report published by the Organisation for Economic

Cooperation and Development (OECD), income inequality has doubled in India

since the early 1990s. The richest 10 percent of Indians earn approximately 12

times as much money as the poorest 10 percent, compared to roughly six times

in 1990. India's economy is one of the fastest-growing emerging economies of

any newly industrialized nation in the world, but other countries have made

significantly more progress in addressing income inequality.

"Brazil, Indonesia and, on some indicators, Argentina have recorded significant

progress in reducing inequality over the past 20 years," according to the OECD

report. "By contrast, China, India, the Russian Federation and South Africa have

all become less equal over time."

ChildFund has worked in India since 1951 and remains committed to fighting

child poverty in the country. Despite the introduction of many initiatives to

address the social causes of poverty, there is much work to be done. The OECD

report revealed that poverty reduction programs have been less effective than

previously thought and also suggested that 42 percent of the Indian population

lives below the poverty line.

Serious Consequences

The causes of income inequality are highly complex and dependent on a range

of factors, and the effects are damaging to vulnerable populations, especially the

young. Children born to parents in lower-income areas are at higher risk of

childhood mortality and disease. According to data from UNICEF, 28 percent of

Indian children born between 2006 and 2010 were underweight at birth, and

approximately 48 percent of children under the age of 5 were affected by

moderate to severe growth stunting as a result of malnutrition.

Through government initiatives and the work of ChildFund and other

nongovernmental organizations, conditions are gradually improving. Data from

UNICEF suggests that 88 percent of Indians living in rural areas had access to

improved drinking water in 2008, and more than 20 percent of rural Indians had

access to better sanitation facilities in during the same time period. Although

these gains are encouraging, there is still more that can be done to improve the

lives of children living in India's poorest communities. One of the best ways you

can help ChildFund fight child poverty is by donating to our Dream Bike

campaign. Providing children living in rural areas with the means to get to school

and receive an education, this program aims to supply 800 schoolgirls in India

and Sri Lanka with bicycles. To date, we have funded more than 600 bicycles.

Another way you can get involved is by purchasing a gift from our Gifts of Love &

Hope catalog. With so many ways to give, including helping us provide water

filters for an Indian school and medical checkups for children with disabilities, our

catalog enables you to help us fight child poverty and offer children a brighter

future. “Poverty is not a certain amount of goods, nor is it just a relation between

means and ends; above all it is a relation among people. Poverty is a social

status.”— Marshall Sahlins (1974, p. 37)

“At the risk of oversimplification, I would like to say that poverty is an absolute

notion in the space of capabilities but very often it will take a relative form in the

space of commodities…”—Amartya Sen (1983, p 161)

In recent years, as I have noted, there has been an increasing concern

among economists and policy makers with poverty in the sense that poverty itself

is seen as an important focus of policy. This is true with regard to low-income

countries, and it has also been an issue at various times in the relatively high-

income countries.

It has not always been this way. With the burgeoning of development

economics in the era of decolonization after World War II, attention was almost

exclusively focused on economic growth. This approach was based on the

assumption that economic growth would – at least in the long run – improve

everyone’s position, the position of the poor as well as the position of the rich.

As it became increasingly clear, however, that economic growth, when it took

place, was not relieving the material deprivation of huge numbers of people – or

at least not doing so with sufficient speed – it began to become apparent that it

would be necessary to address poverty more directly.

As attention then shifted directly to poverty, it became necessary to

specify just what poverty meant – or, more generally, what economic well-being

meant. Usually, poverty has been defined in terms of some absolute standard,

the amount of income needed to provide basic needs. In the United States, for

example, the poverty line in 2008 for a family of four was $21,200. For low-

income countries, a similar absolute standard, though at a very different level, is

generally used. The World Bank’s definition, which is widely accepted (though

also widely criticized), is set at $2/day, in terms of 1990 purchasing power parity.

Dollar inflation since 1990 would make this figure about $3.25 in 2008 prices, or

$4,745 annually for a family of four. The Bank defines “extreme poverty” as half

of this, or $2,372.50 for a family of four. While there is a great deal of

controversy over these numbers and how they are calculated – especially over

how the number of people “in poverty” has changed over time – there is little

dispute about the idea that poverty, or well-being, is defined in terms of some

amount of goods and services, the basic needs – or the money it takes to meet

those basic needs.

Yet there are several problems with this definition. As Amartya Sen has

argued, basic needs are best understood as capabilities, and not all capabilities

can be achieved simply with money. The capability to be free from disease, for

example, depends upon a broad set of social conditions; the capability to travel

depends in part on the public good of a transportation infrastructure; and the

capability to be educated also relies heavily on public goods. Sen sees poverty

as absolute in terms of these capabilities, but in terms of commodities (income)

poverty becomes relative, determined by the standards of the particular society.

The concept of basic needs – the concept generally used to define poverty

– when expressed in terms of commodities, is highly socially contingent. This

social contingency is clear, for example, in the dramatic difference between the

$21,200 that marks the poverty line in the United States and the $4,745 that

defines the line in the low-income countries of the world. People’s standards,

their concept of basic needs, depend on the societies in which they live.

Furthermore, the definition and extent of poverty will depend not only on

the level of a society’s income, but also on the distribution of income. It seems

reasonable to assume that a society’s standards, the norm of what is needed,

are largely determined by the standard of living of those people in the middle.

Then, if we consider two societies in which the bottom segments, say the bottom

quintiles, have the same level of income, poverty will be greater in the society

where income is more unequally distributed. In the more unequal society, the

bottom quintile will be further from the middle and thus further from meeting the

standards of that society; the greater the inequality, the less the group at the

bottom will be able to meet society’s socially determined needs and thus the

more will the members of this group be in poverty.

All this is very well, but even in this relative concept of poverty, people’s

condition, their poverty, is defined as a relation between people and things (the

quantity of things represented by the level of income). Yet implicit in the relative

concept of poverty is that poverty is a social condition, a relation among people –

as stated in the quotation above from Marshall Sahlins. In making his point,

Sahlins (1974, p. 37) argues, “The world’s most primitive people have few

possessions, but they are not poor.” When a whole society – hunter-gatherer

societies, are the case in point – has few possessions, there is no segment of

that society that is considered poor. It is only when these peoples are

incorporated into larger societies, conceptually and practically, that they become

“poor” – failing to meet the standards of basic needs in that larger society. Thus

it is their social status, their relation to others in society, that places them in

poverty.

The point here is not that people’s absolute deprivation is irrelevant to

their material well-being. The point is simply that people’s relative position is

also not irrelevant to their material well-being. We cannot eliminate poverty while

the distribution of income remains highly unequal.

Justice, Fairness and Inequality

The Intrinsic Value of Equality

“Why is equality a value?... the basic reason it matters to us is because we

believe that there is something valuable about human relationships that are – in

certain crucial respects at least – unstructured by differences of rank, power, or

status.”—Samuel Scheffler (2005, p. 17)

Material equality, or at least the absence of extreme inequality, has

intrinsic value and is in some sense a human right. There is a variety of

rationales behind this assertion. One follows directly from the observation that

basic needs are socially contingent (as argued in the previous section). Andrei

Marmor (2003), for example, argues from the assumption that people have a

fundamental right to meet their basic needs and that basic needs are socially

determined. Therefore with greater inequality the larger will be the group of

people who cannot meet those needs, who are being denied by the economic

structure this fundamental right. Then, since there is intrinsic value in people

having their fundamental rights and, in particular, this right of meeting their basic

needs, material equality (at least a good degree of material equality) becomes of

intrinsic value.

Within the realm of modern philosophy, it is perhaps the ideas of John

Rawls (1971) that are most strongly associated with the concept that a just or fair

society is one of relative equality. Rawls argues that reasonable people

choosing a social order from behind a “veil of ignorance” – that is, ignorance

about where they themselves would be situated in that society – would choose a

society with a high degree of material equality. From his basic postulates about

fairness, justice, human behavior and needs, he defines his “difference principle”

as the guide for judging social policy and social change: “The intuitive idea [of the

difference principle] is that the social order is not to establish and secure the

more attractive prospects of those better off unless dong so is to the advantage

of those less fortunate.”(p. 75).

Yet Rawls is not arguing for equality of outcome (or condition) but stays

within the realm of advocating equality of opportunity. He avows (p. 100): “…in

order to treat all persons equally, to provide genuine equal opportunity, society

must give more attention to those with fewer native assets and to those born into

the less favorable social positions.” And Rawls takes a relatively broad view of

“native assets,” arguing that there is no good reason why people with less natural

skills, intelligence, or innate characteristics of personality that would often (in

most circumstance of the real world) contribute to economic success should be

consigned to a lower economic condition because of these traits. He argues that

society should provide redress for these traits, and thus rejects the idea of what

he calls a “callous meritocratic society.” In this sense, the thing of intrinsic value

for Rawls is not so much equality itself as fairness or equality of opportunity. Yet

the outcome, given his rejection of “callous” meritocracy, would be relative

equality of outcome.

There are several other philosophers whose work is associated with

valuing equality who develop their argument from postulating the intrinsic value

of equality of opportunity – for example, Ronald Dworkin (1981), G.A. Cohen

(1989) and John Roemer (1998). These authors, and Rawls, have various

outlooks on what constitutes “native assets,” some adopting a broader view (e.g.,

including tastes or personality traits) and some adopting a narrower view (e.g.,

rejecting the idea that tastes or personality traits are part of an individual’s “native

assets”). Nonetheless, they – and many other liberal egalitarians – argue from

the position that equality of opportunity means that inequalities of outcome are

not legitimate if they arise from characteristics for which people themselves are

not responsible. Indeed, one might go so far as to argue that conservatives, who

give greater emphasis to the difference between equality of opportunity and

equality of outcome, differ from the liberals largely in terms of what they view as

the individual’s responsibility. Conservatives (at least modern conservatives)

would tend to include only such characteristics as race, ethnicity and gender as

traits for which the individual is not responsible. Conservatives, however, would

tend not to advocate redress for these characteristics, but simply advocate that

society not use them as a basis for discrimination. The issue of the connection

between equality of opportunity and equality of outcome will be given more

attention shortly.

The argument, however, that equality of outcome – or, at least, the

absence of extreme inequalities – derives from the intrinsic value of equality of

opportunity is not the same as claiming that equality of outcome itself has

intrinsic value. Fairness as embodied in equal opportunity is good, but it is not all

that is good in relation to economic equality. Even leaving aside the argument

(noted above) that follows from defining economic well-being and basic needs in

relative terms, there are strong reasons to view equality of outcome as having

intrinsic value.

This intrinsic value of equality of outcome is well captured in the Sheffler

quotation above, that “there is something valuable about human relationships

that are …unstructured by differences of rank, power, or status.” Sheffler is not

directly addressing differences of income and wealth. Yet, while it is

conceptually possible to have differences of income and wealth that are not

accompanied by differences of “rank, power, or status,” this seems highly

unlikely, to say the least, in the real world.

A similar idea is expressed by Erik Olin Wright (2000, p. 145): “…income

inequality … fractures community, generates envy and resentment, and makes

social solidarity more precarious.” The pernicious impacts of income inequality

that concern Wright depend at least in part on the origins and degree of the

inequality. If, for example, the inequality is largely based on race or ethnicity or

gender, as is so often the case, then it will be generally perceived as unfair

(except, perhaps, by those at top) and generate considerable resentment.

Similarly, when inequalities are seen as arising from family privilege, they will

tend to be viewed by many people as illegitimate and unfair. Income inequalities

that are seen as arising from differences in skills or efforts are less likely to be

viewed as illegitimate (the views of Rawls and some other liberal egalitarians

notwithstanding). Nonetheless, if inequality is large as it is in much of the world

today, it is likely to be viewed as unfair – and thereby undermine social solidarity

– because few people would view legitimate bases of inequality (e.g., differences

in effort) as generating large inequalities.

Thus the intrinsic value of relative economic equality (of outcome) exists

because it is a foundation for the type of social relations that we consider

desirable – relations of solidarity, trust, and amiability. In this sense, the value of

relative equality can be seen in terms of its role in creating and being part of a

democratic social order. The connection between relative equality and the social

relations of a democratic social order is so intimate that the equality is really part

of those relations, not an instrument that generates their existence. (As we shall

see, however, equality and the social relations that go with it are an important

instrument for a set of positive social outcomes. Also, but beyond my scope

here, they are an instrument as well for the effective operation of political

democracy.)

Equality of Opportunity and Equality of Outcome

“…more effort should be directed specifically towards exploring the hypothesis

that, within the class structure of industrial societies, inequality of opportunity will

be the greater, the greater the inequality of condition – as a derivative, that is, of

the argument that members of more advantaged and powerful classes will seek

to use their superior resources to preserve their own and their families’

positions.”—Robert Erikson and John Goldthorpe (1992, p. 396)

“A society with highly unequal results is, more of less inevitably, a society with

highly unequal opportunity, too”—Paul Krugman (2007, p. 249)

Yet there remains the continuing dispute over whether we should value

equality of opportunity or equality of outcome. Having finally recognized that

equity is an issue, the World Bank (2006) has been adamant in arguing (p. 3)

that the focus in economic development should be on equality of opportunity and

that “the policy aim is not equality in outcomes.” The Bank does include in its

concept of equity, along with equal opportunity, “that individuals should…be

spared from extreme deprivation in outcomes.” (p. 2) Yet this seems a very

limited qualification of its rejection of equality of outcomes and is far from a push

towards economic equality. The problem is that equality of opportunity for one

generation is to a large degree dependent on equality of condition (outcome) in

the previous generation.

That is, there are strong reasons to believe that there is a large degree of

dependence of equal opportunity for generation X on the equality of condition for

generation X-1, which is to say that equal opportunity within generation X

depends largely on the conditions under which members of generation X spend

their childhood. The point can be stated in the most narrow terms of human

capital formation. Children’s schooling and their healthcare in virtually all

societies are highly dependent on the social position and income level of their

families. This dependence is somewhat attenuated by the spread of public

education and by the existence of national healthcare programs in many

advanced industrial countries. But public schools are highly unequal in a way

that is associated with income inequality, and, where public schools are less

unequal, the upper classes tend to send their children to private schools.

Moreover, neither school outcomes nor healthcare outcomes are determined

simply by the formal systems of education and healthcare, but also by a broad

array of social conditions – inside and outside the family – that are more

advantageous for the progeny of the wealthy than for those of the poor. Yet if

there is not equality in the formation of these basic aspects of human capital,

there can hardly be equality of opportunity. And we might well stretch the

argument to point out that economically important aspects of personality – most

notably self-confidence and expectations – are affected to a significant extent by

one’s childhood social status and thus reinforce the dependence of opportunity

upon condition.

Jonathan Schwabish et al (2004) have examined the way these processes

operate in the connection between income inequality and social expenditures in a

set of fourteen relatively high-income countries (including observations on

several of those countries at different times). They work from the hypothesis

“that high levels of income inequality reduce public support for redistributive

social spending” and summarize their findings as follows: “The results suggest

that as the ‘rich’ become more distant from the middle and lower classes, they

find it easier to opt out of public programs and to either self insure or to buy

substitutes in the private market… The conclusion is that higher economic

inequality produces lower levels of those publicly shared goods which foster

greater equality of opportunity, income insurance and greater upward mobility.”

(pp. 32-33). The power of those with high incomes, they suggest, works through

the political process to undermine mobility (very much in accord with the

hypothesis suggested by Erikson and Goldthorpe in the quotation above).

To the extent that income inequality (inequality of outcome) is in conflict

with equality of opportunity, we would expect a positive association between

relative equality in the distribution of income and a higher degree of social or

economic mobility, which would tend to indicate a higher degree of equality of

opportunity. While the data on these issues are sparse and contested and are

even less available for low-income countries than for high income countries, they

tend to be consistent with these expectations. For example, Robert Erikson and

John Goldthorpe (1992, ch. 11) present results of a multivariate analysis of social

mobility across class groupings for a dozen “industrialized countries” showing a

significant role for income inequality in reducing mobility. They are, however,

cautious about the significance of their results, and (as the quotation above

indicates) see the need for more examination of the issue.

Jo Blanden et al (2005, Table 2) report intergenerational partial

correlations for eight European and North American countries (Britain, Canada,

Denmark, Finland, Norway, Sweden, West Germany, and the United States).

Their data cover fathers’ and sons’ earnings, with data on sons born between

1958 and 1970 (depending on the country). Combining these data with Gini

coefficients from the World Bank (2006, Table A2), we obtain the results shown

in Figure 1 – that is, a clear simple correlation between mobility and equality.

These results, of course, must be taken as only suggestive, as there are many

problems with the cross-country compatibility of the data, the number of

observations is very small, and the figure shows only the simple correlation.

Data for the U.S. at different points of time tend to support the same

conclusion. Daniel Aaronson and Bhashkar Mazumder (2005/2007) have

calculated the relationship between adult men’s log annual earnings and log of

annual family income in the previous generation. Their regression coefficients, or

intergenerational elasticities (IGEs), describe how much economic differences

between families persists. They report (their Table 1) the IGE for forty year olds

at the beginning of each decade from 1950 to 2000. These IGE’s show the same

pattern as do the Gini coefficients for family income for these years – i.e., a

decline from 1950 into the 1970s and then a upward movement to 2000. The

two sets of data are shown in Figure 2. While the patterns are not identical, they

are certainly suggestive of the positive relationship between equality and

mobility.

Using a different set of data and different methodology, Katherine Bradbury and

Jane Katz (2002) obtain similar results. They present calculations (their

Appendix Table A1) showing a notable reduction in mobility across income

quintiles for families from the 1970s through the 1990s. For example, they report

that in the 1970s 49.4 percent of families in the bottom income quintile were still

in the bottom quintile in 1979. For the 1980s and 1990s, the comparable figures

were 50.4 percent and 53.3 percent respectively. On the other extreme, while

49.1 percent of those families in the top quintile remained in the top quintile over

the 1970s, 50.9 percent remained there in the 1980s and 53.2 percent remained

there during the 1990s. The 1970s through the 1990s were of course a period of

rising income inequality in the United States, suggesting the inequality-immobility

connection. As noted, however, these findings of an equality-mobility connection

are not uncontested.

There is one study of a set of African countries that yields some support

for the equality-mobility connection. Denis Cogneau and Sandrine Mesplé-

Somps (2008) examine equal opportunity in terms of social and economic

mobility in Ivory Coast, Ghana (at two points in time), Guinea, Madagascar and

Uganda. While the results are not strong, the authors conclude (p. 17):

“Inequality of opportunity for income seems to correlate with overall income

inequality more than with national average income…” These results, however,

are confounded by numerous factors, including, for example, substantial regional

differences within countries and the difference associated with differences in

colonial history. Nonetheless, as with the results noted above for high-income

countries, this information is suggestive.

It would be reassuring to have more extensive data that would allow a

meaningful test of the hypothesis of an equality-mobility connection and thereby

support or undermine the argument that equality of opportunity is dependent on

equality of outcome/condition. However, given the implications of the data we do

have and the character of the argument for such a connection, there is good

basis to reject the idea that we can separate economic of opportunity from

equality of outcome.

Relative Equality as a Positive Instrument

“Using income inequality as an indicator and determinant of the scale of

socioeconomic stratification in a society, we show that many problems

associated with relative deprivation are more prevalent in more unequal

societies. We summarise previously published evidence suggesting that this

may be true of morbidity and mortality, obesity, teenage birth rates, mental

illness, homicide, low social capital, hostility, and racism. To these we add new

analyses which suggest that this is also true of poor educational performance

among school children, the proportion of the population imprisoned, drug

overdose mortality and low social mobility.”—Richard Wilkinson and Kate E.

Pickett (2007, p. 1965)

Beyond questions of definition and beyond philosophic disputes over the value of

relative equality, the distribution of income appears to play some important roles

in affecting various social outcomes that are widely valued. In particular, for

example, a more equal distribution of income appears to be a causal factor

bringing about better health outcomes and a reduction in violent crime. More

precisely, a more equal distribution of income is an indicator (a “marker”) for and

a part of a set of social relations that tend to generate these favorable outcomes.

In this sense, income equality has instrumental value as can be shown using the

health and crime examples.

Equality and Health Outcomes

No one disputes that absolute poverty is bad for one’s health. “Better to be rich

and healthy than poor and sick,” as the sardonic statement puts the matter.

Whether one examines the data within a particular society or across various

societies, the correlation between the level of income of an individual or a society

and health outcomes of the individual or society (e.g., morbidity or mortality) is

fairly clear. In both cases, however, the impact of income on health outcomes

appears to be much stronger at lower than at higher levels of income – that is, at

low levels of income a small increase of income is associated with a large

improvement of health outcomes, but at high levels of income an increase of

income has little impact on health outcomes.

Yet it is also true that if we look across societies (leaving aside for the

moment how we define “societies,” which turns out to be an important issue),

there is a negative correlation between the degree of income inequality and

health outcomes. More unequal societies tend to have worse health outcomes.

This is a controversial statement, as recognized even by its proponents (e.g.,

Wilkinson and Pickett, 2006, and Subramanian and Kawachi, 2004), and some

aspects of the controversy will be taken up shortly. Before I do so, however, it

will be useful to consider the reasons why inequality may cause poor health.

First, there is the phenomenon that a change of income makes more

difference for health outcomes at low levels of income than at high levels of

income. Thus in two societies with the same average level of income we would

expect the more equal one to have better health outcomes on average, but only

at the (small) expense in terms of health outcomes of those at the top; overall –

that is, the health outcomes of the more equal society would not be better at

every level.

Second, as noted above, more unequal societies appear to spend less on

social programs than do more equal societies. Accordingly, we would expect

public health services and the provision of health care for the low-income part of

the populace to be smaller in the more unequal societies. Thus, again we would

expect a more equal society to have better health outcomes on average, but

health outcomes would not necessarily be better for those at the upper income

levels – or, at least, the impacts would be small at the upper income levels.

Third, more unequal societies tend to generate greater stress levels, and

stress can work through psychosocial pathways to generate poor health. Income

inequality “pollutes” the social environment (to use Subramanian and Kawachi’s

term), creating divisions, resentments, and worries at all levels. Those people in

subordinate positions tend to be in a chronic state of tension, as they are unable

to attain the material standards of the society; those people higher up tend to

worry that they may not be able to maintain their position. Fear, it has

sometimes been noted, is a powerful motivator; it is also a powerful generator of

stress. Stress, it is well recognized, is a factor in a great variety of health

outcomes. Perhaps the most important implication of the psychosocial

explanation is that it would explain the finding of some studies that health

outcomes at all levels are better in more equal societies (e.g., Banks et al, 2006)

In many ways the psychosocial explanation of the role of inequality in

affecting health is the most compelling, but it is also difficult to establish and

controversial (e.g., Lynch et al, 2000). Indeed, the entire argument that health

outcomes are significantly affected by income distribution is controversial. In an

extensive review, Angus Deaton (2003) maintains that income distribution itself is

not a major determinant of population health. When controlled for several other

social variables, the relation between income distribution and health, Deaton

argues, drops from sight. But it seems that Deaton does not recognize the point

that income distribution is a “marker” for a whole set of measures of social-

economic differentiation. Controlling for other measures of this differentiation will

reduce, if not eliminate the significance of income distribution itself, but the basic

connection between the differentiation (for which income distribution is marker)

will not be refuted.

Another source of dispute over the role of income distribution in affecting health

outcomes arises from the way “society” is defined in various studies. In general,

studies that focus on larger social units – countries, states or provinces, and

large metropolitan areas – find more support for the connection between

inequality and ill-health than do studies where the units of observations are small

– e.g., towns or counties. Yet it would seem that the comparisons of hierarchy

and status that would affect stress tend to be derived from the larger society in

which people live. Social differences measured within the smaller units are less

likely, according to the psychosocial argument at least, to have a great impact on

health outcomes.

Although the equality-health connection remains controversial, the

evidence from a great many studies provides substantial support for the

argument that inequality (measured by income distribution or some other

indicators of social position) is a significant factor effecting negative health

outcomes. The points made by critics, while relevant, are not convincing. At the

same time, it is important to keep in mind that income level is still an important

factor affecting positive health. This is especially the case in low-income

countries, where rising per capita income is strongly associated with improved

health outcomes. This does not mean, however, that income distribution is

irrelevant for health outcomes in low-income countries. Not only does it appear

to have some direct effect outside the high-income countries (e.g., Subramanian

et al, 2003), but, in addition, patterns of inequality once established tend to

persist. As low-income countries experience economic growth, the impact of

inequalities already well-established will tend to have a greater role in health

conditions.

Equality and Crime

It seems likely that inequality would increase crime. With a high degree of

inequality, people at the bottom would tend to see themselves as especially

deprived and also see their position as unfair. They would then be more likely to

rationalize and engage in burglary and theft, crimes against property. Moreover,

the narrowly economic theories of crime, which see crime as a decision based on

a calculation of potential gains relative to potential costs (deriving from Gary

Becker, 1968), postulate a positive relation between income inequality and crime

based on the larger wealth differences between the rich and the poor – and

therefore the greater potential gain.

Yet, it is the connection between inequality and crimes of violence that is

found to be strong in various studies. For example, Morgan Kelly (2000, p. 530)

in a study based on data for U.S. counties and cities, finds that, “The behavior of

property and violent crime are quite different. Inequality has no effect on

property crime but a strong and robust impact on violent crime…By contrast,

[absolute] poverty and police activity have significant effects on property crime,

but little on violent crime.” In a cross-country study of inequality and violent

crime, Daniel Lederman et al (2002), using data from 39 countries, more than

half of which are low- or moderate-income countries, find a positive causal

connection between inequality and violent crime rates. (Both the studies by Kelly

and by Lederman et al control for a variety of related variables and use a variety

of statistical tests.) Gabriel Demombynes and Berk Ozler (2002) examine the

crime-inequality connection in South Africa, focusing on local areas. They find a

positive association between inequality and crime for both violent crime and

crimes against property.

While the argument based in the narrow economics approach pioneered

by Becker may have some relevance to the explanation of the inequality-crime

connection, it fails to come to grips with the strong relation between inequality

and violent crime. Explanations of the role of income inequality in effecting

violent crime tend to focus on the social impact of inequality, the impact of

inequality on social solidarity referred to earlier. In a 1982 article that has been a

reference point for the crime-distribution connection, Judith Blau and Peter Blau,

examining the issue in the United States, find a strong connection between

violent crime and racial and economic inequality. They offer as an explanation:

“In a society founded on the principle ‘that all men are created equal,’ economic

inequalities rooted in ascribed positions violate the spirit of democracy and are

likely to create alienation, despair, and conflict.” (Blau and Blau, 1982, p. 126).

This argument overlaps with the explanation, offered above, regarding the

intrinsic value of economic equality.

RESEARCH METHODOLOGY

Research methodology can be defined as, it is used to give a clear cut idea on what the

researcher is carrying out his or her research. In order to plan in a right point of time and

to advance the research work methodology makes the right platform to the researcher to

mapping out the research work in relevance to make solid plans.

More over methodology guides the researcher to involve and to be active in his or her

particular field of enquiry. Most of the situations the aim of the research and the research

topic won’t be same at all time it varies from its objectives and flow of the research but

by adopting a suitable methodology this can be achieved.

SOURCES OF DATA

The main source of obtaining necessary data for the study was Secondary Data.

This study is empirical in nature and hence secondary data is used to conduct the

research. The data was collected from the Internet by exploring the Secondary

sources available on websites.

TYPES OF RESEARCH :-

SECONDARY DATA –

Secondary Data: The secondary data constitutes of daily flows data which was

collected from RBI , from websites respectively.

I have collected the Secondary data from following sources:-

Newspaper – Hindustan Times, Times of India, Economic Times

Magazine - The Times. Harvard Business Review, 4P’s

Website/Internet – from different website

Book – Course book/ Philip Kotler

Notes- Professors Notes

TOOL USED-

Excel sheet, pie chart, and histogram

CHAPTER-IV

ANALYSIS AND FINDINGS

In the eight year period from 2000 to 2007, the world inflation averaged 3.9 per

cent per annum. Even the emerging and developing economies (EDEs) which

traditionally had very high inflation showed an average annual inflation at 6.7 per

cent. India’s inflation performance was even better at 5.2 per cent as measured

by WPI and 4.6 per cent measured by the consumer price index (CPI-IW). In

2008 the global financial crisis struck following which inflation rose sharply both

in advanced countries and EDEs as commodity and oil prices rebounded ahead

of a sharp “V” shaped recovery. Thereafter, inflation rate moderated both in

advanced economies and EDEs. In India too the inflation rate rose from 4.7 per

cent in 2007-08 to 8.1 per cent in 2008-09 and fell to 3.8 per cent in 2009-10.

However, the inflation rate backed up and stayed near double digits during 2010-

11 and 2011-12 before showing some moderation in 2012-13. Given India’s good

track record of inflation management, the persistence of elevated inflation for

over two years is apparently puzzling.

Table 1: In recent years India’s inflation rate has been

higher than world average

 (Year-on-year in per cent)

  2000-07 2008 2009 2010 2011 2012 2008-12

Average Annual Average

Global Inflation              

World 3.9 6.0 2.4 3.7 4.9 4.0 4.2

EDEs 6.7 9.3 5.1 6.1 7.2 6.1 6.8

Inflation in India              

WPI 5.2 8.1 3.8 9.6 8.9 7.6 7.6

WPI-Food 3.8 8.9 14.6 11.1 7.2 9.1 10.2

WPI-NFMP 4.3 5.7 0.2 6.1 7.3 5.2 4.9

CPI-IW 4.6 9.1 12.2 10.5 8.4 9.9 10.0

Indian inflation data pertains to financial year,          DEs: Emerging and Developing Economies,

WPI: Wholesale Price Index,                                  NFMP: Non-food manufactured products,

CPI-IW: Consumer Price Index for Industrial Workers.

Second, the deceleration of growth and emergence of a significant negative

output gap has failed to contain inflation. It is understandable if inflation goes up

in an environment of accelerating economic growth. There could be a situation

when the real economy is growing above its potential growth that could trigger

inflation what economists call an overheating situation. It is like an electric cable

exploding if we overload it with appliances beyond its capacity. But, that is not

the case. The Reserve Bank estimates suggest that the potential output growth

of the Indian economy dropped from 8.5 per cent pre-crisis to 8.0 per cent post-

crisis and it may have further fallen to around 7.0 per cent in the recent period.

Even against this scaled down estimate of potential growth, actual year-on-year

GDP growth has decelerated significantly from 9.2 per cent in the fourth quarter

of 2010-11 to 5.3 per cent in the second quarter of 2012-13. The loss of growth

momentum that started in 2011-12 got extended into 2012-13.

During a boom, economic activity may for a time rise above this potential level

and the output gap becomes positive. During economic slowdown, the economy

drops below its potential level and the output gap is negative. Economic theory

puts a lot of emphasis on understanding the relationship between output gap and

inflation. A negative output gap implies a slack in the economy and hence a

downward pressure on inflation. So, India’s current low growth-high inflation

dynamics has been in contrast to this conventional economic theory. Real GDP

growth has moderated significantly below its potential. Yet inflation did not cool

off.

Third, the Reserve Bank raised its policy repo rate 13 times between March 2010

and October 2011 by a cumulative 375 basis points. The policy repo rate

increased from a low of 4.75 per cent to 8.5 per cent. Still it did not help contain

inflation. The critics of the Reserve Bank argue that monetary tightening rather

than lowering inflation has slowed growth. Interest rate is a blunt instrument. It

first slows growth and then inflation. But the growth slowdown has not been

commensurate with inflation control.

The above three considerations will suggest that the recent persistence of

inflation is a puzzle. I will come back to the causes of the recent bout of inflation;

but before that, let me address the question as to why do we need to worry about

high inflation?

Costs of inflation

Inflation, though a nominal variable, imposes real costs on the economy. Let me

elaborate.

First, inflation erodes the value of money. As I mentioned earlier, India is a

moderate inflation country with the 62-year long-term average inflation rate being

6.7 per cent, notwithstanding occasional spikes in inflation. Yet during this period

the overall price level has multiplied 45 times. This means that ` 100 now is worth

only ` 2.2 at 1950-51 prices. Since price stability is a key objective of monetary

policy, central banks are obviously concerned with inflation.

Second, high and persistent inflation imposes significant socio-economic costs.

Given that the burden of inflation is disproportionately large on the poor, and

considering that India has a large informal sector, high inflation by itself can lead

to distributional inequality. Therefore, for a welfare-oriented public policy, low

inflation becomes a critical element for ensuring a balanced progress.

Third, high inflation distorts economic incentives by diverting resources away

from productive investment to speculative activities. Fixed-income earners and

pensioners see a decline in their disposable income and standard of living.

Inflation reduces households’ savings as they try to maintain the real value of

their consumption. Consequent fall in overall investment in the economy reduces

its potential growth. With a high inflation of over two years we are already seeing

a fall in household savings in financial assets, particularly in bank deposits. At the

same time households’ preference for gold has increased. This is putting

additional pressure on our balance of payments.

Fourth, economic agents base their consumption and investment decisions on

their current and expected future income as well as their expectations on future

inflation rates. Persistent high inflation alters inflationary expectations and

apprehension arising from price uncertainty does lead to cut in spending by

individuals and slowdown in investment by corporates which hurts economic

growth in the long-run.

Fifth, as inflation rises and turns volatile, it raises the inflation risk premia in

financial transactions. Hence, nominal interest rates tend to be higher than they

would have been under low and stable inflation.

Sixth, if domestic inflation remains persistently higher than those of the trading

partners, it affects external competitiveness through appreciation of the real

exchange rate.

Finally, as inflation rises beyond a threshold, it has an adverse impact on overall

growth. The Reserve Bank’s technical assessment suggests that the threshold

level of inflation for India is in the range of 4 to 6 per cent. If inflation persists

beyond this level, it could lower economic growth over the medium-term.

Causes of recent inflation spike

Let me first identify the high inflation period. The WPI inflation rate accelerated

from 7.1 per cent in December 2009 to a peak of 10.9 per cent by April 2010,

thereafter it remained stubbornly close to double digits till November 2011. Thus,

we experienced two years of high inflation between January 2010 to December

2011. During this two-year period, WPI inflation averaged 9.5 per cent per

annum. All the major components of inflation contributed to this surge. The

trigger for inflation first emanated from the failure of South-West monsoon of

2009, following which food prices rose sharply. Concurrently, the global economy

made a sharp recovery from the recession of 2009. As a result, global commodity

prices including oil rose substantially. India being a net commodity importer,

particularly oil, the intermediate prices rose. This quickly spilled over to non-food

manufactured products inflation, making the inflation process fairly generalised.

In the subsequent one year between January 2012 to December 2012 the

average WPI inflation moderated to 7.5 per cent led by all its major components

except fuel and power

The high inflation during 2010 and 2011 was a combination of both adverse

global and domestic factors as well as supply and demand factors.

First, crude oil and other global commodity price trends as well as exchange rate

movements are increasingly playing an important role in defining domestic

prices. With the gradual external liberalization, the Indian economy is much more

open and globalised now than ever before. Currently, over 85 per cent of

demand for crude oil in India is met by imports. The imported Indian basket of

crude oil price rose from US $ 49 per barrel in April 2009 to an average of US $

79 per barrel in 2010 and further to US $ 108 per barrel in 2011 and remained

high at US $ 110 per barrel in 2012. Global metal prices, reflected in the IMF

index, rose by 48 per cent in 2010 and again by 14 per cent in 2011 before

moderating by 17 per cent in 2012.

Moreover, the Rupee depreciated from an average of 45.7 per US dollar in 2010

to 46.7 in 2011. The depreciation of the Rupee was particularly sharp in 2012 as

the Rupee averaged 53.4 per US dollar. Empirical evidence suggests that one

percentage point change in the Rupee-dollar exchange rate has 10 basis points

impact on inflation. While, during 2010 and 2011, global commodity prices had

an adverse impact on domestic inflation, the depreciation of the Rupee more

than offset the beneficial impact of modest softening of global commodity prices

on domestic inflation in 2012.

There is another important dimension of India’s external sector linkage,

particularly towards explaining high non-food manufactured product inflation.

Analysis suggests that the pass-through from non-food international commodity

prices to domestic raw material prices has increased in the recent years

reflecting growing interconnectedness of domestic and global commodity

markets. This trend is also corroborated by corporate finance data which show

that the share of raw material costs as a percentage of both expenditure and

sales has been rising. Therefore, as the economy is increasingly getting

integrated, external sector developments are progressively becoming important

for domestic price behavior.

Second, while the growth in domestic agricultural production has stagnated

around 3 per cent per annum, the demand for food has increased. Although the

country currently has sufficient foodgrains stocks, it is not yet self-sufficient in

pulses and oilseeds. Further, demand for protein based products like meat, eggs,

milk and fish as well as fruits and vegetables has increased substantially with

rising per capita income. The protein inflation has assumed a structural

character. This has also resulted in substantial divergence between WPI and CPI

as food has a larger share in the consumer price index basket.

Further, with the increase in income, real consumption expenditure has grown

significantly. Recently released key results of the NSSO 68th round survey

(2011-12) on household consumption expenditure indicate that real per capita

consumption expenditure in rural areas increased at an average rate of 8.7 per

cent during 2009-12 as compared with 1.4 per cent during 2004-09. Similarly,

urban real per capita consumption increased by 6.7 per cent as against 2.4 per

cent in the corresponding period. The fact that real consumption expenditure

expanded during a period of high food inflation indicates that the demand

remains strong, feeding into higher price levels as supply elasticities remain low.

The high food prices are supported by increase in wages. The average nominal

rural wage increase was of the order of 17 per cent during 2008-09 to 2012-13 so

far. Even after adjusting for high rural consumer inflation, real wage increase

over 6 per cent per annum was significant. In the formal sector, company finance

data suggest that the wage bill has risen at a faster rate since the middle of

2009-10. As wages increase, entitlement goes up, and consequently demand

and preference for essential commodities increases.

Table 2: In recent years both fiscal deficit and current account

deficit have increased; while agricultural growth stagnated,

real rural wages increased sharply

(In per cent)

  2000-08 08-09 09-10 10-11 11-12 12-13 2008-13

Average Annual Average

Fiscal/External              

GFD/GDP 4.4 6.0 6.5 4.8 5.7 5.1 5.6

CAD/GDP -0.04 -2.3 -2.8 -2.8 -4.2 -4.6 -3.3

Growth              

GDP 7.2 6.7 8.6 9.3 6.2 - 7.7

Agricultural GDP 3.0 0.1 0.8 7.9 3.6 - 3.1

Rural Wages              

Nominal 3.3 10.7 15.8 18.3 19.8 18.4 16.6

Real @ -0.4 0.6 2.1 8.3 11.5 9.2 6.3

- Not available,    @ Nominal wages adjusted for consumer price index for agricultural labourers,

GFD: Gross fiscal deficit of the centre,                GDP: Gross domestic product,           

CAD: Current account deficit.

Third, with the persistence of near double-digit inflation in 2010 and 2011, the

medium- to long-term inflation expectations in the economy have risen,

underscoring the role of higher food prices in expectations formation. If inflation is

expected to be persistently high, workers bargain for higher nominal wages to

protect their real income. This creates a pressure on firms’ costs and they may in

turn increase prices to maintain their profits. Independently, the producers’ own

inflation expectations also affect inflation directly by influencing their pricing

behaviour. If companies expect general inflation to be higher in the future, they

may believe that they can increase their prices without suffering a drop in

demand for their output.

Fourth, there has also been added stimulus from the crisis driven fiscal and

monetary policy. Fiscal consolidation process was reversed in 2008-09 which

impacted the macroeconomic conditions . Higher fiscal expansion also impedes

efficacy of monetary policy transmission. The moderation in private demand

resulting from anti-inflationary monetary policy stance is partly offset by the fiscal

expansion. Let me now turn to the role of monetary policy in a little more detail.

Role of monetary policy

The current phase of high inflation followed the global financial crisis, which

affected India’s economy, though not with the same intensity as advanced

countries. India, though initially somewhat insulated from the global

developments, was eventually impacted significantly by the global shocks

through all the channels – trade, finance and expectations channels. The

Reserve Bank, like most central banks, took a number of conventional and

unconventional measures to augment domestic and foreign currency liquidity,

and sharply reduced the policy rates. In a span of seven months between

October 2008 and April 2009, there was an unprecedented policy activism. For

example: (i) the repo rate was reduced by 425 basis points to 4.75 per cent, (ii)

the reverse repo rate was reduced by 275 basis points to 3.25 per cent, (iii) cash

reserve ratio (CRR) of banks was reduced by a cumulative 400 basis points of

their net demand and time liabilities (NDTL) to 5.0 per cent, and (iv) the total

amount of primary liquidity potentially made available to the financial system was

over ` 5.6 trillion or over 10 per cent of GDP. The Government also came up with

various fiscal stimulus measures.

The Reserve Bank, in October 2009, highlighted the need for exit from crisis-time

monetary policy stimulus. But it was not easy to exit from the excessively

accommodative monetary policy stance for two main reasons. First, the year-on-

year headline WPI inflation had just barely turned positive and was entirely driven

by food inflation . Industrial production had started to pick up but exports were

still declining. Hence, recovery was not assured. Second, globally, most central

banks were in favour of continuing stimulus. On the other hand, domestically,

consumer price inflation was high, households’ inflation expectations were rising

and surplus liquidity was substantial. These developments had inflationary

consequences.

Nevertheless, the Reserve Bank withdrew the unconventional liquidity support

measures and restored the statutory liquidity ratio (SLR) of banks to its pre-crisis

level. At the same time, monetary policy had to recognise that the economic

growth was recovering from the crisis time slowdown and any aggressive

monetary tightening at that point would have affected the recovery.

Subsequently, in January 2010, the CRR was raised by 75 basis points of banks’

net demand and time liabilities (NDTL), and policy rate was increased for the first

time in March 2010 by 25 basis points. Between March 2010 and October 2011

the policy repo rate was raised by 375 basis points to contain inflation and

anchor inflationary expectations. It may, however be emphasised that policy rate

was raised from a historically low level of 4.75 per cent. As inflation had already

risen sharply, the real policy rate during this period was negative. Thus, monetary

policy was still accommodative though the extent of accommodation was

gradually closing

Table 3: In recent years while the real bank lending rates remained relatively low,

the real policy rate turned mildly negative

(Year-on-year in per cent)

  2000-08 08-

09

09-

10

10-

11

11-

12

12-

13

2009-13

Average Annual Average

Monetary Block              

Money Supply * 16.6 20.5 19.3 16.0 16.1 13.3 17.0

Non-food Credit* 23.8 24.5 14.6 21.2 18.7 16.5 19.1

Weighted Average Bank lending

rate

12.9 11.5 10.5 11.4 12.6 - 11.5

Real Weighted Average lending

rate @

7.7 3.4 6.7 1.8 3.7 - 3.9

Policy repo rate 7.0 7.4 4.8 5.9 8.1 8.0 6.8

Real Policy Rate @ 1.7 -0.7 0.9 -3.6 -0.8 0.4 -0.8

* Data for 2012-13 up to 11 January 2013,                                    - Not available,

@ Nominal rate adjusted for average WPI inflation.

The policy rate was left unchanged at 8.5 per cent between October 2011 and

March 2012. Consequently, the inflation rate started trending down from October

2011 and the real policy rate tuned positive since January 2012. This enhanced

the efficiency of monetary policy which was reflected in easing of the inflation

rate. Accordingly, the Reserve Bank reduced the policy rate by 50 basis points in

April 2012 and again by 25 basis points in the last monetary policy review on

29th January 2013. Currently the CRR stands at a historically low level of 4 per

cent of NDTL of banks and policy repo rate is at 7.75 per cent.

FINDINGS AND INFERENCES

Inflation affects both the business cycle and unemployment. There is an inverse

relationship between rate of inflation and rate of unemployment. This relationship

involves a trade off that is paid a higher rate of inflation to reduce the

unemployment and for reducing the inflation, price in terms of a higher rate of

unemployment has to be borne (Ahuja, 2007). Yields of the airline industry are

decreased with an alarming rate because of Inflation, which will affect the

financial state of the airline industry and will result into a low employment position

in the industry.

Inflation is causing an increase in the price of goods and services and decrease

in the purchasing power of the customers. Inflation will cause an increase in the

cost of the fuel and it will result into an increase in the prices of tickets and

cancellation of routes in the airline industry. Demand in the airline industry is

reduced significantly. Increase in the price of the fuel will cause an increase in

the overall costs of the airline industry (U.S. Airline Industry Headed toward

'Catastrophe' at Current Oil Prices, 2006).

Changes in the employment and interest rates also relate to the business cycle

or economic cycle. Business cycle is a pattern of different periods of economic

growth and a declining period in an industry (Dwivendi, 2006). Inflation will force

the industry towards fiscal decline and it will cause financial instability in the

industry.

Unemployment in the airline industry will affect the quality of the services

because new people will not be hired due to financial instability in the industry.

To provide better services to its customers, it is necessary for the company that

skilled employees should be there. But unemployment position will cause a poor

service and low demand in the industry. Unemployment will force the industry

towards the recession period.

Business cycle- Airline industry has a long-term business cycle and it causes low

profit and return to its shareholders. In expansion and boom cycle of business,

both the output and employment increase till the full employment of resources

and production at the highest possible level (Ahuja, 2007). This period is followed

by the depression period and then by revival period. In second stage, level of

employment will be decreased and the situation of unemployment will appear at

a large scale in the industry.

Currently, fuel prices are increasing and hitting the airline industry badly. Airline

industry is in the crisis situation and it has caused cuts and curtailment in

different airlines. Business model of the industry is not working with the fuel

prices and the current level of capacity (oil crisis in the Airline industry, 2008).

Airline industry is operating in a deregulated environment where firms

themselves decide prices and routes in a given market condition, which is

causing problems for the industry. To show how bad the airlines have suffered

through current economic conditions here is a chart that denotes aircraft type to

be grounded aswell as job cuts to remain afloat:

LIMITATIONS

Inflation is usually considered to be a problem when the inflation rate rises above

2%. The higher the inflation, the more serious the problem it is. In extreme

circumstances hyper inflation can wipe away peoples savings and cause great

instability, e.g.INDIA The inflation rate in India was recorded at 6.1% (WPI) in

August 2013. Historically, from 1969 until 2013, the inflation rate in India

averaged 7.7% reaching an all time high of 34.7% in September 1974 and a

record low of -11.3% in May 1976.

The inflation rate for Primary Articles is currently at 9.8% (as of 2012). This

breaks down into a rate 7.3% for Food, 9.6% for Non-Food Agriculturals, and

26.6% for Mining Products. The inflation rate for Fuel and Power is at 14.0%.

Finally, the inflation rate for Manufactured Articles is currently at 7.3%.

. However, in a modern economy, this kind of hyper inflation is rare. Usually

inflation is accompanied with higher interest rates so savers do not see their

savings wiped away. However, inflation can still cause problems.

2. Interest rate affects the purchasing power of the people at retail level. But this

situation also is overcome by people at retail level with the help of increase in

money supply by government through increase in dearness allowance and other

monetary benefits.

CHAPTER-V

CONCLUSION AND RECOMMENDATION

RECOMMENDATION

The challenges to India’s sustained economic growth are considerable. Both internal and

external factors will weigh heavily as India strives to maintain current growth trends.

Poor infrastructure, stagnate reform, and underperforming industrial sectors will continue

to cost India considerably. These challenges are well within India’s realm to resolve,

however other challenges exist which are unfortunately, largely outside of India’s direct

influence. First, direct competition in the global economy could make other entrants more

attractive. China, for one, is closely studying the Indian model and hopes to overtake

India’s current position in software development by the end of the decade continuing

hostilities in Kashmir. Thomas Friedman contends that while the region is relatively

volatile, increasing trade and economic integration has helped and will continue to help

stave of future conflicts .

The Indian economy continues to grow as a global economic powerhouse. India’s

development is particularly impressive given the considerable obstacles in fostering

economic growth. These obstacles are truly epic with widespread poverty, limited natural

resources, and one of the largest populations. While this growth is impressive, India

continues to have hundreds of millions in abject poverty and much of the economic

prosperity has been fairly localized to specific regions and sectors. The booming

software and technology sector receives daily world attention, however those languishing

in poverty remain largely ignored. Thus, it is important to understand whether the

nascent economic prosperity has also caused an increase in income inequality. Economic

theories vary on both the causes and implications of income equality, however empirical

evidence indicates that India has been able to maintain low income inequality during

periods of significant economic growth. It is important to not, that India’s economic

miracle is a recent phenomenon and that future prospects are far from certain. How well

the Indian people and government will be able to channel current growth into long-term

prosperity remains to be seen.

CONCLUSION

In this part the secondary data regarding of the rate of the inflation and the price of the

various commodity we reached the conclusion that though the inflation got negative no

difference is in the level of the price rise in the economy. There is a strong negative

relationship between weekly inflation rate of the two year 2008-2009. The inflation of the

both the year went in the opposite direction.

India, the 12th largest and the second fastest growing major economy in the world, has

been experiencing significant price instability in the recent past. Even though, the sources

of the phenomenon can be attributed to both internal as well as external factors,

correction of the problem will have to take place mainly though effective domestic

economic policies for both the demand management and supply adjustment. But the

domestic policy measures initiated in India have not seen bringing any significant effects

in controlling price volatility in the country.

It is also an appropriate time to critically think about the quality of the official inflation

statistics published in India. No single price index will be able to provide a measure

inflation that can be used for all the purposes. Five official price indices are published in

India, of which one is WPI and the other four are CPIs. All the five indices suffer from

some inherent deficiencies. The most common deficiencies include importantly the fact

that our compilation procedures neither systematically incorporate new goods and

services as they enter the market nor adjust for changes in the quality of goods and

services over time. Consequently, our price indices could not be used to gauge inflation

in the economy.

Our headline inflation measure, WPI, is extremely inadequate to track the inflationary

pressure in the economy for it excludes services, and it is more susceptible to the problem

of base effect. Moreover, it does not adequately reflect the expansion and quality

improvement of commodities. Therefore, the reported inflationary situation in India,

determined using the WPI, is unreliable to a great extent. In the absence of a reliable

measurement of inflation it is difficult to analyze the exact impact of the

inflation/deflation and announce appropriate policies to ensure price stability. It is high

time for India to revise the method of calculating price index and inflation measurement

so as to enable a proper and periodic assessment and control of inflation in the economy.

It would be desirable to take into consideration the following points while preparing a

price index and measuring inflation in India.

APPENDICESBIBLIOGRAPHY

Ekelund, Robert B., and William P. Gramm (1969), “A Reconsideration of

Advertising Expenditures, Aggregate Demand and Stabilization”, Quarterly

Review of Economics and Business (summer), pp.71-77.

Elliot, C. (2001), “A Cointegration Analysis of Advertisement and Sales

Data”, Review of Industrial Organization, Vol. 18, pp.417-26

Greunes, M.R., Kamershcen, D.R., and Kllin, P.G. (2000), “ The

Competitive Effects of Advertising in the US Automobile Industry 1970-

94”, International Journal of Economies and Business, Vol. 7(3), pp. 245-

61.

Gujrati, Damodar N. (2003), Basic Econometrics, Mc-Graw- Hill

Companies, Inc.: New York.

Guo, Chiquan (2003), “ Cointegration Analysis of Advertising Consumption

Relationship”, Journal of the Academy of Business and Economics,

February, Obtained through the internet: www.findarticles.com, [accessed

on 3rd February, 2008].

Hansens, M. Dominique (1980), “Bivariate Time Series Analysis of the

Relationship between Advertising and Sales”, Applied Economics, pp-329-

39

Jagpal, Harsharanjeet S. (1981), “ Measuring Joint Advertising Effects in

Multiproduct Firms: Use of a Hierarchy-of-Effects Advertising- Sales

Model”, Journal of Advertising Research, Vol. 21 (1), pp. 65-75

STUDENT UNDERTAKING

I hereby certify that this is my original work and it has never been submitted elsewhere

Project Guides:

(BY NITIN GULATI) DR NITI SAXENA