effect of inflation on indian economy

8/8/2019 Effect of Inflation on Indian Economy

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Presented by

Ramniwas


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The change in the price of a set of goods &services in an economy over a period oftime is inflation.

It simply means : Too much moneychasing, too few goods.

Inflation is a state in which the value ofmoney is falling i.e. price are rising.

If inflation of any week is 10.5%. It simplymeans that 10.5 percent rise in the pricesagainst the same week over previous year.


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1. Demand pull inflation: inflation

caused by th

e demand excess insupply in short run.

1. Cost push inflation: the

autonomous increase in the price ofgoods comes in cost push inflation.It include material cost & labourcost.


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There is mainly two methods tomeasure inflation:

1. WPI( WHOLE PRICE INDEX): The Wholesale Price Index or WPI is

the index which shows increase

price of whole sale goods. India is the only major country who

adopt this method to track inflation.


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Consumer Price Index-it measuresthe prices of a selection of goods and

services purchased by a "typicalconsumer.

157 countries out 181 countries use

this tool to track inflation.


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Increase in costs.

Decrease in returns from investments .

High taxes .

Slow infrastructure growth.

Difficulty in making budget by a

company. Devaluation of money.

Problems for the trading activities.


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The inflation in India is in sharp contrast to thesituation in rest of the world. But it start risingfrom the june,2009 when recovery was in its

initial phase and the growth rate at that time7.5% which was quite low as compared to itwas pre Lehman crisis.

this graph will show the trend of increase ininflation.


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As we can predict from the graph that inthe initial phase of recovery, when the

growth

was slow supply side wasresponsible particularly escalation infood prices were main reasons. But as thegrowth become healthier demand side

also came into play mainly the coreinflation was increasing. The followinggraph will help us to understand the

growth

in manufacturing sector.


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It is clear now that inflation caused byboth supply side as well as demand side

but initial stage was driven byh

ikes inprimary article. these are reasons forthese hikes:

1. Weak South-West monsoon

2. Rise in MSP(minimum support price)

3. High production cost

4. Government decision to deregulate fuelrices.


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Monetary policy is the process by which themonetary authority of a country controls thesupply of money, often targeting a rate of interestto attain a set of objectives oriented towards the

growth and stability of the prices. So thegovernment has to tighten policies with somemore extent to rein the inflation.

Management of current inflation require bothdemand side as well as supply side approaches.So monetary has to addressed supply side withgradual, calibrated actions on both interest ratesand liquidity options.


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As Indian economy comes out of slowdown phase very strongly the high inflationappears to create dilemma for the

policymakers to make ch

oice betweenh

igh

growth and high inflation. In my opinioneven at the cost of slightly lower growth,moderating the inflation is crucial as theeffect of high inflation is much more and

specially for a country like India wherepeople in unorganized sector is huge andthere is no protection for them against pricehikes.

effect of inflation on indian economy

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