A Presentation on Inflation andTrend Analysis in the Indian

Context Post-Reforms 1991-92Context Post-Reforms 1991-92

Compiled and Presented by:Dhananjay Ghei 09HS2023Deepant Kandoi 09HS2024Sneha Chilivery 09HS2002Ila Tiwari 09HS2001

INFLATION : An Overview

What is Inflation?In economicterms, inflationis a rise in thegenerallevel of prices oflevel of prices ofgoods andservices in aneconomyover a period oftime .

Causes of Inflation

Demand Pull Inflation Cost Push Inflation

AD Curve shifts rightwards due to favorable demand shocks in the economy.

Output increases resulting in more of employment in the

economy.

AS curves shifts leftwards due to adverse supply shocks in

the economy.

Output does not increase.

General Effects• Decrease in the purchasing

power of the currency • Lenders or depositors who are

paid a fixed rate of interest on loans or deposits will lose purchasing power from their interest earnings, while their borrowers benefitborrowers benefit

• No effect on the real values of commodities, gold, real estate

Negative effects of inflation

• Hoarding of goods• Social unrest and

revoltrevolt• Hyperinflation• Shoe leather costs• Menu costs

Inflation In India : Analysis

• Taking the base year as 1993-94 we have doneanalysis on the inflation rate in India and thenwe have found out various causes and reasonsfor inflation and the various measuresgovernment has taken to curb inflation atgovernment has taken to curb inflation atvarious years.

• We also try to see the trade off betweeninflation and unemployment in the Indiancontext.

Inflation In India : Analysis

We have used WPI index in our calculations everywhere.

Why we chose WPI for our analysis?Why we chose WPI for our analysis?• wider commodity coverage• available on weekly basis• computed at all-India basis

Year WPI (All Commodities)

19931993--9494 100100

19941994--9595 112.6112.6

19951995--9696 121.6121.6

19961996--9797 127.2127.2

19971997--9898 132.8132.8

19981998--9999 140.7140.7

19991999--0000 145.3145.3

20002000--0101 155.7155.720002000--0101 155.7155.7

20012001--0202 161.3161.3

20022002--0303 166.8166.8

20032003--0404 175.9175.9

20042004--0505 187.3187.3

20052005--0606 195.5195.5

20062006--0707 206.1206.1

20072007--0808 215.9215.9

20082008--0909 233.9233.9

20092009--1010 242.7242.7

Average Inflation in India After Reforms

Average Inflation = (12.6+9.0+5.6+5.6+7.9+4.6+10.4+5.6+5.5+9.1+11.4+8.2+10.6+9.8+18+8.8)/16 (in percent)

Average Inflation in India after reforms = 8.92%

Inflation Trend over the Years

Inflation… Why???The earlier crisis, 1973-75 and 1979-81 were

the result of:-• War• Oil prices• Drought

What government did???

• Temporary decrease in food production• Food Rationing• Increase in imports• Petroleum production

Crisis of 1990-91

Major reasons:-• flawed policies during the preceding years• The mini oil shock following the outbreak of

the Gulf War onlythe Gulf War only• Galloping Fiscal Deficit• Continuous increase in the price of food

articles• Low industrial growth sector

Government Reaction

Action Plan of GovernmentInstead of just crisis

management:-• attempt to bring about a

more fundamental or a

Economic Recovery

more fundamental or aparadigm shift inmacroeconomic management

• The change in BOP.• New Economic Policies• Increment in Foreign Exchange

Changes in BOP

• Till 1990 reductions in the aid flow and restrictions on foreign inflows

• New Policies• New Policies encouraging growth in exports change in the policy towards foreign investment

ResultExport growth has helped reduce the trade deficit from US $ 9.4 billion in 1990-91 to US $ 2 billion in 1994-95.

Economic policies

• Opening for international trade Investment • Deregulation• Initiation of Privatization• Tax reforms • Tax reforms

Thus moving from Socialist to CapitalistEconomy

Inflation during 2008-09

• Not only high percentage but consistent

• Tight money policy• Severe in food grains group• Crude Oil Price hikes

Reasons for Inflation in 2008-2009

• Crude Oil prices• Hype for inflation• New printing of money• New printing of money• Reduced interest rate• Increase in prices of food

grains, oilseeds etc

Reasons ( Contd.. )

Shocks:• Global Commodity Price

Shock– All commodity index– Food price Index

• Edible oil (Palm): Net Importer

• Effect on India: Primary food & edible oils

– Iron Ore: Net exporter– Mineral Oil: Net Importer

India : Unemployment Rate Data from 2002-2010

Year Unemployment Rate in India( in % )

2002 8.8

2003 8.8

2004 9.5

2005 9.2

2006 8.9

2007 7.8

2008 7.2

2009 6.8

2010 10.7

Philips Curve in context of India in the short run

Conclusions

• In India, post reforms there has been inflationmostly because of global scenarios which mayberecession or rising crude oil prices that led totremendous increase in the general price level.tremendous increase in the general price level.

• With the introduction of reforms likeGlobalization in India, the economy has beenaffected to a larger extent because of changeshappening in the outside world in both the timeswhether good or bad.

Conclusions (contd..)

• The Philips Short run curve holds good in theIndian context on the data of 2002-10. Itshows that there is definitely a trade offbetween inflation and unemployment level inbetween inflation and unemployment level inthe economy and the role of implementingeffective policies to cure either of them.

References for Data

Reserve Bank of India Websitewww.rbi.org.in

Commerce and Industry Ministry WebsiteCommerce and Industry Ministry Websitewww.commerce.nic.in

Govt. of India Ministry of Labour Websitewww.labour.nic.in