Inflation in India 2009 India has been the cynosure for the past few years in the global economic arena owing to its changing inflation patterns. Between the fiscal year 2004-05 and 2007-2008, India had experienced an average growth rate of more than 9%, but the global crunch pinched the economy so hard that the economy gave in to the adverse external shocks and few sectors experienced a slump. Inflation in India 2009 stands at 11.49% Y-o-Y. The inflation rate is referred to the general rise in prices, taking into consideration the common man's purchasing power. Inflation is mostly measured in CPI.
In 2008 industry bodies, policy makers were all worried with the steadily-mounting inflation. The middle of the year augmented the tension as the majority of the population was wary of a double-digit inflation but things changed within few months. Inflation in India actually fell below 1% during the third week of March, 2009. The moderate inflation is the desirable of all too much of it or too less of it, in every way worries the policy makers. Understanding in the right manner inflation is such a situation when too many people chase too few goods and too few services, which automatically makes the prices of the goods and services high because of the high demand. At the same time, when inflation falls below the desired mark (in the negative territory), then too few people chase too many goods and too many services, making the prices of the goods and services under-priced. The India inflation is actually measured by the Y-o-Y variation in the Wholesale Price Index. While the inflation as measured by WPI is at present at a very low level, the inflation measured by the Consumer Price Index is at elevated levels of 9 to 10%.
Inflation in India statistics Year Ja Jan
Feb
Mar Ap Apr
May Jun
Jul
Aug
Sep
Oct
Nov
2009 10.45 9.63 8.03 8.70 8.63 9.29 11.89 11.72 11.64 11.49 -
D ec -
2008 5.51
5.47 7.87 7.81 7.75 7.69 8.33
9.02
9.77
10.45 10.45 9.70
2007 6.72
7.56 6 .7 .72 6 .6 .67 6 .6 .61 5.69 6 .4 .45
7.26
6.40
5 .5 1
5.51
5.51
2006 4.39
5.31 5 .3 .31 5 .2 .26 6 .1 .14 7.89 6 .9 .90
5.98
6.84
7 .6 3
6.72
6.72
flation is caused due to several economic factors:
•
When the government of a country print money in excess, prices increase to keep up with the
increase in currency, leading to inflation. •
Increase in production and labor costs, have a direct impact on the price of the final product,
resulting in inflation. •
When countries borrow money, they have to cope with the interest burden. This interest burden
results in inflation. •
High taxes on consumer products, can also lead to inflation.
•
Demands pull inflation, wherein the economy demands more goods and services than what is
produced. •
Cost push inflation or supply shock inflation, wherein non availability of a commodity would lead to
increase in prices. Problems The problems due to inflation would be:
•
When the balance between supply and demand goes out of control, consumers could change their
buying habits, forcing manufacturers to cut down production. •
The mortgage crisis of 2007 in USA could best illustrate the ill effects of inflation. Housing prices
increases substantially from 2002 onwards, resulting in a dramatic decrease in demand. •
Inflation can create major problems in the economy. Price increase can worsen the poverty
affecting low income household, •
Inflation creates economic uncertainty and is a dampener to the investment climate slowing growth
and finally it reduce savings and thereby consumption. •
The producers would not be able to control the cost of raw material and labor and hence the price
of the final product. This could result in less profit or in some extreme case no profit, forcing them out of business. •
Manufacturers would not have an incentive to invest in new equipment and new technology.
•
Uncertainty would force people to withdraw money from the bank and convert it into product with
long lasting value like gold, artifacts. Inflation in India Economy India after independence has had a more stable record with respect to inflation than most other developing countries. Since 1950, the inflation in Indian economy has been in single digits for most of the years Between The Between The Between The
inflation
inflation
inflation
on
on
on
an
an
an
average
average
average
was
was
was
at
1950-1960 2.00%
at
1960-1970 7.2%
at
1970-1980 8.5%.
Inflation At Present Inflation in India a menace a few years ago is at a 30 year low. The inflation ended at a low of 0.61% in the week ended May 9, 2009 this after reaching a 16 year high of 12.91 % in August 2008, bringing in a sigh of relief to policymakers.
On March 19, 2010, the Reserve Bank of India raised its benchmark reverse repurchase rate to 3.5% percent, after this rate touched record lows of 3.25%. The repurchase rate was raised to 5% from 4.75% as well, in an attempt to curb Indian inflation.
India’s 2009-10 Economic Survey Report suggests a high double-digit increase in food inflation, with signs of inflation spreading to various other sectors as well. The Deputy Governor of the Reserve Bank of India, however, expressed his optimism in March 2010 about an imminent easing of Indian wholesale price index-based inflation, on the back of falling oil and food prices. For 2009, Indian inflation stood at 11.49% Y-o-Y. This rate reflects the general increase in prices, taking into account the purchasing power of the common man. According to the Economic Survey Report for 2009-10, economic growth decelerated to 6.7% in 2008-09, from 9% in 2007-08. The economy is expected to grow by 8.7% in 2010-11, with a return to a growth rate of 9% in 2011-12.
The Indian method for calculating inflation, the Wholesale Price Index, is different from the rest of world. Each week, the wholesale price of a set of 435 goods is calculated by the Indian government. Since these are wholesale prices, the actual prices paid by consumers are far higher.
In times of rising inflation, this also means that the cost ofliving increases are much higher for the populace. Cooking gas prices, for example, have increased by around 20% in 2008. With most of India’s vast population living close to or below the poverty line, inflation acts as a ‘Poor Man’s Tax’. This effect is amplified when food prices rise, since food represents more than half of the expenditure of this group. The dramatic increase in inflation will have both economic and political implications for the government, with an election due within the year. Economic growth in emerging markets has slowed but is far from over. With the BRIC countries (Brazil, Russia, India and China) alone accounting for more than 3 billion people, and with these people consuming more resources every year, it is likely that higher inflation rates will be with us for a good while yet - and that is worrying news for the government of India.
Causes of Inflation
A sustained rise in the prices of commodities that leads to a fall in the purchasing power of a nation is called inflation. Although inflation is part of the normaleconomic phenomena of any country, any increase in inflation above a predetermined level is a cause of concern. High levels of inflation distort economic performance, making it mandatory to identify the causing factors. Several internal and external factors, such as the printing of more money by the government, a rise in production and labor costs, high lending levels, a drop in the exchangerate, increased taxes or wars, can cause inflation.
Different schools of thought provide different views on what actually causes inflation. However, there is a general agreement amongst economists that economic inflation may be caused by either an increase in the money supply or a decrease in the quantity of goods being supplied.The proponents of the Demand Pull theory attribute a rise in prices to an increase in demand in excess of the supplies available. An increase in the quantity of money in circulation relative to the ability of the economy to supply leads to increased demand, thereby fuelling prices. The case is of too much money chasing too few goods. An increase in demand could also be a result of declining interest rates, a cut in tax rates or increased consumer confidence. The Cost Push theory, on the other hand, states that inflation occurs when the cost of producing rises and the increase is passed on to consumers. The cost of production can rise because of rising labor costs or when the producing firm is a monopoly or oligopoly and raises prices, cost of imported raw material rises due to exchange rate changes, and external factors, such as natural calamities or an increase in the economic power of a certain country. An increase in indirect taxes can also lead to increased production costs. A classic example of cost-push or supply-shock inflation is the oil crisis that occurred in the 1970s, after the OPEC raised oil prices. The US saw double digit inflation levels during this period. Since oil is used in every industry, a sharp rise in the price of oil leads to an increase in the prices of all commodities. While money growth is considered to be a principal long-term determinant of inflation, non-monetary sources, such as an increase in commodity prices , have played a key role in triggering inflation in the past four decades. Inflation has become a major concern worldwide in 2008, with global prices rises in oil, food, steel and other commodities being the culprit.
