INFLATIONMeaning, Measures and Impact on Indian Economy

BySurajit BasakSananda DasguptaSangeeta NandiSuvajit DasSougata DharBandel Bholanath Ghosh

By PresenterMedia.com

Institute Of Engineering & ManagementPGDM 1ST YEAR

In a broad sense, inflation is that state in which the prices of goods and services rise on the one hand and value of money falls on the otherWhen money circulation exceeds the production of goods and services, then inflation takes place in the economy

INFLATION: Meaning

It is a continuous process.It refers to a rise in prices in general.It involves a considerable increase in prices.It causes a decline in the purchasing power of money.

Features of Inflation

1. Demand Pull Inflation2. Cost Push Inflation

Types of Inflation

The demand for goods and services increases and production remains the same or does not increase as fast. The excess demand results in prices being “pulled up”.

Demand pull inflation occurs when total demand for goods and services exceeds the total supply.

This type of inflation happens when there is an inflationary gap

Demand Pull Inflation

6

Demand Pull Inflation

P2

P1

Q2Q1

Aggregate Supply

Aggregate Demand 2

Aggregate Demand 1

Price $

Real GDP ($)

Caused by an increase in the cost of production. Increased costs “push up” the price level.

Cost push inflation can result from change in aggregate supply.

The two main sources of change in aggregate supply are increase in wage rate and price of raw material.

Cost Push Inflation

8

Cost Push Inflation

P2

P1

Q2 Q1

Aggregate Supply 2

Aggregate Demand

Price $

Real GDP ($)

Aggregate Supply 1

Inflation impacts negatively on economic growth.Inflation brings about uncertainty in the economy.Savings and investment are discouraged.Inflation affects the distribution of income.Redistributes income from people with fixed incomes to those with flexible incomes.Redistributes income from private individuals to the government.

Consequences of inflation

Causes fiscal drag and bracket creep: salary increases move people into higher tax brackets and they could be effectively worse off.

Inflation has an adverse effect on a country’s balance of payments.

If India’s rate of inflation is higher than that of our trading partners the result is a loss of international competitiveness.

Inflation can cause a decrease in the real money value of savings.

Consequences of inflation

Fiscal Measures

Monetary Measures

General Measures

Measures to control Inflation

Increase direct taxes.Increase indirect taxes.Reduce government spending.Introduce measures to increase productivity, e.g. tax rebates

Fiscal measures

Increase interest rates of banks.Decrease money supply.Decrease availability of credit from banks.Decrease currency control.

Monetary measures

Increase productivity. Freeze prices and wages. Implement a wage restraint policy. Encourage personal savings. Implement control measures for consumer credit. Import control: make competing imported goods

cheaper. Introduce price indexation: linking all prices to a

particular index, e.g. CPI. Inflation targeting.

General Measures

Empirical evidence of Inflation rate in India

The inflation rate in India was recorded at 5.96 percent in March of 2013,which is reported by the Ministry of Commerce and IndustryIn India, the wholesale price index (WPI) is the main measure of inflation. The WPI measures the price of a representative basket of wholesale goods.

In India, wholesale price index is divided into three groups: Primary Articles (20.1 percent of total weight), Fuel and Power (14.9 percent) and Manufactured Products (65 percent).

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