inflation final word doc ekdum

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IESMCRC 2010-12 Page 1

Presented by

Leadership and Teamwork Module

Library Research Project

Jigar Dharod M-10-08 Harshada Lokhande M-10-29

Rahul Gohil M-10-16 Santosh Shinde M-10-51


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Index

Sr.No Content Page

No

1 Inflation 3

2 Types of Inflation 4

3 Change in Inflation Base Year 5

4 Wholesale Price Index (WPI) 7

5 Reasons of Inflation 11

6 Solutions 13

7 Inflation and Indias Growth Party 14

8 Conclusion 15


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Infl ti n i a sit ati n where there is t much

money chasing too few goods and services. The rise

in demand pushes up the cost of the goods and

services, effectively making each rupee worth less.

This is reflected in the erosion of the purchasing

power of money. Any sort ofinflation results in the

rising of prices.

A low inflation number means that although prices

are rising, they are rising at a slow rate and high

inflation is widely believed to impede economic growth and is inimical to social justice,

thereby lending credence of low and stable inflation is a key objective of economic policy.

Normally, the main cause for inflation is a mismatch between demand and supply. But the

contemporary inflation which we are facing now is due to a combination of global and

domestic factors.

Mathematically, inflation or inflation rate is calculated as the percentage rate of change of a

certain price index. The price indices widely used forthis are Consumer Price Index (adopted

by countries such as USA, UK, Japan and China) and Wholesale Price Index (adopted by

countries such as India). Thus inflation rate, generally, is derived from CPI or WPI. Both

methods have advantages and disadvantages. Since India uses WPI method for inflation

calculation, let s go in to the details of WPI based inflation calculation.

Inflation


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Wage Inflation: Wage inflation is also called as demand-pull or excess demand inflation.

This type of inflation occurs when total demand for goods and services in an economy

exceeds the supply of the same. When the supply is less, the prices of these goods and

services would rise, leading to a situation called as demand-pull inflation. This type of

inflation affects the market economy adversely during the wartime.

Cost-push Inflation: As the name suggests, ifthere is increase in the cost of production of

goods and services, there is likely to be a forcefulincrease in the prices of finished goods and

services. Forinstance, a rise in the wages oflaborers would raise the unit costs of production

and this would lead to rise in prices forthe related end product. This type ofinflation may or

may not occurin conjunction with demand-pullinflation.

Pricing Power Inflation: Pricing power inflation is more often called as administered

price inflation. This type of inflation occurs when the business houses and industries decide

to increase the price oftheir respective goods and services to increase their profit margins. A

point noteworthy is pricing powerinflation does not occur atthe time of financial crises and

economic depression, or when there is a downturn in the economy. Thistype of inflation is

also called as oligopolistic inflation because oligopolies have the power of pricing their goods

and services.

Types of inflation


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Government launched a new series of wholesale price index (WPI) with 2004-05 as base.

Earlier, 1993-94 was used as base year to calculate WPI. The new series of WPI will have

676 items as against 435 items in the previous series. Consumer items widely used by the

middle class like ice-cream, mineral water, flowers, microwave oven, washing machine, gold

and silver will be reflected in the new series of WPI.

Readymade food, computer stationary, refrigerators, dish antenna, VCD, petroleum products

and computers will also be part of the new series.

Under primary article group of the new WPI, there will be 102 items against existing 98,

while fuel and power category will remain static at 19. In the new series, there will be 555

items of manufactured products compared to 318 items at present, the official said.

At the same time, weight of manufactured products will go up to 64.97% compared to

63.75%, while that of primary articles group, including food, will come down to 20.12%,

against 22.02% at present. The new series would accompany inflation numbers with old baseyear (1993-94) as well for comparison.

How i WPI (Wholesale Pri e Index) calculated?

In this method, a set of 676 commodities and their price changes are used for the calculation.

The selected commodities are supposed to represent various strata of the economy and are

supposed to give a comprehensive WPI value for the economy.

WPI is calculated on a base year and WPI for the base year is assumed to be 100. To show

the calculation, lets assume the base year to be 1970. The data of wholesale prices of all the

435 commodities in the base year and the time for which WPI is to be calculated is gathered.

Chan e in Inflation Base Year


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Let's calculate WPI for the year 1980 for a particular commodity, say wheat. Assume that the

price of a kilogram of wheat in 1970 = Rs 5.75 and in 1980 = Rs 6.10

The WPI of wheat for the year 1980 is,

(Price of Wheat in 1980 Price of Wheat in 1970)/ Price of Wheat in 1970 x 100

i.e. (6.10 5.75)/5.75 x 100 = 6.09

Since WPI for the base year is assumed as 100, WPI for 1980 will become 100 + 6.09 =

106.09.

In this way individual WPI values for the remaining 434 commodities are calculated and then

the weighted average of individual WPI figures are found out to arrive at the overall

Wholesale Price Index. Commodities are given weight-age depending upon its influence in

the economy.

How is inflation rate calculated?

If we have the WPI values of two time zones, say, beginning and end of year, the inflation

rate for the year will be,

(WPI of end of year WPI of beginning of year)/WPI of beginning of year x 100

For example, WPI on Jan 1st 1980 is 106.09 and WPI of Jan 1st 1981 is 109.72 then inflation

rate for the year 1981 is,

(109.72 106.09)/106.09 x 100 = 3.42% and we say the inflation rate for the year 1981 is

3.42%.

Since WPI figures are available every week, inflation for a particular week (which usually

means inflation for a period of one year ended on the given week) is calculated based on the

above method using WPI of the given week and WPI of the week one year before. This is

how we get weekly inflation rates in India.


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c. Mil 3.23818 176.0 0.43 0.92 3.88 5.26 14.30 26.53

(B) Non-Food

Articles

4.25756 154.1 0.61 1.12 6.41 2.53 -1.70 16.04

a. Fibres 0.87737 156.7 0.59 0.32 8.45 3.71 -9.75 15.22

b. Oil Seeds 1.78051 141.0 0.67 1.95 5.72 3.52 -0.59 4.44

(C) Minerals 1.52350 248.5 7.33 0.98 19.54 7.30 2.61 23.82

II FUEL &POWER 14.91021 148.0 0.77 0.14 6.82 5.64 -9.68 12.55

Liquefied petroleum

gas

0.91468 128.9 0.00 0.00 0.18 14.99 -7.45 15.30

Petrol 1.09015 139.9 0.00 0.00 9.97 8.62 -11.91 15.33

High speed diesel oil 4.67020 153.5 0.00 0.00 6.52 6.15 -5.84 14.64

III

MANUFACTURED

PRODUCTS

64.97164 127.2 0.75 0.16 1.68 1.27 -0.33 4.78

(A) Food Products 9.97396 138.3 2.78 0.58 8.12 -2.40 10.73 3.91

Sugar 1.73731 156.5 10.29 0.19 23.82 -

14.76

50.72 -0.63

Edible Oils 3.04293 117.9 0.26 1.46 0.62 3.42 -9.08 3.24

(B) Beverages,

Tobacco & Tobacco

Product

1.76247 143.6 0.90 0.14 2.89 1.13 6.38 6.29

a. Cotton Textiles 2.60526 121.2 0.09 -0.16 2.81 4.30 2.61 14.34

b. Man Made

Textiles

2.20573 109.4 0.98 -0.27 2.70 0.92 -1.15 6.52

(D) Wood & Wood 0.58744 149.1 0.50 0.54 2.98 1.84 8.10 5.37


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Products

(E) Paper & Paper

Products

2.03350 121.9 1.27 -0.16 2.49 2.01 2.75 2.01

(F) Leather &

Leather Products

0.83509 128.6 0.00 0.00 3.54 0.94 6.01 -0.08

(G) Rubber &

Plastic Products

2.98697 124.2 0.42 0.40 1.98 3.24 -0.34 4.99

(H) Chemicals &

Chemical Products

12.01770 122.3 0.43 0.08 1.21 1.58 -2.57 4.09

(I) Non-MetallicMineral Products

2.55597 144.6 0.14 -0.41 1.81 1.12 7.88 2.55

c. Cement & Lime 1.38646 152.5 -0.07 -0.78 1.15 0.86 8.57 2.01

(J) Basic Metals

Alloys & Metal

Product

10.74785 133.1 0.65 0.08 -2.12 3.26 -13.19 6.99

a1. Iron & Semis 1.56301 123.4 -0.68 0.16 -6.45 -0.32 -22.18 6.29

(K) Machinery &

Machine Tools

8.93148 120.4 0.17 -0.08 0.25 0.75 0.17 2.03


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WPI and CPI 2010- 2011

Historical

Data Edge Sep' 10 Oct' 10 Nov' 10 Dec' 10 Jan' 11 Feb' 11 Mar' 11 Apr' 11 May' 11

Consumer Price Index Nov' 10 9.9 9.9 8.5 9.2 8.6 8.4 7.8 7.9 7.6Wholesale Price Index Nov' 10 9.1 8.8 7.6 7.6 7.2 7.1 6.9 6.8 6.8

Note: Historical data from selected national and international data sources. All forecasts

provided by IHS Global Insight. Table updated on the 15th of each month

from monthly forecast update bank (GIIF). Written analysis may include references to data

made available after the release of the GIIF bank.

The variation between wholesale price inflation and consumer price-based inflation is mainly

because of high weight age of food items in consumer price indices. The weight age of food

articles in Wholesale Price Index is 16%, but weight age of food articles in all three consumer

price indices--for agriculture labourers, for rural labourers and industrial workers-- is above

60%.


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1. The APMC Act stipulates that farmers can only sell their produce to licensed commission

agents. The Act perpetuates the monopoly of around 4,000 traders across the country. These

traders, often with strong local political clout, further sell the farmers produce to

shopkeepers, after which it reaches the consumer at inflated prices.

2. The Indian economy seems to be destined to take a moderate to high inflation and high

growth route. Two factors are influencing this, both good for millions of poor people in the

country, but leading to inflationary pressures in the medium term.

a) NREGA has resulted in raising the wages of unskilled and agricultural labour across the

country.

b) As input costs have risen, the government has been forced to increase the support prices

for agricultural produce, thereby fuelling food inflation.

3. Oil prices spiralling to US$110/barrel or higher and remaining at elevated levels for three

or more months as a result of supply disruptions from one or more ma jor oil-exporting

countries and other factors, would affect Indias inflation, economic growth, and the current

account.

4. Vegetables v/s Food grains

Unlike food grains like rice and wheat, which are bought and stored by the government to be

released at low prices to control inflation, theres little that the government can do about the

prices of vegetables, fruits, pulses, milk and cooking oil.

One reason for that is that neither the State nor the Central Government has a policy of

buying and storing stuff like vegetables and dal on a large scale.

Without any stocks, theres little the government can do to intervene when prices of such

items go up.

5. Wastage is appallingly high, because storage and transport systems are so rickety. When a

person buys oranges that were grown in Meghalaya in Delhi, four out of every ten loaded on

Reasons of Inflation


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to the truck, perish by the time it reaches its destination. And thats true for all perishables

including onions in our farm economy.

6. In July 2010, following reports of insufficient Russian wheat crop, the prices of wheat shot

up by nearly 50%. With Prime Minister Vladimir Putin's ban on wheat exports announced for

the second successive year, Arabian and African nations, which largely depended on Russian

wheat, were the first to be hit. Egypt, the world's largest wheat importer, had to scramble up

its deficient stockpiles by buying US hard wheat at much higher rates. This prompted banks,

hedge funds and investors to corner food grains on forecast of future shortages and higher

profits. Commodity mutual funds and exchange traded funds in metals, agricultural

commodities, gold and oil were being set up rapidly by the big global investment banks like J

P Morgan, Deutsche Bank, Goldman Sachs and Barclays that would allow investors to hold

commodities without taking physical possession of the inventories. For commodities sold as

asset class had become the investor's favorite instrument in 2010 outpacing stocks, bonds

and currency transactions, both at the London and the New York exchanges.

7. Apart from onion prices that made headlines, here is some more food for thought. The

retail prices of brinjal soared 110% and those of tomato by 125% between the first weeks of

November 2010 and January 2011. The skyrocketing prices of brinjal, tomato or even crude

oil certainly had little to do with supply shortage. But here is where the story of crude oil and

veggies takes a turn. The steep veggie prices led to record food inflation figures of over

18%.It is estimated that, on one hand, prices of vegetables go up by as much as 10 times

between the farm gate and the retail vendor, thanks to the controlled marketing regime.

Prior to 2008, the decline in inflation in recent years has been achieved through supply -

side liberalization, including deregulation and reduction of tariffs and subsidies


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1. Modern retail has solutions that can influence and shape consumer demand. It does this by

offering alternatives and influencing change in consumer habits. For instance, while onion

prices have witnessed wild fluctuations, peas are not subject to such vagaries. This is because

retailers stock frozen peas in ample quantity, eliminating the scope for hoarding, profiteering

and price manipulation.

Theres every reason to believe modern retail can do the same for onions and other essential

commodities, once the laws of the land permit the entry of foreign direct investment in multi-

brand retail. When that happens, Indian farmers and consumers will truly be kings of the

market. And the country will be much better placed to stop the recurrence of sudden,

inflationary trends that arose in 1980, 1988 and once again this time.

2. One thing to boost supplies of all kinds of vegetables and fruits would be to get farmers

who dont grow them now, to grow them soon. Punjab for example was one of the pioneers

of commercial tomato harvesting in the 1980s, when PepsiCo gave contracts to buy tomatoes

to make ketchup to local farmers. Thus the best way to do that by the government is to offer a

carrot of prices and procurement, a carrot that farmers have found irresistible over the years.

If the government opens up its procurement to include fruits and vegetables, farmers all over

the country would fall over themselves to grow the stuff.

3. NREGA should be productively used especially in agricultural sector; it needs to be

effectively used so that farm production goes up. Use the labour in agriculture and we should

be able to measure their output.

4. If the amendment of the Agricultural Produce Market Committees (APMC) Act and

removal of horticulture goods from the APMC list should be brought in immediately to cut

out the middleman, the removal of the administered pricing mechanism policy for motor fuels

needs to kick in as soon as possible.

The Reserve Bank of India (RBI) has been steadily tightening monetary policy in 2010,

hiking reserve requirements and policy interest rates systematically in 2010.

Solutions


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Most economies agree that inflation negatively affects growth. Although the threshold is

different for different economies, IMF stated that it is 11% for an industrial economy and one

to three percent for a developing economy.

Inflation hurts the economy by interfering with the efficient allocation of resources and

reduces real growth. Secondly, a high level of inflation reduces a countrys competitive

powers and hence, its exports fall with a negative impact on the balance of payments. It also

reduces confidence in the countrys currency. In summary, both monetary and fiscal policies

will have a negative impact on the domestic savings and investment and hence, on growth as

well.

Currently, the fundamental threat to the India growth story is more domestic than external.

And the threat is inflation and only inflation. Food prices are not yet falling to the desired

level even after good rains as there has been a structural shift in spending pattern of people

due to rising income level. The commodity and the energy prices have again started to rise in

the global market, which will have its toll on domestic inflation in the days to come.

Therefore, if the inflation expectations remain at an elevated level for an extended period of

time, RBI will continue with tightening monetary policy, which means that the money will bescarce and expensive in an economy, which is hungry to fund its huge infrastructural demand

to propel future growth.

Inflation and Indias Growth Part


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In order to control inflation, we cannot afford to slow down the growth rate because it depicts

the economic strength of the country. Therefore, the government must ensure that the entire

100% of the population is benefitted by this growth. And this can be done by providing all

urban amenities in rural India. The government should try and reduce freebies and subsidies

and should increase capital expenditure for the development which will pave the way for long

term growth with stability which will automatically improve the disposable income and

standard of living of the rural population.

Also the reserve bank of India has to adopt tight money policy. The monetary instruments

such as bank rate, cash reserve ratio, liquidity ratio, open market operations have to work

efficiently. However the fiscal policy also should be synchronized with monetary policy for

the effective management and control of inflation. The fiscal instruments such as taxation,

public debt and deficit financing have to work together. Above all both the centre as well as

state governments need to be in harmonizing with each other for the effective management of

inflation in India.

Conclusion


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Newspapers:

1) Jan 25, 2011 Financial Express

Inflated expectations: Subhomoy Bhattacharjee

2) 31 Jan, 2011, Economic Times

Bold reforms required to contain inflation - Raj Jain,

3) 17 Dec, 2010, Economic Times

Hurdles facing growth plans: Sandip Sen

4) January 18, 2011, Economic Times

Take the sting out of onion prices: Abheek Barman


Bold reforms required to contain inflation - Raj Jain,





7. a) January 18, 2011,Economic Times


8)2 Feb, 2011 Economic Times

Tight liquidity won't tame inflation: Rajesh Shah

References


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We need clarity on inflation situation: KV Thomas

10) Jan 29, 2011, Economic Times

Food inflation is no mystery: Soma Banerjee,

11) Indias growth party reference: - 15 Dec, 2010, Economic Times

Book Reference

1) Inflation in India Issues and Perspectives by Laila Memdani

EBSCO links

1) http://www.financialexpress.com/news/divergence-between-wpi-&-cpi-inflation-disturbing/514091/0

2) http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=58022767&site=ehost-live

3) http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=58022768&site=ehost-live

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