expert lecture series

Economic output slows Unemployment on rise Wage rate inflation trade off becomes exploitative. Industrial sector slows Inflationary pressure ( Negative and Positive)

Major Variables Recovery Recession

1. Industrial production

Gradual increase

Decline

2. Commodity prices -do- Decline

3. Cost of production Gradual increase

Gradual decline

4. Profits Satisfactory level

Gradual decline

5. Investment Replacement of existing capital equipment

Falls slowly

6. Employment Gradual increase Starts falling

7. Wage rate Improvement Starts falling

8. Bank credit Liberal loans and satisfactory demand for advances improvement

Starts falling

9. Bank Reserves Improvement Suffer a setback

Country GDP growth rate

2006 2007 2008 2009(forecast)

United states 2.8 2.0 1.4 -0.7

Germany 3.0 2.5 1.7 -0.8

United kingdom 2.8 3.0 0.8 -1.3

Japan 2.4 2.1 0.5 -0.2

India 9.7 8.7 7.8 6.3/ 5.8 *

Source: IMF and ES 2007 – 08, * - World bank

Countries Current Inflation (%)

New Zealand 3

UK 2.9

Australia 2.5

EU 0.6

Japan -0.3

US -0.4

Industrial growth◦ 11.8 per cent in 2006◦ 9.2 per cent Nov 2007

Index of industrial production (IIP) (released by GOI, on 12th Dec 08)◦ Factory output falling at a rate .4 per cent change in IIP◦ Capital goods output growth was only 3.1 percent year on year

basis from 18.6 per cent in Sept 08.◦ IIP for textile fabrics increased by 7.6 percent in 06 – 07 and has

slowed to 3.4 per cent◦ Export sector declined 2.1 per cent in one month from Oct 08 to

Nov 08.

0

10

20

30

40

50

60

70

1983 1993 - 94 1999 - 00 2004 - 05

Agriculture

Manufacturing

Construction

Trade, hotel

Services ( financial,real, insuranceTransport , storageand communication

Business cycle and inflation are showing pro – cyclic nature

Unemployment is counter cyclic

Mounting govt expenditure – 3,08550 crores in Xth Plan)

Increase in money supply along with black money.

Population growth

Fluctuation in out and supply

Administered prices Hike in oil prices Global inflation leading

to imported inflation

Year WPI ( percentage change)

CPI-IW (industrial Works) ( percentage change)

2000 – 01 7.1 3.8 01 – 02 3.7 4.3 02 – 03 3.4 4.0 03 – 04 5.4 3.9 04 – 05 6.4 3.8 05 – 06 4.4 4.4 06 – 07 5.4 6.7 07 – 08 4.7 6.2 08 – 09 8.3 9.1 09 – 10* 1.6 9.9

Figure 1: Depicting the trend comparision of WPI and CPI

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2

4

6

8

10

12

2000– 01

01 –02

02 –03

03 –04

04 –05

05 –06

06 –07

07 –08

08 –09

09 –10*

Year

Perc

ent c

hang

e in

pric

e in

dex

WPI CPI Linear (CPI) Linear (WPI)

Fiscal year Articles Weighted % 2006 -07 2007 –

08 2008 -

09 2009 – 2010

(CMIE Projected)

Primary articles 22.03 7.8 7.7 10.0 7.3 Fuel, power, light and

lubricant 14.23 5.6 1.0 7.4 -3.9

Manufactured products 63.75 4.4 5.0 8.0 1.4 Food products 11.54 3.2 4.3 9.7 15.0

Beverages tobacco and tobacco product

1.34 7.4 10.3 9.5 4.5

Textiles 9.80 2.2 -1.1 6.1 3.2 Wood and wood products 0.17 6.1 4.6 8.8 1.6 Paper and paper products 2.04 6.9 1.8 4.4 1.2

Leather and leather products 1.02 -4.4 4.2 1.1 -1.0 Rubber and plastic products 2.39 6.6 7.3 4.6 2.7

Chemicals and chemical products

11.39 3.0 5.6 7.1 3.7

Non-metallic products 2.52 12.9 8.9 3.7 3.4 Basic metals alloys and metal

products 8.34 6.7 7.1 14.3 -10.2

Machinery and machine tools 8.36 5.6 7.1 4.7 -1.4 Transport equipment and parts. 4.29 1.6 2.8 5.2 0.1

All Commodities 100.0 5.4 4.7 8.3 1.6

The current economic scenario calls for public private partnership, wherein both preventive and corrective measures need to be taken up at various levels. This is so advocated to prevent the society at large from devastating effects of current WPI and CPI trends. Rising energy, commodity prices have boosted inflationary pressure

Need to adapt to shift in purchasing power from commodity users to entrepreneurs that can generate employment as the people are the consumer as well as the producers.

The fluctuations in crude oil prices globally need to be carefully handled as the entire burden of rising import bill (3,20,641 crores; 33 percent of total imports in 07 – 08)) is rising and with recovery the disposable income also rises compounding the rising demand.

RBI should focus on CPI control as compared to WPI and simultaneously promote growth, employment and price stability.

Need to emphasize on food grain production and strictly work on strategy boosting agriculture sector like Visesh Krishi Upaj Yonjana.

The present sharp rise in prices in CPI is due to sharp increase in prices of wheat, rice pulses etc. this rise is leading to social problems like worsening the economic condition of weaker sections, increased corruption and pilferages in PDS ( Public Distribution System).

Thank You