CHALLENGES FACED BY INDIA OVER A DECADE IN THE FIELD OF ECONOMY

BY-Saksham Dewan

Definition

Inflation can be defined as the rise in overall price level in the economy, i.e. rise in prices of all the goods and services.

When prices rise, it erodes the purchasing power of money.

Inflation is a situation in which there is a persistent and appreciable increase in general level of prices.

Inflation in India

Inflation is the greatest economic concern which has gripped India into its jagged tentacles.

India has been plagued by the disease of inflation since the 1950s but it has started showing its prominently harmful symptoms and ill effects since 1991, post liberalization.

Kick started by the fiscal crisis of 1991, marked by deficits in government finances and devaluation of the rupee, a whopping inflation of 13.66 per cent took its toll on the Indian economy. 

METHODS TO MEASURE

WPI

CPI

GNP DEFLATOR

MEASURING

1.Change in price indexa)Consumer Price Index(CPI)

b) Wholesale Price: A chief measure of price inflation is the inflation rate. It is measured by:

Index (WPI)2. Gross National Product Deflator (GNP

Deflator).

What is Inflation Rate ?

The rate at which the prices of everything go up is called the "rate of inflation". For example, if the price of something is Rs.100 this year and next year the price becomes approximately Rs.104 then the rate of inflation is 4%. If the price of something is Rs.80 then after a year with a rate of inflation of 4% the price go up to (80 x 1.04) = 83.2.

So, when you make an investment, make sure that your rate of return on the investment is higher than the rate of inflation in your country. In our county India, for the year 2005-2006 the rate of inflation was 4%. 

Inflation Rate 1992-1995

Inflation Rate 1997-2000

Inflation Rate 2001-2004

Inflation Rate 2005-2008

Inflation rate 2008-2011

CPI Inflation rate in 2012

Chart - CPI inflation India 2012 (yearly basis)

                                                                                               

Months

CPI Inflation rate in 2013

Chart - CPI inflation India 2013 (yearly basis)

                                                                                               

Months

Reasons for Inflation in 1990s The 1990s is widely described in general

as a price stability era all over the globe, barring some external factors like bouts of:

Increase in international oil price and Natural disasters like drought or flood

showed an ebbing trend.

Continued…

The main problem of inflation came to head in August 1990.

When Iraq invaded Kuwait the prices of oil doubled in international market.

Trade deficit (import exceeding exports) in 1991 rose to 15600 cores therefore,

India borrowed funds from International Monetary Fund(IMF).

Reasons for inflation in early 2000s The first half of India's fiscal 2002-03

(beginning April 1, 2002) witnessed uptrend in inflation largely due to:

Increase in oil prices twice during the period.

Adverse impact of drought on Agricultural products leading to increase in prices – particularly of:

Oilseeds and Edible oils.

Continued…

At the end of the fiscal 2002-03 inflation was up 3.3 percentage points. In the light of overall variation in wholesale price inflation, the inflation in fiscal 2002-03 was dominated by non-food items unlike preceding years, as per a RBI report

Defence expenditures (official) skyrocketed, also four times, from Rs 16,347 cores to Rs 65,000 cores in the budget of 2002/03.

Reasons for inflation in 2004-2007 2004-2005 weak monsoon sharp increase in oil prices

2006-2007 overheating in real estate and labour markets salaries of skilled workers rising The Public Distribution System has virtually

collapsed and the means that were available at least in theory to protect poorer sections of society have disappeared.

Reasons for Inflation in 2007-2009 2007-2008 Increase in the prices of coal and crude-oil Rise in the prices of diesel and petrol

2008-2009 Global financial meltdown and economic

recession in developed economics major factors in India's economic slowdown and therefore Inflation.

Reasons for Inflation at present Increase in money supply Deficit financing Increase in government expenditure Inadequate agricultural and industrial

growth Rise in administered prices Rising import prices Rising taxes

Inflation in different sectors

YEAR ANNUAL RATE OF INFLATION(%)

1990-1991 13.81

1991-1992 11.88

1992-1993 6.31

1993-1994 10.24

1994-1995 10.22

1995-1996 8.98

1996-1997 7.25

1997-1998 13.17

1998-1999 4.84

1999-2000 4.02

YEAR ANNUAL RATE OF INFLATION(%)

2001-2002 3.8

2002-2003 3.4

2003-2004 5.4

2004-2005 6.4

2005-2006 4.4

2006-2007 5.3

2007-2008 4.7

2008-2009 12.44

2009-2010 10.2

2010-2011 9.4

Inflation rate 1990-2000Inflation rate 2001-2011

India:WPI Inflation by Component

Causes of Inflation

1. Cost push inflation.

2. Rising imported raw materials costs.

3. Rising labor costs.

4. Higher indirect taxes imposed by the government.

5. Demand pull inflation.

Effect of Inflation

Lifestyle Inflation

Rupee Depreciation Reasons and Effects

How a Currency value is decided ? When Demand > Supply, Currency

becomes more valuable and vice versa.

REASONS FOR RUPEE DEPRECIATION

WITHDRAWAL OF INVESTMENTS

Recession in developed economies like US made big institutions to pull out their money from India

Institutional investors investing in India are directly impacted by the global market uncertainty. In 2008 India had a net outflow of $14billion of FIIs and INR drastically. A volatile currency is never good for a foreign investor as it increases the transaction risk. Though RBI has intervened through open market operations to arrest the downfall of INR (managed float) but the reserves of $290billion don’t provide enough room to make a significant impact.

EUROZONE CRISIS

Default concerns of European nations has resulted in loss of confidence in the Euro and appreciation of dollar

Owing to uncertainty prevailing in Europe and slump in international market, investors prefer to stay away from risky investments. This has significantly affected the portfolio investment in India. Credit rating agency’s downgrade of India to BBB- has not helped the cause. Any outward flow of currency or decrease in investment will put a downward pressure on exchange rate.

TRADE DEFICIT Trade deficit has widened by 40,000

crores in the last quarter. This has resulted in increased imports and spike in dollar demand

The fiscal deficits continue to remain high. The government projected a fiscal deficit target of 4.6% for 2011-12 but is likely to be much higher on account of higher subsidies. The markets questioned the fiscal deficit numbers just after the budget and projected the numbers could be much higher. This indeed has become the case. As highlighted above, persistent fiscal deficits play a role in shaping expectations over the currency rate as well.

HIGHER IMPORT BILLS

Expecting current account deficit to settle at  3.0-3.1% of GDP by March 2012

IMPACT OF RUPEE DEPRECIATION Economic recovery will get delayed as... The Reserve Bank of India will not be

able to cut rates for fear of causing more outflow..

Weaker rupee will make capital imports expensive, forcing companies to delay investments..

Impact on inflation and higher fuel prices will affect consumer sentiment..

Foreign investors will postpone investments till things stabilise

FISCAL SLIPPAGE

INCREASED BURDEN ON BORROWERS

IMPACT ON EXPORTS

Bibliography

http://www.mysmp.com/bonds/inflation.html http://www.personalfinanceology.com/the-effects-of-

inflation-on-your-money/ http://www.indiaonestop.com/inflation.htm http://www.adb.org/documents/books/ADO/2004/

update/ind.asp http://business.mapsofindia.com/news/inflation.html http://www.economywatch.com/inflation/economy/stock-

market.html http://www.tradingeconomics.com/india/inflation-cpi http://www.wikipeia.com http://www.rbi.org.in/scripts/BS_ViewBulletin.aspx