Synopsis

Meaning of inflation

Inflation in India

Statistical data

Causes and problems

Rate of inflation and return

Inflation in India

ntha ile Business School What Does Inflation Mean?

R.Ana raman Versat

The rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling. Central banks attempt to stop severe inflation, along with severe deflation, in an attempt to keep the excessive growth of prices to a minimum.

Inflation in India

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, 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 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2009 10.45 9.63 8.03 8.70 8.63 9.29 11.89 11.72 11.64 11.49 -

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 6.72 6.67 6.61 5.69 6.45 7.26 6.40 5.51 5.51 5.51 2006 4.39 5.31 5.31 5.26 6.14 7.89 6.90 5.98 6.84 7.63 6.72 6.72

The Indian economy has been registering stupendous growth after the liberalization of Indian economy. The opening up of the Indian economy in the early 1990s had increased India's industrial output and consequently has raised the India Inflation Rate. The Registrars of Companies in different states chiefly manage: The stupendous growth rate of industrial output and employment has created enormous pressure on the inflation rate. The Reserve Bank of India and the Ministry

of Finance, Government of India are concerned about the prevalent and intermittent rise of the inflation rate. The present rise of inflation rate in India can be detrimental to the projected growth of Indian economy. Thus, the Reserve Bank of India is devising methods to arrest the rise of inflation by putting checks and measures in place. Although the central bank has assured the Indian business community and the general public about the harmless inflationary rise, apprehensions still exist among the business circles of India. The main cause of rise of India Inflation Rate is the pricing disparity of agricultural products between the producer and end-consumer. Moreover, the meteoric rise of prices of food products, manufacturing products, and essential commodities has also catapulted the India Inflation Rate. As a result of this, the Wholesale Prices Index (WPI) of India touched 6.1% as on 6th January, 2007. Moreover, the Cash Reserve Ratio touched 5.5% on the same day. To arrest the panic and discomfort amongst the Indian business circles, the Reserve Bank of India, in its recently drafted monetary policy, had given top priority to price stability. It also sought to sustain the stupendous rate of economic growth of India. The Reserve Bank of India has raised the Cash Reserve Ratio in a continuous manner to arrest the rise of India Inflation Rate. The solution to this problem lies in rationalizing the pricing disparity between the producer and the consumer. Only this

will ensure inflation stabilization and thus sustainable economic growth of India.

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.

Indias 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 200708. 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 of living increases are much higher for the populace. Cooking gas prices, for example, have increased by around 20% in 2008. With most of Indias vast population living close to or below the poverty line, inflation acts as a Poor Mans 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.

Inflation in India Inflation 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 1950-1960 The inflation on an average was at 2.00% Between 1960-1970 The inflation on an average was at 7.2% Between 1970-1980 The inflation on an average was at 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.

Inflation rates of India (2010)

Categories: Economy and Policy This post tracks inflation rates of India for the year 2010, like Inflation rates of India (2009) did for 2009 and Inflation rates of India (2008) did for 2008. Before that, a few facts about inflation rate calculation in India. - Inflation in India is based on Wholesale Price Index - A set of 435 commodities are used for the WPI based inflation calculation - The base year for WPI calculation is 1993-94 - WPI is available at the end of every month, for a period of 1 year ended that day Latest Inflation Rate

- 2010 Sep - 8.62% (for 12 months ended on the given month) Previous Inflation Rates (for 12 months ended on given month) - 2010 Aug - 8.51% - 2010 Jul - 9.97% - 2010 Jun - 10.55% - 2010 May - 10.16% - 2010 Apr - 9.59% - 2010 Mar - 9.90% - 2010 Feb - 9.89% - 2010 Jan - 8.56% What is the rate of inflation? 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% (Which is really low and amazing!). This rate keeps changing every year.

The finance minister generally gives the official statement on the inflation rate of the country for a particular year.

What is the rate of return? The rate of return is how much you make on an investment. Suppose you invest Rs.100 in the market and over a year, you make Rs.120, then you rate of return is 20%. If you invest Rs.100 in the market today and you make money at a 3% "rate of return" in one year you will have Rs.103. But now, since the rate of inflation is at 4%, an item costing Rs.100 today will cost Rs.104 a year from now. So what you can buy with todays Rs.100, you will only be able to buy with Rs.104 a year from now. But the Rs.100 that you invested has grown only at a 3% rate of return and so it is worth Rs.103. In effect, you are loosing money! So in conclusion, the rate of return on your investments, have to be higher than the rate of inflation. From the above paragraphs you can note how silently, inflation eats into your money. You would not even know about it and your money would sit loosing value for no fault of yours. But inflation is not the only thing you should be considering, there are other things too that eat into you money. The first thing is brokerage and the second thing is taxation.