Report on Inflaton in pakistan

During 1990s

B.S. (Business Administration) 5th Semester, Section A

Submitted to:

Date: 11th May, 2011

Dr.Farooq Aziz

Department of Business Administration Federal Urdu University of Arts, Science & Technology

Inflation in Pakistan
During 1990s
Inflation In Pakistan | 1990s a

Table contents
EXECUTIVE SUMMARY------------------------------------------01 INTRODUCTION TO PROJECT---------------------------01-02 OBJECTIVES--------------------------------------------------------02 INTORDUCTION TO INFLATION----------------------------03 TYPES OF INFLATION-------------------------------------- 03-05 CAUSES OF INFLATION-------------------------------------06-07 MEASURES TO CONTROL INFLATION-----------------08-09 INFLATION IMPPACT ON ECONOMY------------------09-10 INFLATION TRENDS IN PAKISTAN-------------------------11 INFLATION DURING 1990s-2000-------------------11-16 CURRENT INFLATION TRENDS -------------------------17-21 CONSEQUENCES OF INFLATION------------------------21-22 MEASURES TO CONTROL INFLATION------------23-25 CONCLUSION----------------------------------------------------------25

EXECUTIVE SUMMARY: Pakistan has undergone a significant economic growth during last few years, but the core problems of the economy are still unsolved. Inflation remains the biggest of all these problems. Our aim is to find the

determinants of inflation, its causes, situation in Pakistan, and measures to control it. Limitations are defined as per actual. In this report we reviews the literature defining inflation as too much money chasing too few goods. This explains the view point of different researchers in determining the causes of inflation and establishing links of different variables with inflation such as fiscal and monetary policies, unemployment, demand pull and cost pull factors that affect inflation. We also identify monetary shocks, inflation expectations, nominal exchange rate, and price of imports, exogenous supply shocks and fiscal policy shocks as determinants of inflation. The inflation gives patterns in Pakistan from 2000s to 2009, which reports the last five years as highly inflationary due to expansionary monetary policy and high oil prices.The sustained level of high economic growth over the year has increased the level of income, which has resulted in a surge in domestic demand. High international oil prices lead to increase in transportation charges as well as energy intensive industry products such as metal commodities. As producers pass on the increased costs to consumers, this leads to an increase in cost of Pakistani imports, which drives up inflation. Government actions are not useful, as we are not seeing any difference in the inflation rates. Domestic production should be encouraged instead of imports; investment should be given preference in consumer goods instead of luxuries, Agriculture sector should be given subsidies, foreign investment should be attracted, and developed countries should be requested for financial and managerial assistance. And lastly a strong monitoring system should be established on different levels in order to have a sound evaluation of the process at every stage.

INTRODUCTION TO PROJECT: Our study will be focused at the various aspects of inflation in Pakistan from a local and global perspective. Inflation or price inflation is a rise in the general level of prices of goods and services in an economy over a period of time. It can also be described as a decline in the real value of moneya loss of purchasing power. The level of inflation in Pakistan has been persistently rising since Partition. The high levels of inflation reflect a volatile economy in which money does not hold its value for long. Workers require higher wages to cover rising costs, and are disinclined to save. Producers in turn may raise their selling prices to cover these increases, scale back production to check their costs (resulting in lay-offs), or fail to invest in future production. Many such problems have been, and still are, being faced by Pakistan. The factors leading to high levels of inflation include deficit financing, foreign remittances, foreign economic assistance, increase in wages, population explosion, black money, prices of imported goods, devaluation of rupee, etc.

Objectives: The main objectives of this project are to: 1. Present the scenario of inflation in Pakistan and highlight the figures in recent years 2. Study the measures that have been taken by the government to control inflation 3. Analyze policies of the State Bank of Pakistan and the tools it is using to control inflation.

INTRODUCTION: Inflation:
What Does Inflation Mean?

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.

Types of Inflation:
 Cost-Push Inflation  Demand Pull Inflation 1.Cost-push Inflation: As the name suggests, if there is increase in the cost of production of goods and services, there is likely to be a forceful increase in the prices of finished goods and services. For instance, a rise in the wages of laborers would raise the unit costs of production and this would lead to rise in prices for the related end product. This type of inflation may or may not occur in conjunction with demand-pull inflation. OR Aggregate supply is the total volume of goods and services produced by an economy at a given price level. When there is a decrease in the aggregate supply of goods and services stemming from an increase in the cost of production, we have cost-push inflation. Cost-push inflation basically means that prices have been pushed up by increases in costs of any of the four factors of production (labor, capital, land or entrepreneurship) when companies are already running at full production capacity. With higher production costs and productivity maximized, companies cannot maintain profit margins by producing the same amounts of goods and services. As a result, the increased costs are passed on to consumers, causing a rise in the general price level (inflation). Production Costs To understand better their effect on inflation, lets take a look into how and why production costs can change. A company may need to increases wages if laborers demand higher salaries (due to increasing prices and thus cost of living) or if labor becomes more specialized. If the cost of labor, a factor of production, increases, the company has to allocate more resources to pay for the creation of its goods or services. To continue to maintain (or increase) profit margins, the company passes the increased costs of production on to the consumer, making retail prices higher. Along with increasing sales, increasing prices is a way for companies to constantly increase their bottom lines and essentially grow. Another factor that can cause increases in production costs is a rise in the price of raw materials. This could occur because of scarcity of raw materials, an increase in the cost of labor and/or an increase in the cost of importing raw materials and labor (if the they are overseas), which is caused by a depreciation in their home currency. The government may also increase taxes to cover higher fuel and energy costs, forcing companies to allocate more resources to paying taxes. Putting It Together: To visualize how cost-push inflation works, we can use a simple price-quantity graph showing what happens to shifts in aggregate supply. The graph below shows the level of output that can be achieved at each price level. As production costs increase, aggregate supply decreases from AS1 to AS2 (given production is at full capacity), causing an increase in the price level from P1 to P2. The rationale behind this increase is that, for companies to maintain (or increase) profit margins, they will need to raise the retail price paid by consumers, thereby causing inflation.

2. Demand Pull Inflation: Wage inflation is also called as Wage 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. OR Demand-pull inflation occurs when there is an increase in aggregate demand, categorized by the four sections of the macro economy: households, businesses, governments and foreign buyers. When these four sectors concurrently want to purchase more output than the economy can produce, they compete to purchase limited amounts of goods and services. Buyers in essence bid prices up, again, causing inflation. This excessive demand, also referred to as too much money chasing too few goods, usually occurs in an expanding economy. Factors Pulling Prices Up: The increase in aggregate demand that causes demand-pull inflation can be the result of various economic dynamics. For example, an increase in government purchases can increase aggregate demand, thus pulling up prices. Another factor can be the depreciation of local exchange rates, which raises the price of imports and, for foreigners, reduces the price of exports. As a result, the purchasing of imports decreases while the buying of exports by foreigners increases, thereby raising the overall level of aggregate demand (we are assuming aggregate supply cannot keep up with aggregate demand as a result of full employment in the economy). Rapid overseas growth can also ignite an increase in demand as more exports are consumed by foreigners. Finally, if government reduces taxes, households are left with more disposable income in their pockets. This in turn leads to increased consumer spending, thus increasing aggregate demand and eventually causing demand-pull inflation. The results of reduced taxes can lead also to growing consumer confidence in the local economy, which further increases aggregate demand. Putting It Together: Demand-pull inflation is a product of an increase in aggregate demand that is faster than the corresponding increase in aggregate supply. When aggregate demand increases without a change in aggregate supply, the quantity supplied will increase (given production is not at full capacity). Looking again at the price-quantity graph, we can see the relationship between aggregate supply and demand. If aggregate demand increases from AD1 to AD2, in the short run, this will not change (shift) aggregate supply, but cause a change in the quantity supplied as represented by a movement along the AS curve. The rationale behind this lack of shift in aggregate supply is that aggregate demand tends to react faster to changes in economic conditions than aggregate supply. As companies increase production due to increased demand, the cost to produce each additional output increases, as represented by the change from P1 to P2. The rationale behind this change is that companies would need to pay workers more money (e.g. overtime) and/or invest in additional equipment to keep up with demand, thereby increasing the cost of production. Just like cost-push inflation, demandpull inflation can occur as companies, to maintain profit levels, pass on the higher cost of production to consumers prices.

Inflation is not simply a matter of rising prices. There are endemic and perhaps diverse reasons at the root of inflation. Cost-push inflation is a result of decreased aggregate supply as well as increased costs of production, itself a result of different factors. The increase in aggregate supply causing demand-pull inflation can be the result of many factors, including increases in government spending and depreciation of the local exchange rate. If an economy identifies what type of inflation is occurring (cost-push or demand-pull), then the economy may be better able to rectify (if necessary) rising prices and the loss of purchasing

CAUSES OF INFLATION:
There are so many causes of inflation in the less developed countries like Pakistan. Inflation may occur due to any one of the following reasons or causes.

1. Increase in Demand: Due to increase in population or due to change in certain other factors, the demand for goods and services measures supply remaining the same, expenditure will increase and inflation occur.

2. Lack of Supply: Due to some unfavorable climatic situations, political, social, national or international situation production remains low (small) in any particular year and supply will also decrease, prices will go up and inflation will occur. 3. Increase in the Cost of Production: In certain cases cost of production increases due to rise in the prices of factors of production, producer rises price level and due to excessive expenditure inflation occur.

4. Over Population: Inflation also occurs due to the increasing rate of growth of population. As Pakistan is an over populated country and the rate of growth of her population is about 3% per year, while the rate

of production of goods is very low and due to this prices of commodities rise and inflation occur.

5. Development Expenditure: In under developed countries like Pakistan major amount of money is spent on the development programmers and due to increase in the income of the individuals, their expenditure is the basic cause of the inflation.

6. Food Problem: Pakistan is basically an agricultural country. Near about 30% of national income is had by agriculture sector. But unfortunately there is an acute shortage of food grain in Pakistan and so is the case with other developing and under developed countries of the world. The prices of other commodities are influenced by the continuous rise food grain prices and thus inflation occurs.

7. Financial Position of Common Man: In under developed countries, the financial position of a common man is very poor and there is a lock of saving because the major portion of income is spent on the purchase of only consumer goods.

8. Import of Machinery: Under developed countries spent lot of amount on the import of machinery. So the cost of production increase and inflation occur this price of goods also increase and inflation occur.

9. Expenditure on Defense: Of course defence is very important for every country. A huge amount of budget is spent on defiance requirements in all countries of the world. Like other countries Pakistans major part of budget is spent on defece requirements. As we only produce 5% of total defence requirements within country and the remaining requirements are imported from abroad. Due to this reason inflation occurs.

10. Natural Climate: Natural climate play an important role in the economy of any country. Pakistan is basically an agricultural country we earn near about 30% of national from agriculture sector. Agricultural products wholly depend upon natural climate. Due to unfavourable natural climatic conditions when agricultural cross are destroyed or decreased as a result of this supply decrease and prices increase and inflation occur.

11. Deficit Financing: By deficit financing we mean that there is deficit created in budget when budget is announced. Expenditure is more than income in actual sense by deficit financing mean to issue new currency when this new currency came into the market it increases the demand of goods and services but on the other hand supply remain the same as a result of this price increase and inflation occur.

12. Decrease in Production: Inflation may occur if production decreases. There are many reasons of decrease of production e.g. natural climate, political, social conditions, competition, national and international problems etc which are cause of inflation.

13. Corruption:

Another cause of inflation is corruption. There are two types of corruption. There is not morality and every one is trying to earn more and more by using fair and unfair means. Officials waste their time has low efficiency. Only one relationship that is exists in society is money. One has to pay a heavy cost to get his right. Law and order conditions are out of control and institutions are failed to provide justice to a common man. Justice can be bought by money only. But government is unable to control such type of things. In this whole scenario some corrupt people has been occupying the resources and common man is living in miserable conditions. Pakistan Corruption Report, 2002 (this report was the basis for the regional one listed above) The survey was conducted by Marketing and Research consultants under the auspices of TI Pakistan. The general objective of the survey was to measure the nature and extent of corruption being faced by consumers of seven public sector departments (Education, Health, Power, Land Administration, Taxation, Police, and Judiciary). Another objective of the survey was to gather information about the particular stages where obstacles are usually being faced, locate the responsible element for creating the obstacles and the means for overcoming the bottlenecks in the seven sectors under study.

MEASURES TO CONTROL INFLATION:

The methods which are adopted to remove inflation, they are called anti-inflation measures. These measures may be of the following three kinds. 1. Monetary Measures 2. Fiscal Measures 3. Non-Monetary Measures or General Measures. Let us discuss these turn be turn

1. MONETARY MEASURES

Monetary measures mean those measures which are taken by the Central Bank of the country. Antiinflationary measures of pure monetary nature are largely a matter of Central Bank policy. These are discussed as under. (i) Bank Rate Policy: In the time of need the people may discount the bills from commercial banks. When there is inflation in the country then banks should increase the rate so that people can not get cash by discounting the bills. This is the bank rate policy and is major weapon of controlling the inflation. (ii) Open Market Operation: When Central Bank sales or purchases the securities in open market, it is called open market operation. If there is inflation in the country then central Bank should sell the securities so that the inflation may be controlled. (iii) Higher Reserve Requirements: Higher reserve requirements are also necessary to control the inflation. Because of reserves are increased then purchasing power of people is also decreased. (iv) Monetary Reforms: The Government can order to exchange old notes by new ones in this way a

large part of money may be blocked. Money should be repaid to people after achieving the purpose. (v) Marginal Requirement: Marginal requirements mean the value of securities against which banks agree to advance loans. If banks increase the marginal requirement then people can not get more loans and inflation may be controlled. (vi) Credit Rationing: Sometimes Central Bank advises to commercial banks to stop the advancing loans for one month or two months or more. In this way inflation may also be controlled.

2. FISCAL MEASURES (i) Cut on Expenditure: If government decreases her expenditure on unproductive activities then inflation is also automatically controlled. (ii) Change in Taxation System: Tax system should be reorganized to encourage investment and productive activities in the country. It may help to increase production and to control the general price level. (iii) Restriction on Exports: Government may control inflation by applying restriction on the export of those goods which other wise may create shortage in the country. (iv) Managing Public Debt: Public debt should be managed in such a systematic way that money supply is reduced and consequently the inflation may be removed. (v) De-nationalization: To control the inflation government should de-nationalize sick public industries. The experience of nationalization of industries in Pakistan has been quite bitter for economy. (vi) Protection to Infant Industries: To control inflation, increase in domestic production is required. So government should protect the domestic infant industries by applying import duties.

3. GENERAL MEASURES (i) Population Planning: The demand of goods and services may be controlled by control of population growth. So effective population planning may also help to control inflation. (ii) Co-operation between Monetary and Fiscal Policies: Government may control inflation, if there is a proper co-operation between fiscal and monetary policies. (iii) Effective Planning: Administration and politician may help to control inflation by making policies for the interest of the whole nation and by sacrificing their personal benefits. (iv) Increase in Output: Steps should be taken to increase the output, so that the shortage problem of goods can be removed. If there are sufficient products in the market in sufficient quantity. Then the too much money will not chase too few goods and in this way the inflation will automatically be controlled. (v) Political Stability: Government should take the steps to remove the political crisis so that business sectors are encouraged to invest in the country. This is very positive and natural way of controlling inflation. (vi) Discipline: There should be discipline in factories and offices so that output of the country may increase and inflation is controlled. (vii) Hoarding and Smuggling: Hoarding and Smuggling should be controlled because if hoarding and smuggling are controlled then inflation is also controlled.

Inflation Impact on Economy:

Inflation means a rise in prices of goods and services in an economy over a period of time. Inflation is caused by some demand side factors (Increase in money supply, Increase in income, Black money spending, Expansion of the Private Sector, Increasing Public Expenditures) and some Supply side factors

(Shortage of factors of production, Industrial Disputes, Increase in exports (excess exports), Global factors, Neglecting the production of consumer goods). Inflation effects the different sectors of the economy (Effects on the distribution of income and wealth, Effects on production, Effects on the Government, Effects on the Balance of Payment, Effects on Monetary Policy, Effects on Social Sector, Effects on Political environment) and different classes of the people (Debtors & Creditors, Salaried Class, Wages earners, Fixed income group, Investors and shareholders, Businessmen, Agriculturists). There are many causes for inflation, depending on a number of factors. For example, inflation can happen when governments print an excess of money to deal with a crisis. When any extra money is created, it will increase some societal groups buying power. All sectors in the economy try to buy more than the economy can produce. Shortages are then created and merchants lose business. In the end, the price level rises. Another common reason of inflation is a rise in production costs, which leads to an increase in the price of the final product. For example, if raw materials increase in price, this leads to the cost of production increasing, this in turn leads to the company increasing prices to maintain their profits. Inflation can also be caused by federal taxes put on consumer products. As the taxes rise, suppliers often pass on the burden to the consumer. In Pakistan, the most important thing is the rise in prices of oil, gas, excise duties and the increase in the utility tariffs. These all has an inflationary impact on the economy. Pakistan, with a population of about 16 million people has undergone a remarkable economic growth during last few years, but the core problems of the economy are still unsolved. Inflation is one of these core problems. Government claims that in order to keep the prices of essential commodities under control, it has been taking various measures throughout the year. In order to provide relief to the low and fixed income groups, the government has been selling wheat flour and sugar through the outlets of the Utility Stores Corporation (USC) at much lower prices than the market. The government has also allowed the import of various items through land routes from neighboring countries. But, all these are secondary measures. Problems like inflation and poverty cant be resolved by applying the secondary measures directly, these need strategic planning. Unfortunately, in Pakistan, these core problems have never undergone such a planning process. Government has never invited foreign investment for the production of basic goods. Agriculture sector, on which the major industries rely for the raw material has not been given sufficient subsidies. The major rise in the prices is because of the increasing prices of oil (as increased prices of oil increase the cost of production), but no such steps have been taken to control the oil prices. Domestic productions at less cost of production will not only make the availability of goods much easier but Aggregate Supply will also increase, and domestic industry will get developed. Inflation is one of the obstacles on the way of development. In Pakistan, it has squeezed the major part of the population. It needs to be controlled by strategic planning. Domestic production should be encouraged instead of imports; investment should be given preference in consumer goods instead of luxuries, Agriculture sector should be given subsidies, foreign investment should be attracted, and developed countries should be requested for financial and managerial assistance. And lastly a strong monitoring system should be established on different levels in order to have a sound evaluation of the process at every stage. Inflation always hurts ones' standard of living. Rising prices mean people have to pay more for the same goods and services. If income increases at a slower rate as inflation, the standard of living declines even

if one makes more. So it is the root cause in making and affecting economy and people of the country poor. If we want to control inflation we shall have to inflict strict control over the supply of money and evading any relaxation to the supply of money. This is the most apt way whereby we can control inflation effectively and keep the economy of the country in a strong and stable position.

INTERPERTATION & ANALYSIS OF DATA

INFLATION TREND IN PAKISTAN

Inflation trend in 1990s to 2000

The sustained and significant reduction in inflation observed during the last three years constitutes one of the key achievements of Pakistan. During the first seven years (1990-97) of the 1990s the average annual inflation rate, measured on the basis of the consumer price index, remained in the double-digit (11.4%). Poor fiscal management resulting in the monetization of large fiscal deficits, declining economic growth causing supply bottlenecks of essential items, frequent upward adjustment of utility charges, frequent downward adjustment of rupee viz. US dollar, and excessive reliance on indirect taxes for resource mobilization are some of the factors responsible for the persistence of double-digit inflation during 1990-97.flation in Pakistan continued to exhibit a declining trend thereafter. It declined to 7.8 percent in 1997-98 and further to 5.7 percent in 1998-99 (See Table 8.1). Table 8.1 Annual Rate of Inflation (Percentage) CPI 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 Average 1990-97 1997-98 1998-99 Jul-April 1998-99 1999-2000 Source: Federal Bureau of Statistics 12.7 10.6 9.8 11.3 13.0 10.8 11.8 11.4 7.8 5.7 6.1 3.4 WPI 11.7 9.8 7.4 16.4 16.0 11.1 13.0 12.2 6.6 6.4 6.7 1.6 SPI 12.6 10.5 10.7 11.8 15.0 10.7 12.5 12.0 7.4 6.4 6.8 1.6 GDP Deflator 13.1 10.1 8.7 12.9 14.2 8.0 13.3 11.5 7.7 6.0 3.1

Relatively tight monetary policy, improved supply situation of essential items, little upward movements in administered prices, reduction in tax and tariff rates, and depressed international prices of Pakistan's major imports are some of the factors contributed to bringing inflation down to the single-digit level. Food and non-food inflation followed the overall inflationary patterns and declined to a single-digit level. As against an average food inflation of 12.4 percent during 1994-97, it declined to 7.6 percent in 1997-98 and further to 5.9 percent in 1998-99. Similarly, non-food inflation declined to 8.0 percent and 5.6 percent, respectively from an average of 11.0 percent during the same period (See Table 8.2).

Year 1993-94 1994-95 1995-96 1996-97 Average 1994-97 1997-98 1998-99 Jul-April 1998-99 1999-2000

Overall CPI Inflation 11.3 13.0 10.8 11.8 11.7 7.8 5.7 6.1 3.4

Food Inflation 11.0 16.7 10.1 11.9 12.4 7.6 5.9 6.2 2.0

Non-Food Inflation 11.5 9.3 11.5 11.7 11.0 8.0 5.6 5.9 5.0

Table 8.2 Rate by

Inflation Groups

(Percentage) The hard-earned progress towards taming the inflation was further consolidated in 1999-2000. Inflation decelerated further to 3.4 percent during the first ten months of the current fiscal year as against 6.1 percent in the corresponding period of last year. Although the food and non-food inflation exhibited a declining trend it was the former which decelerated sharply to 2.0 percent as against 6.2 percent of the corresponding period of last year. Non-food inflation is estimated at 5.0 percent as against 5.9 percent of the corresponding period of last year (See Table 8.2.). Before we go into the details of the price situation in 1999-2000, a few words regarding the various price indices that are used in measuring the cost of living in Pakistan are in order. II. Measuring Price Indices In Pakistan, the four types of price indices are used to measure price changes. These are: (i) Consumer Price Index (CPI); (ii) Wholesale Price Index (WPI); (iii) Sensitive Price Indicator(SPI), and the GDP deflator. The CPI captures monthly trends in retail prices of 460 items, covering nine commodities groups, three broad categories of industrial, commercial and government employees, and collected from 25 urban centres. The CPI is also calculated for five separate income groups such as, upto Rs 1500, Rs 1501 to Rs 4000, Rs 4001 to Rs 7000, Rs 7001 to Rs 10,000 and Rs 10,000 per month and above. The weights of the different consumer items in a basket of commodities were constructed from especially designed survey conducted in 1990-91. The prices used in the construction of monthly WPI are generally those which conform to primary sellers at "Mandi" or ex-factory level. It covers 97 commodities and does not include services. The SPI coverage is a weekly index but limited to 47 essential items from 12 centres in 50 markets, used by the typical consumers earning income upto Rs.1500 per month. The GDP deflator (market prices) is based on prices of all goods and services produced in the economy during a year. It is therefore, more broad-based measures of inflation. These four indices of inflation differ among themselves in terms of their coverage of commodities and markets. Notwithstanding these difference, the consumer price index has traditionally been regarded as a better indicator of inflation as well as used for measuring cost of living.

III. Inflation in 1999-2000 The declining trend in inflation that was set into motion in 1997-98, continued with a relatively stronger force during the outgoing fiscal year 1999- 2000. Inflation during the first ten months of the current fiscal year declined further to 3.4 percent as against the target of 6.0 percent and last year's level of 6.1 percent in the comparable period. The trend of falling inflation continued virtually uninterrupted since August 1998 with minor spikes in between. The rate of deceleration is more pronounced since March 1999 [see Table 8.3]. A number of factors have contributed to keep the inflation subdued in 1999-2000. Prominent among the factors are the sharp containment of money supply growth which is estimated at 3.2 percent during July-March 1999-2000 against the target of 9.4 percent. Beside lower-than-targeted monetary growth, strong rebound in agriculture helped improve food supply situation, relatively depressed domestic demand, and weak international commodity prices have been mainly responsible for the lowest inflation in the recent history of the country. Table 8.3 Monthwise Inflation (CPI) 1996-97 Period July Aug Sep Oct Nov Dec Jan Feb Mar Apr May June CPI 10.32 9.54 9.83 11.03 11.18 11.41 13.40 3.83 11.82 13.57 12.93 12.45 Food 10.04 8.27 9.02 10.92 10.57 10.79 14.36 15.27 11.11 14.86 13.89 13.15 Non Food 10.61 10.93 10.71 11.14 11.83 12.06 12.39 12.32 12.57 12.20 11.92 11.73 CPI 11.59 10.87 10.29 9.43 8.92 8.10 5.75 4.98 7.32 5.28 5.65 6.48 1997-98 Food 11.84 11.24 10.55 9.70 9.65 9.03 5.70 4.43 7.32 3.41 4.28 5.93 Non Food 11.32 10.48 10.01 9.13 8.15 7.11 5.79 5.58 7.33 7.33 7.11 7.05 CPI 6.74 6.97 6.42 6.52 6.23 6.36 6.23 6.24 4.76 4.57 4.34 3.68 1998-99 Food 6.01 6.46 5.50 5.56 7.22 7.22 6.75 6.57 5.73 5.29 4.83 3.73 Non Food 7.51 7.52 7.42 7.54 5.16 5.44 5.66 5.89 3.73 3.81 3.82 3.63 1999-2000 CPI 3.49 3.07 3.35 3.79 3.39 3.03 3.43 3.02 3.57 3.88 Food 3.84 3.15 3.43 3.23 0.69 0.13 1.03 0.47 1.59 2.15 Non Food 3.14 2.99 3.27 4.38 6.36 6.20 6.02 5.78 5.70 5.72

Food and non-food inflation also remained subdued during 1999-2000. A strong recovery in agriculture improved the food supply situation and as a result food inflation remained all time low in many years. As against an average of 10.5 percent during 1994-99, food inflation decelerated sharply to 2.0 percent in the first ten months of the current fiscal year. Non-food inflation also remained subdued during 1999-2000. As against an average of almost 10 percent during 1994-99, non-food inflation declined to 5.0 percent in the first ten months of current fiscal year. During the first quarter of the current fiscal year, non-food inflation remained around 3.0 percent but various adjustments in gas and petroleum prices during second quarter onward caused acceleration in non-food inflation. The non-food inflation increased to 5.6 percent in second and 5.8 percent in the third quarter of the current fiscal year. Within the non-food inflation., price indices of transport and communications group (7.8%), laundry and personal appearance group (5.9%), apparel & textile group (5.8%), and recreation, entertainment &

education (4.9%), registered an increase which are higher than the overall increase in the price level [see Table 8.4]. It is, therefore, safe to say that the current year inflation is mainly driven by non-food inflation.

Table 8.4 Inflation By Commodity Groups (Percentages) Average % Change (July-April) Commodities CPI A. Food Group B. Non-Food Group i) Apparel, Textile and Footwear ii) House Rent iii Fuel and Lighting iv) Household Furniture Equipment, etc. v) Transport and Communication vi) Recreation, Entertainment and Education vii) Cleaning Laundry and Personal Appearance viii) Medicines Weight 100.00 49.35 50.65 7.56 18.98 6.13 2.00 5.08 3.12 5.40 2.38 1998-99 6.1 6.2 5.9 6.5 7.0 4.8 3.5 7.6 4.6 5.4 1.5 19992000 3.4 2.0 5.0 5.8 4.3 4.5 3.1 7.8 4.9 5.9 1.3 % Point Contribution (July-April) 1998-99 6.1 3.1 3.0 0.5 1.3 0.3 0.1 0.4 0.1 0.3 0.0 19992000 3.4 1.0 2.5 0.4 0.8 0.3 0.1 0.4 0.2 0.3 0.0

a) Wholesale Price Index (WPI) The WPI has increased by 1.6 percent during July-April, 1999-2000, as against 6.7 percent in the same period last year. The lower increase in the WPI as compared with last year has mainly been due to the decline in the prices of raw materials (-10.67%), building materials (-3.16%), and smaller increase in food (1.3%) and non-food group (1.8%). The decline in raw material group has largely been on account of decrease in the prices of cotton and cotton related products. In the case of building material group, the decline in prices of cement (-4.20%), iron bars (-3.78%) and sanitary pipes (-2.49%) have been responsible for disinflation in this group. The changes in the WPI by main commodities groups are given in Table 8.5: Table 8.5 WPI Changes Price Change (July-April) Commodities General Food Non-Food Raw Material Fuel, Lighting & Lubricant Manufacturing Weight 100.00 45.79 54.21 8.76 15.28 25.53 1998-99 6.7 6.2 7.1 10.3 9.7 3.0 1999-2000 1.6 1.3 1.8 -10.7 8.5 4.9 % Point Contribution (JulyApril) 1998-99 6.7 2.8 3.9 0.9 1.5 0.8 1999-2000 1.6 0.6 1.0 -0.9 1.3 1.3

Building Material

4.64

2.2

-3.2

0.1

-0.1

b) Sensitive Price Indicator(SPI) The sensitive price indicator (SPI) is based on the prices of 47 essential consumer items belonging to the commodity basket of the CPI. The SPI is highly sensitive to price changes in the food items because 33 items out of 47 are food and the remaining 14 are the non-food items. During July-April 1999-2000, the increase in the SPI on annualized basis is 1.6 percent, as against 6.8 percent in the comparable period last year. The slower increase in the SPI is mainly due to the decline in the prices of potatoes (-28.9%), onion (-29.4%), chicken (-24.0%), red chilies (-20.4%_), eggs (-16.9%) and moong pulse (-13.9%). However, the prices of certain mass consumption items like wheat, rice, mash & gram pulses, sugar and gur have recorded price increases, mainly because of the seasonal variations and the demand-supply gap. IV. Inflation by Income Groups The CPI compiled for the five different income groups for the first 10 months of the current fiscal year exhibit more or less a similar pattern of last year. The lowest income group has faced lowest inflation (3.0%) while the highest income group experience highest inflation (5.0%). It is well-known that low income group people spend much of their income on food consumption and since food inflation has been minimal this year, therefore, the lowest income group faced comparatively lower burden of inflation. This income-wise inflation is given in Table 8.6:

Table 8.6 Inflation By Income Groups (July-April) (Percentages) 1996-97 Income Group Upto 1500 1501-4000 4001-7000 7001-10000 Above 10000 11.4 11.6 11.5 11.5 11.2 1997-98 8.4 8.2 8.3 8.3 8.1 1998-99 5.9 6.0 6.2 6.6 6.9 1999-2000 3.0 3.2 3.7 4.4 5.0

V. Price Stabilization The hard-earned success in taming the inflation will continue to receive greater attention and the

government will make every effort to keep the inflation low. To maintain price stability, the government will continue to pursue a relatively tight monetary policy complemented by a prudent fiscal management. The monetary aggregates will be closely monitored to ensure that money supply does not become a source of inflation. The government will also make efforts to keep the food inflation low by augmenting agricultural supplies through higher production and, if necessary, through imports of essential commodities. In addition, other institutional measures will be taken to maintain price stability. These include the use of country-wide outlets of the Utility Store Corporation to ensure proper supplies of essential consumer items, and the special weekly bazaars. The Committee on Kitchen Items and the Economic Coordination Committee of the Cabinet will continue to keep a close watch on the price developments and supply position of the essential consumer items.

Current inflation trend:

Inflation averaged at 3.3 percent during July-April 2002-03. The low level of inflation in the midst of 12.5 percent increase in money supply is the result of better supply situation of essential commodities, appreciation of exchange rate, prudent fiscal management and continued sterilization of monetary impact of massive foreign exchange inflows. Food and non-food inflation have been estimated at 3.1 percent and 3.4 percent, respectively as against 2.1 percent and 4.4 percent respectively in the corresponding period of last year [See Table-4.3]. The higher increase in food inflation over the comparable period of last year is attributable to increase in prices of wheat, wheat flour, rice basmati, meat, tea, vegetable ghee and cooking oil. The increase in vegetable ghee and cooking oil is the result of increase in international price of palm oil and imposition of GST on the local manufacturing of ghee in the Federal Budget 2002-03. As shown in Table 4.4, out of 19 widely consumed daily items the prices of 9 items have declined in the range of 3.8 percent (Chicken Farm) to 51.5 percent (potato). At the same time, the prices of 10 items have increased in the range of 2.7 percent (Fresh Milk) to 15.8 percent (tea). It may be noted that prices of all the four types of pulses (Masur, Moong, Mash and Gram) have declined because of increase in their production. Accordingly, the contribution of food inflation in overall inflation is estimated at 38.1 percent in 2002-03 as against 25.1 percent last year. Slower increase in non-food inflation as compared with last year resulted mainly on account of lesser increase in fuel and lighting group (8.5% as against 9.6% of last year) and transport & communication group (5.5% as against 7.1% last year). It is important to note that during July 1-May 15, 2002-03, 22 adjustments in prices of petrol have taken place - 13 times the prices were raised and 8 times reduced while one time it remain unchanged. On July 1, 2002 the price of petrol was Rs.33.71/Litre and on May 16, 2003 it stood at Rs.28.88/Litre - a decline of 14.3 percent. The prices of petroleum product and its various grades including kerosene oil fluctuated moderately during the fiscal year 2002-03. The prices of the various components of petroleum products generally witnessed a rising trend but reached at all time high on March 16, 2003 as a result of the continuous escalation of POL prices in the international market. During the last four adjustments the prices of POL products declined sharply across the board. Most

importantly, the price of petrol, which stood at Rs.37.11/Litre on March 16, 2003, declined to Rs.28.88/Litre on May 16, 2003 a decline of Rs.8.23/Litre or 22.2 percent. Similarly, the price of diesel (HSD) declined from Rs.25.93/Litre to Rs.19.91/Litre a decline of Rs.6.02/Litre or 23.2 percent during the same period. The price of Kerosene declined from Rs.24.62 to Rs.18.53 a decline of Rs.6.09/Litre or 24.7 percent. Contrary to the general perception, the government has judiciously passed on the benefit of lower international prices of POL products to the people by lowering the domestic price of these products [See Table-4.5 and Fig-2]. The contribution of non-food inflation is estimated at 61.3 percent, which is lower than last year (77.5%). Within non-food inflation, almost one-half contribution has come from fuel & lighting and transport and communication.

Slower increase in non-food inflation as compared with last year resulted mainly on account of lesser increase in fuel and lighting group (8.5% as against 9.6% of last year) and transport & communication group (5.5% as against 7.1% last year). It is important to note that during July 1-May 15, 2002-03, 22 adjustments in prices of petrol have taken place - 13 times the prices were raised and 8 times reduced while one time it remain unchanged. On July 1, 2002 the price of petrol was Rs.33.71/Litre and on May 16, 2003 it stood at Rs.28.88/Litre - a decline of 14.3 percent. The prices of petroleum product and its various grades including kerosene oil fluctuated moderately during the fiscal year 2002-03. The prices of the various components of petroleum products generally witnessed a rising trend but reached at all time high on March 16, 2003 as a result of the continuous escalation of POL prices in the international market. During the last four adjustments the prices of POL products declined sharply across the board. Most importantly, the price of petrol, which stood at Rs.37.11/Litre on March 16, 2003, declined to Rs.28.88/Litre on May 16, 2003 a decline of Rs.8.23/Litre or 22.2 percent. Similarly, the price of diesel (HSD) declined from Rs.25.93/Litre to Rs.19.91/Litre a decline of Rs.6.02/Litre or 23.2 percent during the same period. The price of Kerosene declined from Rs.24.62 to Rs.18.53 a decline of Rs.6.09/Litre or 24.7 percent. Contrary to the general perception, the government has judiciously passed on the benefit of lower international prices of POL products to the people by lowering the domestic price of these products [See Table-4.5 and Fig-2]. The contribution of non-food inflation is estimated at 61.3 percent, which is lower than last year (77.5%). Within non-food inflation, almost one-half contribution has come from fuel & lighting and transport and communication.

The month-wise analysis of inflationary trend as documented in Table-4.6 suggests that overall inflation continued to exhibit a broadly declining trend since July 2002. On year-on-year basis the overall inflation stood at 4.0 percent in July 2002 but declined to 2.2 percent in April 2003. Food inflation decelerated from 5.8 percent to 0.5 percent by March 2003. Non-food inflation on the other hand continued to rise because of the rising trend in oil prices. It has started declining since March 2003.

Wholesale Price Index (WPI) The WPI, on average basis, increased by 6.1 percent during July-April, 2002-03. This increase in WPI is significantly higher than the increase of 2.1 percent last year. To this increase, maximum contribution was

made by the fuel & lighting group (15.7 percent), followed by raw material (9.4 percent), and manufacturing group (2.6 percent). The larger increase in the index of fuel & lubricant at 15.7 percent against 3.5 percent last year is mainly attributable to increase in prices of POL products. The increase in the prices of raw material has mainly been due to the fact that price indices of certain important items like cotton, cotton yarn, vegetable ghee etc. have increased at higher rate during the current fiscal year than last year [See Table-4.6].

Sensitive Price Indicator (SPI) The SPI is used to capture the movement in prices of 53 essential items, consumed by the urban households with income of Rs.3000-Rs.12000 per month. The increase in SPI during the first ten months of the current fiscal year (July- April) 2002-03 is estimated at 3.7 percent against 3.2 percent last year mainly due to the increase in prices of some basic food items such as wheat (7.8%), wheat flour (5.8%), rice basmati (9.2%), mutton (13.8%), beef (13.7%), vegetable ghee (8.4%), cooking oil (10.5%) and tea (15.8%). Much of the increase in prices of wheat is attributable to its lower production (-4.2%) in 2001-02. The increase in Meat prices is due to increasing demand and vegetable ghee is due to imposition of GST on local manufacturing of ghee as well as substantial increase in the international price of palm oil. However, prices of some basic food items like sugar, pulses, red chilies, chicken (Farms), onion and potatoes have shown significant decline up to the range of 52% on account of improved supply position of these items [See Table-4.4 for details].

Price Stabilization Measures Price stabilization measures are important when there are unusual variations in the prices. Presently, the government in commensurate with its policy of decontrol, deregulation and liberalization, believes in tackling the inflationary pressures through economic measures rather than formal price control. However, close vigilance is kept on unusual rise in prices through weekly meetings of the Kitchen Items Committee, now called the Sensitive Items Price Committee (SIPC) and through the weekly meetings of the ECC of the Cabinet. Other measures in the realm of supply augmentation, reduction in import duty to facilitate larger imports, improved marketing practices, timely distribution, coordination with private sector and persuading traders/manufacturers to refrain from unfair practices are undertaken to ensure price stability in the country.

The above analysis clearly suggests that the Government has succeeded in keeping inflation not only low but it is much lower than the target (4.0%) for this fiscal year. The increase in prices of daily consumable

items has also remained low. In many cases the prices of some essential items have fallen when compared with last year. In some cases the price have increased as well. This is the normal practice in any economy. The whole idea of the countrys monetary and fiscal policy is not to maintain negative inflation (decline in general price level) but to keep inflation at low level. The government has succeeded in keeping inflation low (3.3%) during the current fiscal year. Even in future, inflation rate should remain within the range of 3 to 4 percent. Keeping inflation at low level should be regarded as protecting the poor from inflation tax. Despite several announcements during the 1990s by each of the last three elected governments regarding reduction of inflation from double to single digits, there is no evidence at present that in the coming years this dream will materialize. This can be attributed primarily to the bleak economic Scenario prevailing in the country. Several studies have been conducted to explore the causes of inflation during the 1990s. Generally, monetary growth, public policy, administered prices, rise in the prices of imported goods, inflationary expectations and output growth is termed as the determinants of inflation in Pakistan. However, their actual contribution towards inflation is debatable. One group of economists considers inflation a monetary phenomenon, while the other assigns more weight age to rise in administered prices and increase in prices of imported goods as determinants of inflation. Overall, host of factors from both the demand and supply side are responsible for the recent price spiral in Pakistan. The following is a brief review of the factors responsible for inflation during this period.

Consequences of inflation:
During an inflationary period it becomes very difficult for the government to fulfill its commitments of achieving macro economic targets. Almost all targets, such as GDP growth, price inflation, bank borrowing, trade deficit, budget deficit, are violated. This hurts the credibility of the government. Costs of development project and non-development expenditure increase due to which the government needs more funds next year by the amount of inflation to keep economic activity at the level of previous year. A low saying rate in the country is also one of the causes of rising inflation. In the wake of 14 per cent inflation and an average 10 per cent deposit rates, depositors are getting negative real rates of return on their deposits. Income of the individuals is being diverted from saving to consumption and non- productive channels like purchase of real estate and conspicuous consumption leaving saving at a very low level of 11 per cent in the country. Redistribution of income takes place during an inflationary regime. Resources are moving from lender to borrower. As in the case of Pakistan, lenders are small deposit holders and borrowers the rich elite. Double-digit inflation is aggravating the already high inequality between the rich and the poor. A kind of rent seeking culture develops due to inflation where the businessman earns lucrative profits by trading existing production. This provides a disincentive for him to be involved in the production process. An entrepreneurial culture cannot develop in this situation. Trading further raises the price level by manipulation of the market through hoarding and black marketing by the rent seekers while production eases the upward pressure on price level in an economy. As inflation is a regressive tax on fixed and low-income groups, it can cause anxiety, unrest and many other social problems in the country. Dollarization, as defined by the ratio of foreign currency deposits total monetary assets (M2), takes place due the decline in the value of domestic currency. This process never reverses until or unless the value of the local currency is not restored as is evident from the study of transitional economics of the socialist block and other developing countries. Foreign currency deposits in Pakistan have reached the $ 9.4 billion mark since their inception in 1992 to date acting as a hanging sword on the head of the government. Inflation expedites this trend further.

Devaluation is also one of the consequences of inflation. Due to double-digit inflation Pakistan has been caught in the vicious circle of devaluation (devaluation inflation loss of competitiveness again devaluation). As a result of inflation real money balances (M/P) decline and we need more money to exchange the same quantity of goods and services. This puts pressure on the printing press to print more and more currency notes to meet the requirement. This is the extra cost attached to inflation. The State Bank of Pakistan has promised to take steps to counter the inflation or contain it. But they are likely to be mostly monetary measures, primarily through reducing the money supply or currency in circulation. It will suck up the excess money in the market by offering better yields, as it had done recently in the case of the six-monthly treasury hills. It sold such bills for Rs. 29.5 billion instead of the Rs 15 billion it had originally sought and at a yield of 1.72 per cent instead of a lower percentage it had offered earlier. It may do more of the same hereafter to reduce the money supply. But such a remedy may not be very effective in an informal economy in which the money afloat outside the control of the banks is very large and its pressure on demand is very heavy. In addition, between, July 1 and January 31 the currency in circulation had shot up by Rs 88 billion and the net private sector credit had a record offtake of Rs 206 billion. Quite a large part of this credit was not used for production but as consumer banking, particularly to buy imported luxuries or consumer durables, like cars. While the official figures of inflation has risen far above the official projection and continues to do so, the people do not accept the official figures. They find that the cold market reality belies them and the rate of inflation is far higher. When wheat prices rise by 25 per cent following the rise in official support prices and it is short in supply in many areas, the food prices are bound to shoot up. Along with that when the meat prices have shot up, far exceeding the previous record of Rs 200 a kilo and the onion prices have risen high, inflation in food prices is bound to be heavy. The traders are always ready to exploit shortages or create shortages and push up the prices unconscionably. Petrol and other oil prices have been rising every fortnight for long and that pushes up freight rates and transport costs. All these have a multiplier effect on prices. If along with that electricity and other energy prices rise pushing up the cost of industrial production and transportation, it is a free for all for the profiteers. Along with that, the rent in the urban areas also rise substantially. The finance officials argue that if the meat or fish prices rise in Karachi that does not mean the same kind of increase has taken place in Gujranwala or Sialkot. Hence that rise is not fully reflected in the varied national indices. But surely the rise in the POL prices, electricity rates, wheat prices, etc does affect all the consumers. MEASURES TO CONTROL INFLATION We have studied above that inflation is caused by the failure of aggregate supply to equal the increase in aggregate demand. Inflation can, therefore, be controlled by increasing the supplies and reducing money incomes in order to control aggregate demand. The various methods are usually grouped under three heads: Monetary measures, fiscal measures and other measures. 1. Monetary Measures Monetary measures aim at reducing money incomes. (a) Credit Control. One of the important monetary measures is monetary policy. The central bank of the country adopts a number of methods to control the quantity and quality of credit. For this purpose, it raises the bank rates, sells securities in the open market, raises the reserve ratio, and adopts a number of selective credit control measures, such as raising margin requirements and regulating consumer credit.

Monetary policy may not be effective in controlling inflation, if inflation is due to costpush factors. Monetary policy can only be helpful in controlling inflation due to demand-pull factors. (b) Demonetization of Currency. However, one of the monetary measures is to demonetize currency of higher denominations. Such a measure is usually adopted when there is abundance of black money in the country. (c) Issue of New Currency. The most extreme monetary measure is the issue of new currency in place of the old currency. Under this system, one new note is exchanged for a number of notes of the old currency. The value of bank deposits is also fixed accordingly. Such a measure is adopted when there is an excessive issue of notes and there is hyperinflation in the country. It is very effective measure. But is inequitable for its hurts the small depositors the most. 2. Fiscal Measures Monetary policy alone is incapable of controlling inflation. It should, therefore, be supplemented by fiscal measures. Fiscal measures are highly effective for controlling government expenditure, personal consumption expenditure, and private and public investment. The principal fiscal measures are the following: (a) Reduction in Unnecessary Expenditure. The government should reduce unnecessary expenditure on non-development activities in order to curb inflation. This will also put a check on private expenditure which is dependent upon government demand for goods and services. But it is not easy to cut government expenditure. Though economy measures are always welcome but it becomes difficult to distinguish between essential and non-essential expenditure. Therefore, this measure should be supplemented by taxation.

(b) Increase in Taxes. To cut personal consumption expenditure, the rates of personal, corporate and commodity taxes should be raised and even new taxes should be levied, but the rates of taxes should not be so high as to discourage saving, investment and production. Rather, the tax system should provide larger incentives to those who save, invest and produce more. Further, to bring more revenue into the tax-net, the government should penalize the tax evaders by imposing heavy fines. Such measures are bound to be effective in controlling inflation. To increase the supply of goods within the country, the government should reduce import duties and increase export duties. (c) Increase in Savings. Another measure is to increase savings on the part of the people. This will tend to reduce disposable income with the people, and hence personal consumption expenditure. But due to the rising cost of living, people are not in a position to save much voluntarily. Keynes, therefore, advocated compulsory savings or what he called `deferred payment' where the saver gets his money back after some years. For this purpose, the government should float public loans carrying high rates of interest, start saving schemes with prize money, or lottery for long periods, etc. It should also introduce compulsory provident fund, provident fund-cum-pension schemes, etc. compulsorily. All such measures to increase savings are likely to be effective in controlling inflation. (d) Surplus Budgets. An important measure is to adopt anti-inflationary budgetary policy. For this purpose, the government should give up deficit financing and instead have surplus budgets. It means collecting more in revenues and spending less. (e) Public Debt. At the same time, it should stop repayment of public debt and postpone it to some future date till inflationary pressures are controlled within the economy. Instead, the government should borrow more to reduce money supply with the public.

Like the monetary measures, fiscal measures alone cannot help in controlling inflation. They should be supplemented by monetary, non-monetary and non fiscal measures. 3. Other Measures: The other types of measures are those which aim at increasing aggregate supply and reducing aggregate demand directly. (a) To Increase Production. The following measures should be adopted to increase production: (i) One of the foremost measures to control inflation is to increase the production of essential consumer goods like food, clothing, kerosene oil, sugar, vegetable oils, etc. (ii) If there is need, raw materials for such products may be imported on preferential basis to increase the production of essential commodities. (iii) Efforts should also be made to increase productivity. For this purpose, industrial peace should be maintained through agreements with trade unions, binding them not to resort to strikes for some time. (iv) The policy of rationalization of industries should be adopted as a long-term measure. Rationalization increases productivity and production of industries through the use of brain, brawn and bullion. (v) All possible help in the form of latest technology, raw materials, financial help, subsidies, etc. should be provided to different consumer goods sectors to increase production. (b) Rational Wage Policy. Another important measure is to adopt a rational wage and income policy. Under hyperinflation, there is a wage-price spiral. To control this, the government should freeze wages, incomes, profits, dividends, bonus, etc. But such a drastic measure can only be adopted for a short period and by antagonizing both workers and industrialists. Therefore, the best course is to link increase in wages to increase in productivity. This will have a dual effect. It will control wage and at the same time increase productivity, and hence production of goods in the economy. (c) Price Control. Price control and rationing is another measure of direct control to check inflation. Price control means fixing an upper limit for the prices of essential consumer goods. They are the maximum prices fixed by law and anybody charging more than these prices is punished by law. But it is difficult to administer price control. (d) Rationing. Rationing aims at distributing consumption of scarce goods so as to make them available to a large number of consumers. It is applied to essential consumer goods such as wheat, rice, sugar, kerosene oil, etc. It is meant to stabilise the prices of necessaries and assure distributive justice. But it is very inconvenient for consumers because it leads to queues, artificial shortages, corruption and black marketing. Keynes did not favour rationing for it "involves a great deal of waste, both of resources and of employment."

Conclusions:
Consensus has developed among the economists that the inflation and output growth are negatively correlated specially at the level of double digit inflation. An unclear trade-off between inflation and unemployment at a very low level of inflation of 3 to 4 per cent is also identified. On the basis of these findings a low inflation of 2-3 per cent is desirable. It can be achieved through curtailment of monetary expansion, lowering budget deficit, promoting efficiency by education and skill, enhancing agriculture production through research and credit availability, promoting national savings by offering positive rate of return on deposits and identifying profitable avenues of investment and revival of the economy by solving the problems of sick industrial units and quick and transparent privatizations of public sector enterprises. During the first seven months of the current financial year ending January 30, the Federal Bureau of Statistics says inflation (consumer price index) was 3.38 per cent, while the Sensitive Price Index, which covers largely food items, was 4.78 per cent and the wholesale price index 6.43 per cent. If the prevailing price push continues, as seems likely, the consumer price index may cross the 4 per cent barrier soon and move to a far higher figure. And if the continuing massive unemployment is aggravated by rising inflation, particularly of essential items, the hardships of the people can be enormous. The fact that CPI inflation has risen by 4.31 per cent in February 2003 primarily owing to increase in the items falling in food and beverages bring home a crucial point. That is the effective inflation for the poor people who spend most of their income on food is much higher than the nominal 4.31 per cent increase in CPI value during last month. Food & beverages have more than 40 per cent weight in overall CPI consisting 374 items.