Description
It describes the Causes and consequences of Inflation in India.
INFLATION IN INDIA- CAUSES AND CONSEQUENCES
INFLATION
In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time. It takes into account ALL items keeping relative prices constant. If some items become expensive it is a case of market correction. The inflation rate is the percentage rate of change of a price index over time.
ORIGIN OF INFLATION
? Inflation originally referred to the debasement of the
currency. ? In earlier days,gold was used as currency. ? Increase in coins through mixing with other metals like lead and copper. ? Cost of each coin got lowered in this way from an increase in seigniorage
MEASURING INFLATION
? Inflation is measured by change in weighted average of
prices of a basket of goods. ? It is measured by finding out the change in existing price over base year prices: (P1-P0)/P0 x 100 ? Inflation is usually estimated by calculating the inflation rate of a price index, usually the Consumer Price Index . ? The Consumer Price Index measures weighted average of prices of a selection of goods and services purchased by a "typical consumer".
INFLATION IN INDIA-WPI
? Measurement of inflation in India is done in terms of WPI ? A Wholesale Price Index (WPI) is the price of a
representative basket of wholesale goods. It is the price of the goods measured at the farm gate of production. ? The Wholesale Price Index focuses on the price of goods at which producers sell, rather than goods bought by consumers ? The purpose of the WPI is to monitor price movements that reflect supply and demand in industry, manufacturing and construction. ? We use WPI instead of CPI because in INDIA retail sector is unorganised and fragmented
BREAK-UP OF GOODS
? Primary Articles ? Food Articles
? ?
(22.03%)
(2.45%) (1.38%) (4.37%) (1.36%)
?
?
Rice Wheat Milk Raw Cotton
? Non Food Articles ? Minerals
? Fuel, Power, Light and Lubricants ? Manufactured Products
(14.22%) (63.75%)
INFLATION IN INDIAN 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
STATE OF INFLATION IN INDIA
? 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 1.65% in the week ended 1st december, 2009 this after reaching a 16 year high of 12.91 % in August 2008, bringing in a sigh of relief to policymakers.
State of Inflation in India
? The Indian economy has been registering a mammoth
GDP growth post-liberalization. ? The opening up of the Indian economy after the 1990s increased India's industrial output and we saw inflation rates rise significantly.
Causes of Inflation
1.
Expansionary Fiscal Policy and Expansionary Monetary Policy
2. Wage earners’ Expectations. 3. Change in Mark up
IMPACT OF EXPANSIONARY FISCAL POLICY ON INFLATION
? A rise in Fiscal Policy in the form of an increase in
Government Expenditure leads to an increase in price level prevailing in the economy.
IMPACT OF EXPANSIONARY MONETARY POLICY ON INFLATION
? TYPES
? 1) PRINTING NOTES ? 2) CRR,SLR
? 3)REPO,REVERSE REPO
? 1) As we increase money supply by printing notes it
leads to more money in the hands of public leading to an increase in inflation.
IMPACT OF MONETARY POLICY ON INFLATION(CONTD.)
? CRR-The minimum amount of money that
commercial banks have to deposit with the central bank.(5%) ? SLR- It is the amount which a bank has to maintain in the form: Cash, Gold valued at a price not exceeding the current market price, government securities and gilts. ? (25%)
IMPACT OF MONETARY POLICY(Contd)
? Liquidity Adjustment Policy
? Repo and Reverse Repo Rate: ? a)Rate at which central bank(RBI) lends money to
commercial banks(4.75%) ? b) Rate at which central bank(RBI)borrows out money from the commercial banks(3.25%)
? These types of policies lead to Demand Pull Inflation
CAUSES OF INFLATION
2) After a demand pull inflation which leads to a rise in expected price levels wage earners expect a higher wage. This higher wage increases the cost to company Companies tend to increase the prices in turn.
3) Sometimes in non competitive markets companies tend to increase the markup which tends to increase the general price level.
CONSEQUENCES OF INFLATION
? Ruins the Monetization of the economy i.e. it wipes away
the use of money as a medium of exchange. Services cannot survive as they are highly perishable. ? Creates a lot of Noise-which makes resource allocation as per price signaling impossible. (Price acts as a reallocation signal). ? Redistributes the benefits between creditor and debtor. In a state of inflation people don’t like savings much. Inflation leads to a rise in the general price level so that money loses its value. When inflation is high, people lose confidence in money as the real value of savings is severely reduced. Savers will lose out if nominal interest rates are lower than inflation – leading to negative real interest rates.
CONSEQUENCES OF INFLATION(contd)
? Government Tax point-Inflation distorts the tax
system.Taxes are imposed on nominal rate,hence even if your real income has not changed you are taxed more.
THANK YOU
Anirban Mazumdar-40 Amalesh Bandopadhyay-06 Swati Gupta-26 Manuja Chaudhri-10 Sagar Yerunkar-61 Ashish Khurana-37
doc_438917023.pptx
It describes the Causes and consequences of Inflation in India.
INFLATION IN INDIA- CAUSES AND CONSEQUENCES
INFLATION
In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time. It takes into account ALL items keeping relative prices constant. If some items become expensive it is a case of market correction. The inflation rate is the percentage rate of change of a price index over time.
ORIGIN OF INFLATION
? Inflation originally referred to the debasement of the
currency. ? In earlier days,gold was used as currency. ? Increase in coins through mixing with other metals like lead and copper. ? Cost of each coin got lowered in this way from an increase in seigniorage
MEASURING INFLATION
? Inflation is measured by change in weighted average of
prices of a basket of goods. ? It is measured by finding out the change in existing price over base year prices: (P1-P0)/P0 x 100 ? Inflation is usually estimated by calculating the inflation rate of a price index, usually the Consumer Price Index . ? The Consumer Price Index measures weighted average of prices of a selection of goods and services purchased by a "typical consumer".
INFLATION IN INDIA-WPI
? Measurement of inflation in India is done in terms of WPI ? A Wholesale Price Index (WPI) is the price of a
representative basket of wholesale goods. It is the price of the goods measured at the farm gate of production. ? The Wholesale Price Index focuses on the price of goods at which producers sell, rather than goods bought by consumers ? The purpose of the WPI is to monitor price movements that reflect supply and demand in industry, manufacturing and construction. ? We use WPI instead of CPI because in INDIA retail sector is unorganised and fragmented
BREAK-UP OF GOODS
? Primary Articles ? Food Articles
? ?
(22.03%)
(2.45%) (1.38%) (4.37%) (1.36%)
?
?
Rice Wheat Milk Raw Cotton
? Non Food Articles ? Minerals
? Fuel, Power, Light and Lubricants ? Manufactured Products
(14.22%) (63.75%)
INFLATION IN INDIAN 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
STATE OF INFLATION IN INDIA
? 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 1.65% in the week ended 1st december, 2009 this after reaching a 16 year high of 12.91 % in August 2008, bringing in a sigh of relief to policymakers.
State of Inflation in India
? The Indian economy has been registering a mammoth
GDP growth post-liberalization. ? The opening up of the Indian economy after the 1990s increased India's industrial output and we saw inflation rates rise significantly.
Causes of Inflation
1.
Expansionary Fiscal Policy and Expansionary Monetary Policy
2. Wage earners’ Expectations. 3. Change in Mark up
IMPACT OF EXPANSIONARY FISCAL POLICY ON INFLATION
? A rise in Fiscal Policy in the form of an increase in
Government Expenditure leads to an increase in price level prevailing in the economy.
IMPACT OF EXPANSIONARY MONETARY POLICY ON INFLATION
? TYPES
? 1) PRINTING NOTES ? 2) CRR,SLR
? 3)REPO,REVERSE REPO
? 1) As we increase money supply by printing notes it
leads to more money in the hands of public leading to an increase in inflation.
IMPACT OF MONETARY POLICY ON INFLATION(CONTD.)
? CRR-The minimum amount of money that
commercial banks have to deposit with the central bank.(5%) ? SLR- It is the amount which a bank has to maintain in the form: Cash, Gold valued at a price not exceeding the current market price, government securities and gilts. ? (25%)
IMPACT OF MONETARY POLICY(Contd)
? Liquidity Adjustment Policy
? Repo and Reverse Repo Rate: ? a)Rate at which central bank(RBI) lends money to
commercial banks(4.75%) ? b) Rate at which central bank(RBI)borrows out money from the commercial banks(3.25%)
? These types of policies lead to Demand Pull Inflation
CAUSES OF INFLATION
2) After a demand pull inflation which leads to a rise in expected price levels wage earners expect a higher wage. This higher wage increases the cost to company Companies tend to increase the prices in turn.
3) Sometimes in non competitive markets companies tend to increase the markup which tends to increase the general price level.
CONSEQUENCES OF INFLATION
? Ruins the Monetization of the economy i.e. it wipes away
the use of money as a medium of exchange. Services cannot survive as they are highly perishable. ? Creates a lot of Noise-which makes resource allocation as per price signaling impossible. (Price acts as a reallocation signal). ? Redistributes the benefits between creditor and debtor. In a state of inflation people don’t like savings much. Inflation leads to a rise in the general price level so that money loses its value. When inflation is high, people lose confidence in money as the real value of savings is severely reduced. Savers will lose out if nominal interest rates are lower than inflation – leading to negative real interest rates.
CONSEQUENCES OF INFLATION(contd)
? Government Tax point-Inflation distorts the tax
system.Taxes are imposed on nominal rate,hence even if your real income has not changed you are taxed more.
THANK YOU
Anirban Mazumdar-40 Amalesh Bandopadhyay-06 Swati Gupta-26 Manuja Chaudhri-10 Sagar Yerunkar-61 Ashish Khurana-37
doc_438917023.pptx