1. Inflation in India - Overview
Dr Rangarajan Chairman, (PMEAC), on inflation in India:
“In other countries, the growth rate is low, but at the same
time inflation is also low. Whereas in our country, while growth
is slowing, inflation remains at a high level.”
Inflation Rate WPI (May 2012): 7.55%
Inflation Rate CPI (May 2012) : 10.36 %
All time high (Sept 1974): 34.7%
Record low (May 1976) : -11.3

3. Nature & Causes of
Inflation
Q1

4. Nature of the Inflation
Supply Shock (Cost-Push):
• Agricultural production in India has not grown in
proportion to the growth in Population, thus creating a
supply shortage.
• India has seen a rise in prices of Raw Materials and wage
rates and a shortage of Natural resources This has caused
the Price level (cost of goods) to increase.
• Food prices rose 10.49% in April with the price of
vegetables surging ahead at more than 60%.
• Fuel and electricity inflation rose to 11.03% in April
compared with 10.41% in the previous month.

5. Causes of Inflation in India
Rise in Food Prices:
In May food prices rose an annual 10.74% compared to 8.25% in
the year-ago period.
• Nature of the Agricultural Industry:
For e.g. this year Karnataka, Maharashtra and Andhra Pradesh
have had poor rains, which is crucial for the cultivation of pulses.
Prices of Pulses contribute 0.72% of India’s Inflation.
• Supply Bottle Necks:
Inflation is often attributed to supply bottlenecks such as in food
distribution, where an estimated one third of fresh produce is
wasted.

6. Rise in fuel prices:
Rise in petrol prices significantly effects the CPI of the country and
rise in diesel prices effects inflation as a whole.
Oil is our No.1 Purchase (Import), with a 31% commodity share
for 2010-2011 (Economic Times, 7 July 2012). Therefore, it has a
strong bearing on our trade deficit.

7. Trade deficit and the Depreciation of the rupee:
Because of the steady decline of the rupee, import costs are
rising. This creates the need for subsidies. Increasing subsidies
adversely affects India’s fiscal deficit and makes it harder to
tackle inflation.
Political Instability:
The Coalition government struggles to push forward with reforms
in the face of a strong opposition, much to the frustration of
investors who abandon the idea of investing in India. Lack of
Investment, means lack of growth, further fuelling the supply
shortage and rise in prices.

8. Inflation over the Past Year
Wholesale Price Index (WPI) for the past one year

9. Inflation : Structural
or Monetary
Causes?
Q2

10. Structural or Monetary?
• Monetary Inflation: Sustained increase in the money
supply of a country.
• Structural Inflation: Strongly influenced by Govt’s
monetary policy and economic structure.
• Inflation in India is more structural than monetary.
• India’s economy is dotted by structural imbalances in
various sectors.
• Major sectors contributing to inflation are Agriculture,
Manufacturing,services and Fuel.
• Bottleneck in supply side ,slump in production,decline
in agriculture growth are all major causes for inflation
in india.

11. • The graph shows a very high correlation between
repo rate and growth in WPI and IIP.
• As per the graph, the constant rise in rates has been
adversely affecting the industry as the cost of
borrowing has increased, investments have dried up
and profit margins have taken a hit.

12. In the case of food inflation, as the repo rate is increasing,
the growth rate also is increasing.
• Major Contributor to food Inflation is protein rich foods
like milk, pulses, eggs, fish etc.

13. • With the change in purchasing power, the trend of food
consumption has shifted from carbohydrate rich foods to
protein rich foods.
• In the case of pulses,the problem is compounded by the
fact that India is the single biggest consumer and only a
handful of other countries produce in quantities that
India demands.

14. Can Organized retailing
in India reduce the
Inflation?
Q3

15. India: Goldmine for retail investors
According to the A T Keaney Global Retail Development Index Report 2011 / 2012,
India is has a great opportunity for organized retailing because:
• Vast Population of approx 1.2 Billion with fast Labor force growth.
• Rapid Urbanization
• High Savings and Investment rates giving more purchasing power to Consumers
• Accelerated retail growth of 15 to 20 percent .
• Low Organized Retail penetration of about 5% to 6 % indicating room for growth.
• Changes in foreign direct investment (FDI) regulations favouring various international
retailers' entry and expansion plans.

16. Impact of FDI : Structural/Institutional
• Inclusion of 51% foreign direct investment in multi-brand retail
• Attract global supermarkets, such as Walmart, Tesco and Carrefour (Min
FDI - $100 million (Rs 450 crore)
Impact Urban Retail Rural Retail Market Local Small Local Big
Market Retailer Retailer
Supply Chain • Increased • Increased Penetration of • Harder to • Harder to
Localized Competitiveness Markets Compete Compete
• Product • Backward and Forward • Sales Based on • Impetus to
Differentiation Linkages to Kirana Shops, -Convenience innovate
• Price Wars Local Farmers, Local -Competitive • Brand War
Stores in Villages Pricing eminent
Job Creation / • Training Institutes • Agriculture best practices • Indirect • Direct
Offset & other ancillaries • Transportation & competition – competition
• Employment for Administrative Jobs minimal impact –impact
Middle / Upper • Offset : Local eminent
Class Supermarket store will • Survival of
• Offset : Medium face severe competition the fittest
Size Retailer
Warehousing / • Inclusion of multi brand stores will lead to localizing the supply chain & pds system will
PDS be impacted parallelly, adding best practices for supply chain management

17. IMPACT of FDI : Inflation Rate
Offset of
SIMPLISTIC VIEW OF IMPACT OF INFLATION Existing
Distributors
Reduced Middle Man Increased
Investment by Waste Cut Out Income Of
Increased Organized Farmers Inflation
Multi Brand
Competition Supply Chain Decrease
Outlets
Increased
Increased
Job Creation Disposable
Consumption
Income
Source : India Retail Report 2011

18. Thank You
Group 4
S3