Solution to the problem Inflation in India

1. 28 States
Inflating Problem due
To Inflation
Team Name:
We for the Change
Tech-id
TECH51306

2. What is
Inflation ?
Inflation : 
Inflation is defined as a rise in the general price
level over a period of time.
 In other words, prices of many goods and
services such as housing apparel, food,
transportation, and fuel become dearer during
inflation.
Deflation :  Deflation is defined as fall in the general price
level over a period of time.
Both Inflation and Deflation create Problems…
What happens during Inflation : Value of Money goes down↓↓ and Prices rise High↑↑

3. Growth vs. Inflation: India, 1951-2011
Average annual
growth rate of GDP at
constant prices
(%)
Average annual
rate of
WPI inflation
(%)
2005-06 to 2010-11
8.47
6.55
2000-01 to 2005-06
6.93
4.68
1995-96 to 2000-01
5.92
5.07
1990-95 to 1995-96
5.38
10.18
1980-81 to 1990-91
5.64
8.51
1970-71 to 1980-81
3.16
10.28
1960-61 to 1970-71
3.75
6.24
1950-51 to 1960-61
3.94
1.75
Period
WPI - Wholesale Price Index
- measured weekly in India
Rate of Inflation
The relative price of food is computed as the
ratio of the WPI component for primary food
commodities to an index of non-food
manufacturing prices computed from WPI data.
The Indian evidence above shows the lack of any simple
unidirectional relationship between inflation and growth.

4. Why is Inflation a Problem in India?
Price Effects :
1. Inflation makes some people worse off, but it makes others better off
Ex: 1. Increase in Gasoline prices affect the Truck drivers more but barely affects people who go to there work by walk and
economy vehicles
2. College tuition fees has risen almost twice as fast as average prices over the past 10 years, which hurts you a lot,
but may have little impact on a married couple with no children.
3. Poultry diseases causes a rise in the prices of Non-veg food items and affect people who eats more of Non- veg
food items but it barely affects people eating Veg food.
4. People in Cities get affected more than people in small towns and villages
Income Effects :
1. Prices for goods and services mean income for some people. So, as some prices increase faster
than other, some people’s income increase faster than others.
Ex: 1.Due to increase in number of automobiles working on Gasoline increased, due to this most of the Oil companies
record very high amounts of improvements in profits every year
2. Due to ever increasing in pollution, the number of people suffering from different diseases also increased which gave
chance to many pharmaceutical companies to improve profits every year
3. All the retail stores working on % profit’s increase there income when ever there is increase in prices of goods
Wealth Effects :
1. Inflation redistributes income between Borrowers and Lenders
2. Inflation benefits the borrowers and hurts the lenders
Reason: As the value of money decreases at higher rate

5. Inflation redistributes the social conditions of people
Causes of Inflation
Factors on Demand side :
1.
2.
3.
4.
Factors on Supply Side :
Increase in Money Supply
Increase in Disposable Income
Deficit Financing
Foreign exchange reserves
1.
2.
3.
4.
Printing Of Money
is never a
Solution for Inflation
Rise in administered prices
Erratic agricultural growth
Agricultural price policy
Inadequate industrial growth

6. Factors on Demand side
2. Increase in Disposable Income
1. Increase in Money Supply
If the currency in circulation increased, there
would be a proportional increase in the price
of goods
Disposable income is total personal income minus personal current taxes. disposable income is the
amount of "play money“ left to spend or save. If this is increased people spend money on
unnecessary things and there demand increases and thus inflation
3. Deficit Financing
4. Foreign Exchange Reserves
government spends more money than it receives as revenue, the difference
being made up by borrowing or minting new funds, minting new funds
decrease the value of money and thus inflation
Foreign exchange reserves include foreign currency deposits and
bonds and also adds gold reserves, which increase the
circulation of money and thus inflation
Factors on Supply Side
1. Rise in administered prices
Prices decided by an individual producer or seller not purely by market
forces, this is common when there is only one supplier and he has chance
to increase the cost with out any conditions
3. Agricultural price policy
Due to fluctuating prices during mid 60’s during the Pakistan war APP
was introduced to ensure stability in prices, so when the supply
decreases they have to manage the prices in order to stabilize the cost
and inflation occurs
2. Erratic agricultural growth
India is country where in 60% of people still relay on farming
and the weather is so uneven and prices depend on the
agricultural productivity
4. Inadequate industrial growth
Most of the markets in India run foreign imported products due to lack of
technology and other issues, so the pieces also keep fluctuating on the
other countries markets and market value and too much imports can lead
to fall of value of money

7. Factors on Demand side
Increase in Printed Money
Increase in Disposable Income
Due to Increase in disposable
money people spend money
lavishly independent of there
necessity and thus there is
increase in Inflation
Mainly seen in
IT Sector
in India
due to its speedy growth
Deficit Financing
Foreign Exchange Reserves
This happens every year
in India and India has a
debt of
172 Billion Dollar up-to
now and still unable to
repay it to
World bank
Forex reserves increase every
week due to good participation
of foreign companies and latest
reports from RBI says 293
Billion Dollar investment from
Foreign companies

8. Factors on Supply Side
Rise in administered prices
Erratic agricultural growth
Vegetable
Max
Cost/kg
Min
Cost/kg
Tomato
60
5
Potato
30
14
Onion
70
20
Cauliflower
45
20
Brinjal
In case of India the
administer can be
government or individual
if it is government then
it is a fixed price if it is on
the individual then there
is lot more variations based
on ones decision costs are
decided
45
20
Inadequate industrial growth
Agricultural price policy
Though APP was successful for in
some regions but due to poor
Infrastructure the food grains
and vegetables stored always get
spoiled and due this the demand
supply would decrease
GDP growth
which clearly
depicts
Industrial
Growth

9. They add inefficiencies in the market and make it difficult for companies to budget or
plan for long term
Uncertainty about the future purchasing power of money discourages investments
and savings
There can be negative impacts to trade from an increased instability in currency
exchange prices caused by unpredictable inflation
If the inflation rate in the economy of a country is higher than rates in other economy’s
there will be huge increase in imports and decrease in exports (in terms of vaule)
and hence huge fall in GDP
Higher income tax rate
Value of money decreases

10. Measures to control Inflation
1. Effective policies to control inflation need to focus on the underlying causes of inflation in the
economy
Ex: 1. If the main cause is excess demand for goods and services, then government policy
should look to reduce the level of aggregate demand
2. If cost-push inflation is the root cause, production costs need to be controlled for the
problem to be reduced
Step to be taken
Investment in infrastructure and human capital to ensure that
desired growth does not exceed the productive capacity of
the economy.
2. If Inflation is for short period of time and If not Food Inflation
Step to be taken
In the short-run the RBI should raise interest rates sharply to
protect its anti-inflationary credibility.

11. 3. To eradicate Erratic agricultural growth problem
Step to be taken
Investment and promotion of organizational innovations in
agriculture to ensure that food supply does not become a
bottleneck to growth and price to price (cost effectively)
4. Demonetization Of Currency
Step to be taken
Primarily to curb unaccounted money. The higher
denomination banknotes in Rs.5000 and Rs.10000 were to
reintroduced and these banknotes (Rs.5000 and Rs.10000)
were to be demonetized
5. A strong Fiscal Policy Reduction in unnecessary expenditure by the government
Step to be taken
Expenditures on public functions and rally's and public meeting, usage high
standards Infrastructure by public officials need to be decreased to certain
fixed level

12. 6. Check on the amount the government sector borrows each year
7. Moving towards greater independence for the central bank and transparency in monetary
policy to stabilise inflationary expectations.
8. Increase in Savings
Policy recommended for short-run
What
happens
with fiscal
Policy
Fiscal consolidation to ensure that fiscal policy does not
work at cross-purposes with monetary policy.
A loose fiscal policy, by increasing the debt burden
both directly and through its effect on interest rates,
would prove to be unsustainable in the long run
As the debt burden rises, the pressure to print money
to finance the fiscal deficit would rise, thereby making
it impossible to pursue an anti-inflationary monetary
policy.
These fiscal policies increase the rate of
leakages from the circular flow and reduce
injections into the circular flow of income
and will reduce demand pull inflation at the
cost of slower growth of economy

13. Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit man.
Ronald Reagan