Inflation in India
Length: 1714 words (4.9 double-spaced pages)
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"An increase in the amount of currency in circulation, resulting in a relatively sharp and sudden fall in its value and rise in prices: it may be caused by an increase in the volume of paper money issued or of gold mined, or a relative increase in expenditures as when the supply of goods fails to meet the demand.
This definition includes some of the basic economics of inflation and would seem to indicate that inflation is not defined as the increase in prices but as the increase in the supply of money that causes the increase in prices i.e. inflation is a cause rather than an effect.
A persistent increase in the level of consumer prices or a persistent decline in the purchasing power of money, caused by an increase in available currency and credit beyond the proportion of available goods and services.
In this definition, inflation would appear to be the consequence or result (rising prices) rather than the cause.
A general and progressive increase in prices; "in inflation everything gets more valuable except money"
CAUSES FOR INFLATION:
Inflation is caused by a combination of four factors.
Those factors are:
The supply of money goes up.
The supply of goods goes down.
Demand for money goes down.
Demand for goods goes up
IMPACT OF INFLATION:
Inflation seemed to be a chronic problem in many parts of the world. There is a wide spread recognition that inflation results in inefficient resource allocation and hence reduces potential economic growth. Inflation imposes high cost on economies and societies; disproportionately hurts the poor and fixed income groups and creates uncertainty throughout the economy and undermines macro economic stability. High inflation has always penalized the poor more than the rich because the poor are less able to protect themselves against the consequences, and less able to hedge against the risks that high inflation poses. Lowering inflation therefore, directly benefits the low and fixed
income groups.Economists think of inflation more plainly as a "sustained rise in the general level of prices." Their concerns focus on questions such as whether inflation distorts economic decisions. Very high inflation adversely impacts economic performance, as evidence from cross-country studies shows. Likewise, moderate levels of inflation can distort investment and consumption decisions.
1. ON OUR FUTURE PLANS:
Inflation has an impact on our plans for the future. When saving for retirement, college, a house, or simply budgeting for the next 12 months, the cost of goods and services have a direct impact on your goals.
Due to inflation, your goals may cost more in the future than today. A meal that costs $10 today may cost $10.36 in one year. A car that costs $10,000 today may cost $10,359 in one year, and almost $12,000 in only 5 years. So, when planning for the future, you must consider inflation and the effect it may have on your goals.
2. REAL WAGES OF EMPLOYEES:
Many people dislike inflation because they feel it makes it easier for the government, employers, financial institutions, and others to deceive them. One of the most important things about inflation is that the confusion caused by price changes enables people to play tricks on employees, at their expense." Thus, some employers may "forget" to raise their employees' wages as much as inflation thereby giving them a real pay cut. There is evidence that people do get fooled, at least initially, about their real wages.people seem to base their sense of satisfaction on nominal earnings, rather than real earnings.
3. PAYING HIGHER TAXES:
Inflation creates other opportunities for sophisticated institutions to unfairly take advantage of the average individual, in many people's minds. Inflation can increase the complexity of evaluating financial assets, from CDs and insurance policies to stocks and bonds. This shifts the distribution of power in the financial marketplace to the more sophisticated and knowledgeable actors to the detriment of the average person, in this view. Thus, the government might "forget" to change the tax brackets after an inflationary episode, so the average person would end up paying higher taxes.
4. DISTORTING INVESTMENTS:
Economists tend to emphasize that inflation can do economic damage by distorting investment and consumption decisions. Distortions results from households' and businesses' uncertainty about inflation's future course.When inflation is stable, people are more likely to have roughly the same anticipation of its future level. When inflation is highly volatile, however, people have different guesses. Most turn out to be wrong. Inadvertently, some end up winners and others losers.
CURRENT INFLATION IN INDIA
India's inflation, based on the Wholesale Price Index (WPI), stood at 4.61% in the week ended September 9, the Government said on Friday. It was at 4.78% in the previous week.
Meanwhile, the Commerce & Industry Ministry has revised inflation for the week ended July 15, from the preliminary estimate of 4.52% to 4.62%.
India's wholesale price index rose 4.61 percent in the 12 months to Sept. 9, lower than 4.78 percent a week earlier due to lower price of manufactured products.
India's accelerating industrial production growth should help control inflation by boosting the supply of manufactured products.
Industrial production, which accounts for almost a quarter of India's $775 billion economy, expanded at the fastest pace in a decade in July, as power companies doubled electricity output to keep up with demand from factories producing cars and textiles and government spending on roads and ports spurred demand for steel and cement.
The pace of growth raised concern among economists that rapid consumer demand may spur inflation and prompt India's central bank to increase interest rates next month for the fourth time this year. The wholesale price index of manufactured products rose to a two-month high of 3.79 percent in the first week of September.
``There is a greater industrial output response, so the price increase will be less,'' ``With oil prices falling, India has a twin advantage. Inflation should continue at these levels.''
Oil has plunged 19 percent from a record $78.40 a barrel on July 14 on signs that fuel inventories will be sufficient to meet demand and as Middle East tensions ease. European nations are seeking talks with Iran to solve the nuclear dispute.
Crude oil for October delivery was at $63.95 a barrel, up 15 cents in after-hours electronic trading on the New York Mercantile Exchange at 8:15 a.m. in Singapore. Prices today are 5 percent lower than a year ago.
The yield on India's benchmark 10-year bonds, which fell 22 basis points in the past month as oil prices fell and the U.S. Federal Reserve left its benchmark rate unchanged last month, has risen 7 basis points in the past week, partly on concern of rising prices of manufactured products.
Reserve Bank of India Governor Yaga Venugopal Reddy has increased the central bank's key overnight rate by 150 basis points since October 2004 to 6 percent, to keep record fuel costs and an expanding economy from stoking inflation. He has raised borrowing costs three times this year and will unveil the next monetary policy statement on Oct. 31.
The central bank said Aug. 30 that ``there are continuing signs of demand pressures that could exert upward pressure on prices when associated with supply shocks such as from oil''.
``The rise in industrial production is not so much demand- driven,'' ``It is the effect of investments showing up. You are seeing at long last the manufacturing sector showing resurgence.''
India's economy has averaged an 8.1 percent expansion in the past three years, the most after China among the world's biggest economies encouraging investments from companies such as General Motors Corp., the world's biggest automaker, and Posco, the world's fourth-largest steelmaker.
In the past three months alone, companies including Mittal Steel Co., the world's largest steelmaker, have pledged to invest $149 billion in India, according to the Associated Chambers of Commerce and Industry in New Delhi.
``A lot of investments are taking place and the outlook for industrial growth looks good,'' Lahiri said. ``Industrial expansion is broad-based and at least eight industries including engineering and textiles are growing in double digits.''
Industrial production is also expanding as Prime Minister Manmohan Singh's government boosts infrastructure spending by 24 percent to 992 billion rupees ($21 billion) in the year that started April 1 to help spur economic growth to 10 percent over the next decade. India spends a seventh of China's $150 billion investment in public works each year according to Morgan Stanley.
Production at factories, utilities and mines gained 12.4 percent in July from a year earlier, the largest increase since June 1996, India's government said Sept. 12. Manufacturing rose 13.3 percent in July from 9.9 percent in the previous month.
The Reserve Bank of India may increase its key rate by a quarter point at its next review on Oct. 31, six of 10 analysts surveyed by Bloomberg News said July 25, to contain inflation.
India's finance ministry has called for low interest rates to boost investments and economic expansion.
``Inflation is under control and there is no immediate threat to it,''
RBI expects annual inflation to be between 5.0-5.5 percent by the end of the fiscal year in March 2007.
India imports more than 70 percent of its oil needs so falling prices could help lower inflationary pressures.
"At the current interest rate level inflation will be contained and as well as be sustained and support the growth,"
RBI is due to review monetary policy on Oct. 31. It has raised the reverse-repo rate three times this year, taking it to 6.0 percent, to fight inflation.
The RBI was also keeping its forecast that the economy would grow 7.5-8 percent for the year to March 2007.
Gross domestic product is estimated to have expanded 8.4 percent in the fiscal year to March 2006 and the government wants to sustain growth at more than 8 percent in coming years.
The RBI expected the federal fiscal deficit for the year to March 2007 to be within target. In the first four months of 2006/07 the deficit was 58.1 percent of the full-year target of 1.49 trillion rupees.
The figure was higher than a forecast for 4.48 percent. The inflation rate was 4.11 percent during the corresponding week of the previous year.
The wholesale price index is more closely watched than the consumer price index, which is published monthly, because it has a higher number of products in its basket and is published weekly.