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MINOR PROJECT REPORT

ON

A STUDY OF RISING INFLATION BRINGING INCOME INEQUALITY


IN INDIA

Submitted in partial fulfillment of requirement of Bachelor of


Business Administration (B.B.A) General

BBA VIth SEMESTER (Evening)(A)


BATCH 2013-2016

Submitted to: Submitted by:


MANJEET SINGH GARIMAKHURANA
ASSISTANT PROFESSOR 03124501713

JAGANNATH INTERNATIONAL MANAGEMENT SCHOOL


KALKAJI

ACKNOWLEDGEMENTS
A lot of effort has gone into this training report. My thanks are due to many
people with whom I have been closely associated.

I would like all those who have contributed in completing this project. First of all, I

would like to send my sincere thanks to MR.MANJEET SINGH for his helpful

hand in the completion of my project.

I would like to thank my entire beloved family & friends for providing me monetary
as well as non monetary support, as and when required, without which this
project would not have completed on time. Their trust and patience is now
coming out in form of this thesis

GARIMA KHURANA

CONTENTS
Description Page No.
Acknowledgement (i) (i)
Contents with page no. (ii)
List of tables (iii)
List of figures (iii)
Executive Summary 4
Certificate of completion 5
CHAPTER I
Introduction to topic 6
Objectives 11
CHAPTER-II 20
Literature review 38
Research Methodology 37
CHAPTER-III
Analysis & Interpretation 39
Findings & Inferences 51
Limitations 53
CHAPTER-IV 72
Recommendations and Conclusion 54
Appendices 60
Bibliography 61

EXECUTIVE SUMMARY
In simple language, inflation means rising prices and it shows the increase in
cost of living. In economics, inflation is explained as rise in the general level of
prices of goods and services in an economy over a period of time. With the rise
in price levels a unit of currency will buy fewer goods and services. As a result,
the purchasing power of money will be reduced with inflation. In other words the
real value of money will be lost day by day along with inflation. Inflation is
measured by the Rate of Inflation or Inflation Rate which is the percentage
change in a general price index calculated as an annualized figure.
A low inflation rate is beneficial to a country and zero or negative inflation is
considered as bad. Also, a high inflation is harmful to an economy and it affects
an economy in many ways.
High inflation distorts consumer behavior. Because of the fear of price
increases, people tend to purchase their requirements in advance as
much as possible. This can destabilize markets creating unnecessary
shortages.
High inflation redistributes the income of people. The fixed income earners
and those lacking bargaining power will become relatively worse off as
their purchasing power falls.
Trade unions may demand for higher wages at times of high inflation. If
the claims are accepted by the employers, it may give rise to a wage-price
spiral which may aggravate the inflation problem.
During a high inflation period, wide fluctuations in the inflation rate make it
difficult for business organizations to predict the future and accurately
calculate prices and returns from investments. Therefore, it can undermine
business confidence.
When inflation in a country is more than that in a competitive country, the
exports from former country will be less attractive compared to the other
country. This means there will be less sales for that countrys goods both
at home and abroad and that will create a larger trade deficit. At the same
time, high inflation in a country weakens its competitive position in the
international market.
CERTIFICATE OF COMPLETION
This is to certify that GARIMA KHURANA student of JAGANNATH
INTERNATIONAL MANAGEMENT SCHOOL, KALKAJI, OF BBA
SIXTH SEMESTER, has completed this project and prepared this
report on A STUDY OF RISING INFLATION BRINGING INCOME
INEQUALITY IN INDIA under my Guidance. The matter embodied
in this project work has not been submitted earlier for the Award of
any Diploma to the best of my Knowledge and Belief.

MANJEET SINGH
ASSISTANT PROFESSOR
CHAPTER I
INTRODUCTION TO THE TOPIC
Respected dignitaries on the dais: Advocate V. R. Parnerkar, Advocate Laxmikant
Parnerkar, Shri Pradip Palnitkar, Shri Mohan Tanksale, Justice Mhase, Dr. S. N.
Pathan and Dr. Ashutosh Raravikar; Ladies and Gentlemen.
It is indeed my honour that Late Dr. Ramchandra Parnerkar Outstanding
Economics Award for 2013 has been bestowed upon me. I thank the Poornawad
Charitable Trust and its Life Management Institute for this recognition. It is
heartening to see that over the last so many years, the Trust has taken up the
mission of peoples welfare and is working towards enrichment of our life
through various social service activities, inspired by the life and mission of Dr.
Parnerkar.
Vidvat Ratna Dr. R. P. Parnerkar (1916-1980) was a great philosopher and
thinker. He recognised that human beings require incentive for action. At the
same time, they need emotional support to tie over adversities and sustain their
effort. He was a Karma Yogi. He used to say, Only singing the praise of the God
without putting in efforts would not lead you anywhere. Master is like electricity
and disciple is like a bulb. A bulb with broken filament cannot experience the
illumination from electricity.
Dr. Parnerkar put forth his economic and philosophical thought, which he termed
Poornawad. It says that matter and the mind are manifestations of only one and
the same reality which he called Poorna. The economic doctrine revolves around
the central idea of food as a fundamental human right. He believed that as long
as a person has to earn his food at somebody elses wishes, humanity would
always remain in doldrums. He believed that free food will not make people
indolent as multiple other needs would make him toil.
The problems of food security, poverty and unemployment, which were close to
his heart, are the burning issues even today. The Food Security Bill as introduced
in the Parliament by the Government in a way comes close to that dream of Dr.
Parnerkar. His economic insight blended with humanism will always remain a
beacon for generations. I was wondering how best to honour Dr. Parnerkars
contribution? Given his deep commitment to social welfare, I thought he would
have been concerned as we have been in the Reserve Bank of India about the
current state of inflation, particularly food inflation. We have been grappling with
this for some time now.
I take this opportunity to share my thoughts on the topic of inflation which affects
one and all. Over the last three years the persistence of inflation in an
environment of falling economic growth has come out as a puzzle. In my
presentation I propose to address the following questions: What do I mean by a
puzzle? Why do we need to worry about inflation? What is the nature of the
current inflation process? How did monetary policy respond to the recent bout of
inflation? I conclude with some thoughts on the way forward to achieve price
stability.
Current inflation Puzzle?
First, let me begin by giving the context. India is a moderate inflation country. For
example, in the 62 years since 1950-51average annual inflation rate as
measured by changes in the wholesale price index (WPI) increased at a rate of
6.7 per cent per annum. That is not a very high rate considering that many
countries, both developed and developing, experienced very high inflation in their
modern development history. In fact, more recently in the 1980s and 1990s the
world inflation averaged around 17 per cent per annum. In the 2000s there was a
sharp all round moderation in global inflation.
Inflation is viewed as being undesirable because of some serious economic and
social effects. Inflation impacts on income distribution making an random
redistribution of real income. Those receiving fixed money incomes (e.g.,
pensioners, beneficiaries etc.) are usually disadvantaged because often their
incomes are not adjusted upwards fast enough to compensate for the effects of
continually rising prices. Their real incomes (i.e., the goods and services their
incomes will buy) will fall. Individuals whose incomes rise more rapidly than the
inflation rate will experience increasing real incomes. Generally, the pattern of
income distribution tends to become more unequal than it was before inflation. If
the rate of inflation is high, individuals with money tend to buy real assets such
as property, gold and antiques, which often increase in value faster than the rate
of inflation. This group will gain by increasing the size of their share of the
nation's wealth.
Inflation tends to increase spending and encourage borrowing at the expense of
savings. If prices are rising quicker than incomes, individuals will tend to buy at
current prices before goods and services become more expensive and less
affordable. Some consumers may buy using higher levels of debt (i.e., borrowing)
than otherwise might the case. Savings may be discouraged because with high
inflation when the money saved is repaid, it can be worth much less than when it
was lent and the real rate of interest may be low. The real rate of interest rates
fail to keep pace with inflation the saver loses purchasing power, i.e., their ability
to buy things falls. Rising prices are a boon to borrowers because the repayment
of interest and the sum borrowed (i.e., the principal) is with lower valued money.
Inflation reduces the real value of the amount they owe, as the sum repaid has
less purchasing power. Of course, any gain by borrowers must be weighed
against the interest they must pay.

Investment, in economics, means the creation of new capital goods. Investment


can only take place if there is saving. Inflation encourages spending and
discourages saving, so funds that might otherwise have been available for
investment tend to dry up. With lower levels of investment there is likely to be a
slowing of the rate of growth of national output (GDP). This in turn leads to a
reduction in new jobs and so can increase the level of unemployment. Inflation
can distort market price signals and the market may fail to allocate resources
efficiently. Planning and investment decisions become more difficult to predict as
firms are unsure what will happen to prices and costs during times of inflation. If
firms are unable to pass on the increase in costs to consumers this will impact on
profits possibly causing some firms to close or cut back production and
subsequent employment.

Inflation in India at a faster rate relative to our trading partners can harm
exporters and benefit importers. India firms exporting their products overseas will
find it more difficult to sell their products because they are less competitive price
wise. Local producers may find it difficult to complete in domestic markets
because of relatively cheaper foreign imports. Declining exports and increasing
imports can lead to deterioration in the balance of payments. High inflation in
India may see nations trading elsewhere while a lack of business confidence
because of the perceived higher risks may see firms investing elsewhere. This
high inflation will slow growth and employment through the dampening effects on
investment and declining exports.
OBJECTIVES

To study how inflation impact on the income inequality of India


To understand income distribution and growth in India.
To understand how company create the better product and service
how met the inflationary demand for the Indian customer and
income inequality.
To study the concept of inflation and the its impact on the economy.
CHAPTER-II

LITRATURE REVIEW
The best definition of economic inequality I've read is as follows: Economic
inequality occurs when the same input 'A' produces two different outputs 'B' and
'B*' for two separate and independent parties using the same mechanism. In this
regard time/effort is input 'A' and output 'B' is what you receive, while output 'B*'
is what they receive. Economic inequality exists at the smallest personal levels,
all the way up to the highest social levels. Truth be told, even so called
marxist/socialist/communist regimes experience an even GREATER economic
inequality than capitalist systems. While initially this looks ridiculous as socialism
is supposed to be the even distribution of output for all without regard for input, it
is in fact very fractured. Those that run/control those regimes often give in to
human emotions of greed, jealousy, etc, and since they have the power the
swing the largest portions of output their way they often do. In a capitalist regime
free market forces often prevent even the biggest players from taking too much
as the economic law of diminishing marginal returns takes effect. It is only when,
to no big surprise, you involve politics and government opinion/control into the
market do we see an ever widening income gap. So in conclusion, economic
inequality is the financial manifestation of human greed and our lust for power.
Example: A man working in the street is digging up a water main to replace a
valve, while on the tenth story of the building behind him is a man on the phone
with his contacts in Japan working out a business model. The man working in the
street is paid $25 an hour to do his job, and it takes him 3 hours to do. The man
in the office makes salary, which when broken down by average hours per week
comes to be about $45 and hour, and it also takes him 3 hours to discuss and
approve the business model. At the end of the day the guy in the street made
$75 gross income, while the man in the building made $135 gross income. While
we consider both as having equal value for there time, we as a regulated system
do not and we value each other's time differently depending upon what we
produce with it. While this creates a naturally occuring income gap (inequality) it
is often marginal at best and is made up for by the fact that both men have
completely different tastes, lifestyles and needs beyond the basic. This is where
a FREE MARKET economy would close the gap, as the man making more would
spend more, while they guy making less will likely spend less. Therefore the
UTILITY acheived by both men is nearly the same. It's the whole 'grass is
greener' concept that provides the illusion that both men are not equall because
of the difference in dollar amounts

Cyclical unemployment is unemployment associated with the up or down


fluctuations in the business cycle. This type of unemployment rises during
recessions and depressions and falls during recoveries and booms. In the
graph, the unemployment rate rose sharply during each recession period and
then fell slowly as the recession ended and business activity picked up.
Unemployment will always exist to some degree for various reasons. People who
leave their job will need time to look for another (frictional unemployment).
Business will continue to fluctuate, causing some amount of cyclical
unemployment. Technological change will continue, resulting in some loss of
jobs. Also, some work is seasonal.
The percentage of total employment is generally increasing in low-skilled and
high-skilled services. These trends seem to suggest that future employment
opportunities will be greatest in services. Employment in factory and farm work
have been declining steadily since 1960, suggesting that job opportunities in
these fields will likely continue to decline into the future. Employment in office
jobs has increased steadily until its peak around 1990, when it declined and
then leveled off. This suggests that prospects for office jobs could be flat or
slightly rising in the future.

Began looking at how prices are formed in a market economy as a first step
toward understanding how individual decisions are coordinated in markets.
Market prices reflect the interactions of two different forces: demand and supply.
The quantity demanded varies with the price of the good, the price of substitutes
and complements, expected future prices, income, tastes and population.
Holding all variables constant except the price of the good (ceteris paribus), we
decided there should be a negative relationship between price and the quantity
demanded (the income and substitution effects). Any change in price, ceteris
paribus, causes a movement along the demand curve (i.e., a change in the
quantity demanded). Any violation of the ceteris paribus assumption causes the
demand curve to shift (i.e., a change in demand).
Similarly, the quantity supplied depends on the price of the good, the price of
inputs, technology, the price of substitutes and complements (in production),
expected future prices, the goals of the firm, and the number of firms. Holding all
variables constant except the price of the good, we decided there should be a
positive relationship between price and the quantity supplied (profits). Any
change in price, ceteris paribus, causes a movement along the supply curve (i.e.,
a change in the quantity supplied). Any violation of the ceteris paribus
assumption causes a shift in the supply curve (i.e., a change in supply).
Combining the two curves shows the interaction between producers and
consumers. The market always tends to the price that equates the quantity
demanded and supplied. This is the point where the demand and supply curves
intersect. If price is above this equilibrium level, there is excess supply. This
forces price down, causing the quantity supplied to decrease and the quantity
demanded to increase. The adjustment process stops when the quantity
producers are willing to supply equals the quantity that consumers are willing to
purchase. The opposite adjustment occurs if price is below the equilibrium value,
creating excess demand. Thus, if markets are out of equilibrium (characterized
by shortages or surpluses), market forces will automatically bring the market
back into equilibrium. This is how market prices help coordinate independent
actions of individuals. Market economies will appear coordinated as long as
prices are free to adjust to their equilibrium values.
If the government wants to influence market prices, it can operate through the
market by imposing taxes or subsidies. Taxes (subsidies) increase (decrease)
the costs of production (recall taxes and subsidies are both modeled as affecting
the supply curve). This shifts the supply curve, and the market will adjust to a
new equilibrium point. Thus, taxes and subsidies can influence equilibrium price
and output, but price is free to adjust to the level that clears the market. Because
prices are free to adjust, taxes and subsidies are considered as operating
through the market.

Price Ceilings
Alternatively, the government can choose to supersede the market by imposing
price ceilings or floors. Price ceilings limit prices to values below the equilibrium
level (if the limit is set above the equilibrium level, the ceiling would be
ineffective). Price floors limit prices to values above the equilibrium level. These
policies are considered as superseding the market because prices are not
allowed to adjust to their equilibrium values. As a result, price changes can not
signal consumers and producers to adjust their behavior (incentive) and prices
do not balance supply and demand (allocation).
For example, consider price ceilings (e.g., rent control, gas price controls, Nixon
and post World War II price and wage freezes, anti-price-gauging laws, etc.).
What effect does a price ceiling have on demand and supply? None. It simply
restricts price below its equilibrium value. As a result, there are chronic
shortages (see figure). Prices cannot rise, so consumers do not get the signal to
economize and producers do not get the signal to expand output.
Furthermore, there is an allocation problem that is not present when demand
equals supply. A limited supply has to be divided up between a greater demand.
Thus, we need to create some mechanism to allocate the scarce supply to
consumers. As described in the text, several allocation rules might result: first
come first serve, lottery, favoritism, discrimination, bribes, survival of the fittest,
etc. Consumers will compete to obtain a share of the limited supply, where the
rules of the competition are determined by the allocation mechanism. This
competition generally creates costs in addition to the monetary price of the good
(e.g., time waiting in line, bribes, in-kind payments, etc.). This generally
increases the total cost of the good (opportunity cost, including monetary and
non-monetary costs) above the ceiling, and even above the unrestricted
equilibrium price. Thus, price ceilings actually increase total costs above the
equilibrium level.
For example, consider ration coupons as suggested for gas in the 1970s. The
government prints one ticket for each gallon of gasoline supplied. To receive a
gallon of gas, you must sacrifice the regulated price of a gallon plus one ration
coupon. This eliminates excess demand (though there is criticism about
alternative schemes to allocate ration coupons). There are two cases: ration
coupons can be exchanged; ration coupons are non exchangeable. If ration
coupons can be exchanged, what is the market price of a ration coupon?
PC = PD - P'. If we purchase a gallon of gas with a coupon we have purchased

from someone else, what is the total cost of a gallon of gas? P D = P' + PC (see
figure). If we purchase the gallon of gas with a ration coupon we received for
free, what is our total cost of gas? P D, because PC becomes an opportunity cost.
We forgo this value when we decide to use our own coupon rather than selling it
to someone else. What if ration coupons are not exchangeable? Black market,
siphon gas, or other method to circumvent the restrictions. Opportunity cost will
still rise by an amount close to the value when coupons are exchangeable.
Are there differences between exchangeable ration coupons and other allocation
schemes? Exchangeable ration coupons are efficient (they ensure that the good
is allocated to consumers who place the highest value on the good). Other
schemes may be inefficient (e.g., lower valued consumers may receive the good
under first come first serve if they have a lower value of time).
Thus, ration coupons and other methods of allocating the limited supply all have
the effect of raising the total cost of the good above the ceiling, and above the
unrestricted equilibrium price. Thus, price ceilings actually have the opposite
effect intended. They raise total costs and lower output. Evidence supports this:
low occupancy in apts. under rent control, gas lines, and trekking (40% fall in
train rider-ship after price control were lifted in post World War II Europe). The
alternative allocation mechanisms that arise are generally considered inefficient,
unfair, and sometimes immoral.
India is a huge country, with a population of 1.2 billion. More than 50% of its
people are still dependent on agriculture which is growing at a rate of around 3%
for the last decade. As the countrys GDP is seen to grow at 7%, it is quite clear
that all these 50% people are lagging behind in the growth story of India.
According to the World Bank report, the Gini Coefficient had increased from 0.34
to 0.37 over the last decade. The top ten richest people in India constitute to
around 5% of the total GDP. What is this paradox? Is pulling these people out of
villages and away from agriculture the only way to reduce the income inequality?

Fortunately, the answer is absolutely no. If you look in to history, all the
developed countries have grown to what they are today, because they have
capitalized on what are their strengths. For example South Korea and Taiwan
became Technology leaders in Semiconductors and Electronics, Hong Kong
became a major center for Financial Institutions, Singapore became a logistical
nerve center for the global supply chain, Japan as an automobile exporter etc.
Then what are the strengths of India? ndia has 52% of cultivable land as
compared to the worlds average of 11%. All 15 major climatic conditions are
present in India. Forty six out of sixty soil types are present in India. India has 20
agro climatic regions. There are 10 bio-diversity regions. The hours of sunshine
and length of days are ideal for round the year cultivation. India has the largest
livestock population. India has the largest irrigated Land area in the world.
By 2020, India needs 340 million tons of food grains in view of the population
growth. The current available arable land of 190 million hectares will shrink down
to 140 or 120 million hectares by 2020. India has to work hard to increase the
productivity per hectare from 2 tons to 4 tons by 2020.

The gap between the industry and agriculture has to be reduced. Value addition
to the produce of the farmers has to be taken up on a national scale, which would
bring additional streams of revenue to these people. For every 20 acres of farm
land, a kiosk has t be installed with a computer and internet connection. If every
farmer registers himself and his farm in the computer, then the government with
its host of research institutions should advise the farmers in knowing the soil
conditions, weather conditions, type of crops to be grown and fertilisers to be
used.
Once provided with this kind of assistance, the farmers should be encouraged to
sell his products at the prevailing market rates through direct participation in the
commodity exchanges. For this, mid night oil has to be burnt by the local village
administration and various ministries. But this is the only way to increase their
efficiency.

The branded agricultural products have only 1% of the market share. There is a
huge market lurking out there in the branded food products like pulses, rice,
wheat, vegetables, fruits etc. The corporates like Tatas and Birlas should put up
the processing and packaging units of them in these interior areas and provide
alternate employment to these people in a recession proof industry. Even we can
export these processed products instead of exporting raw materials which shall
boost our foreign exchange earnings in the long run. Under the MGNREG
(Mahatma Gandhi National Rural Employment Generation Scheme), roads are to
be built connecting every 10 villages to the nearby town. This shall allow the
farmers to transport their produce to the markets and sell them at remunerative
tariffs. All these initiatives does not any incremental investment from the
governments, but only aligning the existing programmes towards aiding
infrastructure building. With this initiative, urban migration can be avoided and
urban facilities can be provided in rural areas to improve the quality of life. India
is the world's largest democracy, with a population of more than 1.2 billion
people. Despite making substantial financial gains since the introduction of
market-based economic reforms in the early 1990s, India continues to struggle
with several major problems, including poverty, inadequate infrastructure and
economic inequality. Although much progress has been made to tackle the social
causes of poverty in India, millions of children face an uncertain future.
A Double-Edged Sword

The same regulatory reforms that enabled India's economy to grow so rapidly
during the past 20 years have also had a serious impact on the nation's poorest
citizens. According to a 2011 report published by the Organisation for Economic
Cooperation and Development (OECD), income inequality has doubled in India
since the early 1990s. The richest 10 percent of Indians earn approximately 12
times as much money as the poorest 10 percent, compared to roughly six times
in 1990. India's economy is one of the fastest-growing emerging economies of
any newly industrialized nation in the world, but other countries have made
significantly more progress in addressing income inequality.

"Brazil, Indonesia and, on some indicators, Argentina have recorded significant


progress in reducing inequality over the past 20 years," according to the OECD
report. "By contrast, China, India, the Russian Federation and South Africa have
all become less equal over time."

ChildFund has worked in India since 1951 and remains committed to fighting
child poverty in the country. Despite the introduction of many initiatives to
address the social causes of poverty, there is much work to be done. The OECD
report revealed that poverty reduction programs have been less effective than
previously thought and also suggested that 42 percent of the Indian population
lives below the poverty line.
Serious Consequences

The causes of income inequality are highly complex and dependent on a range
of factors, and the effects are damaging to vulnerable populations, especially the
young. Children born to parents in lower-income areas are at higher risk of
childhood mortality and disease. According to data from UNICEF, 28 percent of
Indian children born between 2006 and 2010 were underweight at birth, and
approximately 48 percent of children under the age of 5 were affected by
moderate to severe growth stunting as a result of malnutrition.

Through government initiatives and the work of ChildFund and other


nongovernmental organizations, conditions are gradually improving. Data from
UNICEF suggests that 88 percent of Indians living in rural areas had access to
improved drinking water in 2008, and more than 20 percent of rural Indians had
access to better sanitation facilities in during the same time period. Although
these gains are encouraging, there is still more that can be done to improve the
lives of children living in India's poorest communities. One of the best ways you
can help ChildFund fight child poverty is by donating to our Dream Bike
campaign. Providing children living in rural areas with the means to get to school
and receive an education, this program aims to supply 800 schoolgirls in India
and Sri Lanka with bicycles. To date, we have funded more than 600 bicycles.
Another way you can get involved is by purchasing a gift from our Gifts of Love &
Hope catalog. With so many ways to give, including helping us provide water
filters for an Indian school and medical checkups for children with disabilities, our
catalog enables you to help us fight child poverty and offer children a brighter
future. Poverty is not a certain amount of goods, nor is it just a relation between
means and ends; above all it is a relation among people. Poverty is a social
status. Marshall Sahlins (1974, p. 37)

At the risk of oversimplification, I would like to say that poverty is an absolute


notion in the space of capabilities but very often it will take a relative form in the
space of commoditiesAmartya Sen (1983, p 161)

In recent years, as I have noted, there has been an increasing concern


among economists and policy makers with poverty in the sense that poverty itself
is seen as an important focus of policy. This is true with regard to low-income
countries, and it has also been an issue at various times in the relatively high-
income countries.

It has not always been this way. With the burgeoning of development
economics in the era of decolonization after World War II, attention was almost
exclusively focused on economic growth. This approach was based on the
assumption that economic growth would at least in the long run improve
everyones position, the position of the poor as well as the position of the rich. As
it became increasingly clear, however, that economic growth, when it took place,
was not relieving the material deprivation of huge numbers of people or at least
not doing so with sufficient speed it began to become apparent that it would be
necessary to address poverty more directly.

As attention then shifted directly to poverty, it became necessary to


specify just what poverty meant or, more generally, what economic well-being
meant. Usually, poverty has been defined in terms of some absolute standard,
the amount of income needed to provide basic needs. In the United States, for
example, the poverty line in 2008 for a family of four was $21,200. For low-
income countries, a similar absolute standard, though at a very different level, is
generally used. The World Banks definition, which is widely accepted (though
also widely criticized), is set at $2/day, in terms of 1990 purchasing power parity.
Dollar inflation since 1990 would make this figure about $3.25 in 2008 prices, or
$4,745 annually for a family of four. The Bank defines extreme poverty as half
of this, or $2,372.50 for a family of four. While there is a great deal of
controversy over these numbers and how they are calculated especially over
how the number of people in poverty has changed over time there is little
dispute about the idea that poverty, or well-being, is defined in terms of some
amount of goods and services, the basic needs or the money it takes to meet
those basic needs.

Yet there are several problems with this definition. As Amartya Sen has
argued, basic needs are best understood as capabilities, and not all capabilities
can be achieved simply with money. The capability to be free from disease, for
example, depends upon a broad set of social conditions; the capability to travel
depends in part on the public good of a transportation infrastructure; and the
capability to be educated also relies heavily on public goods. Sen sees poverty
as absolute in terms of these capabilities, but in terms of commodities (income)
poverty becomes relative, determined by the standards of the particular society.

The concept of basic needs the concept generally used to define poverty
when expressed in terms of commodities, is highly socially contingent. This
social contingency is clear, for example, in the dramatic difference between the
$21,200 that marks the poverty line in the United States and the $4,745 that
defines the line in the low-income countries of the world. Peoples standards,
their concept of basic needs, depend on the societies in which they live.

Furthermore, the definition and extent of poverty will depend not only on
the level of a societys income, but also on the distribution of income. It seems
reasonable to assume that a societys standards, the norm of what is needed,
are largely determined by the standard of living of those people in the middle.
Then, if we consider two societies in which the bottom segments, say the bottom
quintiles, have the same level of income, poverty will be greater in the society
where income is more unequally distributed. In the more unequal society, the
bottom quintile will be further from the middle and thus further from meeting the
standards of that society; the greater the inequality, the less the group at the
bottom will be able to meet societys socially determined needs and thus the
more will the members of this group be in poverty.

All this is very well, but even in this relative concept of poverty, peoples
condition, their poverty, is defined as a relation between people and things (the
quantity of things represented by the level of income). Yet implicit in the relative
concept of poverty is that poverty is a social condition, a relation among people
as stated in the quotation above from Marshall Sahlins. In making his point,
Sahlins argues, The worlds most primitive people have few possessions, but
they are not poor. When a whole society hunter-gatherer societies, are the
case in point has few possessions, there is no segment of that society that is
considered poor. It is only when these peoples are incorporated into larger
societies, conceptually and practically, that they become poor failing to meet
the standards of basic needs in that larger society. Thus it is their social status,
their relation to others in society, that places them in poverty.

The point here is not that peoples absolute deprivation is irrelevant to


their material well-being. The point is simply that peoples relative position is
also not irrelevant to their material well-being. We cannot eliminate poverty while
the distribution of income remains highly unequal.

Justice, Fairness and Inequality

The Intrinsic Value of Equality

Why is equality a value?... the basic reason it matters to us is because we


believe that there is something valuable about human relationships that are in
certain crucial respects at least unstructured by differences of rank, power, or
status.

Material equality, or at least the absence of extreme inequality, has


intrinsic value and is in some sense a human right. There is a variety of
rationales behind this assertion. One follows directly from the observation that
basic needs are socially contingent (as argued in the previous section). Andrei
Marmor, for example, argues from the assumption that people have a
fundamental right to meet their basic needs and that basic needs are socially
determined. Therefore with greater inequality the larger will be the group of
people who cannot meet those needs, who are being denied by the economic
structure this fundamental right. Then, since there is intrinsic value in people
having their fundamental rights and, in particular, this right of meeting their basic
needs, material equality (at least a good degree of material equality) becomes of
intrinsic value.
Within the realm of modern philosophy, it is perhaps the ideas of John
Rawls (1971) that are most strongly associated with the concept that a just or fair
society is one of relative equality. Rawls argues that reasonable people choosing
a social order from behind a veil of ignorance that is, ignorance about where
they themselves would be situated in that society would choose a society with
a high degree of material equality. From his basic postulates about fairness,
justice, human behavior and needs, he defines his difference principle as the
guide for judging social policy and social change: The intuitive idea [of the
difference principle] is that the social order is not to establish and secure the
more attractive prospects of those better off unless dong so is to the advantage
of those less fortunate.

Yet Rawls is not arguing for equality of outcome (or condition) but stays
within the realm of advocating equality of opportunity. He avows: in order to
treat all persons equally, to provide genuine equal opportunity, society must give
more attention to those with fewer native assets and to those born into the less
favorable social positions. And Rawls takes a relatively broad view of native
assets, arguing that there is no good reason why people with less natural skills,
intelligence, or innate characteristics of personality that would often (in most
circumstance of the real world) contribute to economic success should be
consigned to a lower economic condition because of these traits. He argues that
society should provide redress for these traits, and thus rejects the idea of what
he calls a callous meritocratic society. In this sense, the thing of intrinsic value
for Rawls is not so much equality itself as fairness or equality of opportunity. Yet
the outcome, given his rejection of callous meritocracy, would be relative
equality of outcome.

There are several other philosophers whose work is associated with


valuing equality who develop their argument from postulating the intrinsic value
of equality of opportunity for example, Ronald Dworkin (1981), G.A. Cohen
(1989) and John Roemer (1998). These authors, and Rawls, have various
outlooks on what constitutes native assets, some adopting a broader view (e.g.,
including tastes or personality traits) and some adopting a narrower view (e.g.,
rejecting the idea that tastes or personality traits are part of an individuals native
assets). Nonetheless, they and many other liberal egalitarians argue from
the position that equality of opportunity means that inequalities of outcome are
not legitimate if they arise from characteristics for which people themselves are
not responsible. Indeed, one might go so far as to argue that conservatives, who
give greater emphasis to the difference between equality of opportunity and
equality of outcome, differ from the liberals largely in terms of what they view as
the individuals responsibility. Conservatives (at least modern conservatives)
would tend to include only such characteristics as race, ethnicity and gender as
traits for which the individual is not responsible. Conservatives, however, would
tend not to advocate redress for these characteristics, but simply advocate that
society not use them as a basis for discrimination. The issue of the connection
between equality of opportunity and equality of outcome will be given more
attention shortly.

The argument, however, that equality of outcome or, at least, the


absence of extreme inequalities derives from the intrinsic value of equality of
opportunity is not the same as claiming that equality of outcome itself has
intrinsic value. Fairness as embodied in equal opportunity is good, but it is not all
that is good in relation to economic equality. Even leaving aside the argument
(noted above) that follows from defining economic well-being and basic needs in
relative terms, there are strong reasons to view equality of outcome as having
intrinsic value.

This intrinsic value of equality of outcome is well captured in the Sheffler


quotation above, that there is something valuable about human relationships
that are unstructured by differences of rank, power, or status. Sheffler is not
directly addressing differences of income and wealth. Yet, while it is conceptually
possible to have differences of income and wealth that are not accompanied by
differences of rank, power, or status, this seems highly unlikely, to say the least,
in the real world.
A similar idea is expressed by Erik Olin Wright: income inequality fractures
community, generates envy and resentment, and makes social solidarity more
precarious. The pernicious impacts of income inequality that concern Wright
depend at least in part on the origins and degree of the inequality. If, for
example, the inequality is largely based on race or ethnicity or gender, as is so
often the case, then it will be generally perceived as unfair (except, perhaps, by
those at top) and generate considerable resentment. Similarly, when inequalities
are seen as arising from family privilege, they will tend to be viewed by many
people as illegitimate and unfair. Income inequalities that are seen as arising
from differences in skills or efforts are less likely to be viewed as illegitimate (the
views of Rawls and some other liberal egalitarians notwithstanding).
Nonetheless, if inequality is large as it is in much of the world today, it is likely to
be viewed as unfair and thereby undermine social solidarity because few
people would view legitimate bases of inequality (e.g., differences in effort) as
generating large inequalities.

Thus the intrinsic value of relative economic equality (of outcome) exists
because it is a foundation for the type of social relations that we consider
desirable relations of solidarity, trust, and amiability. In this sense, the value of
relative equality can be seen in terms of its role in creating and being part of a
democratic social order. The connection between relative equality and the social
relations of a democratic social order is so intimate that the equality is really part
of those relations, not an instrument that generates their existence. (As we shall
see, however, equality and the social relations that go with it are an important
instrument for a set of positive social outcomes. Also, but beyond my scope
here, they are an instrument as well for the effective operation of political
democracy.)
Equality of Opportunity and Equality of Outcome

more effort should be directed specifically towards exploring the hypothesis


that, within the class structure of industrial societies, inequality of opportunity will
be the greater, the greater the inequality of condition as a derivative, that is, of
the argument that members of more advantaged and powerful classes will seek
to use their superior resources to preserve their own and their families
positions.Robert Erikson and John Goldthorpe

A society with highly unequal results is, more of less inevitably, a society with
highly unequal opportunity, tooPaul Krugman

Yet there remains the continuing dispute over whether we should value
equality of opportunity or equality of outcome. Having finally recognized that
equity is an issue, the World Bank has been adamant in arguing that the focus in
economic development should be on equality of opportunity and that the policy
aim is not equality in outcomes. The Bank does include in its concept of equity,
along with equal opportunity, that individuals shouldbe spared from extreme
deprivation in outcomes. Yet this seems a very limited qualification of its
rejection of equality of outcomes and is far from a push towards economic
equality. The problem is that equality of opportunity for one generation is to a
large degree dependent on equality of condition (outcome) in the previous
generation.

That is, there are strong reasons to believe that there is a large degree of
dependence of equal opportunity for generation X on the equality of condition for
generation X-1, which is to say that equal opportunity within generation X
depends largely on the conditions under which members of generation X spend
their childhood. The point can be stated in the most narrow terms of human
capital formation. Childrens schooling and their healthcare in virtually all
societies are highly dependent on the social position and income level of their
families. This dependence is somewhat attenuated by the spread of public
education and by the existence of national healthcare programs in many
advanced industrial countries. But public schools are highly unequal in a way
that is associated with income inequality, and, where public schools are less
unequal, the upper classes tend to send their children to private schools.
Moreover, neither school outcomes nor healthcare outcomes are determined
simply by the formal systems of education and healthcare, but also by a broad
array of social conditions inside and outside the family that are more
advantageous for the progeny of the wealthy than for those of the poor. Yet if
there is not equality in the formation of these basic aspects of human capital,
there can hardly be equality of opportunity. And we might well stretch the
argument to point out that economically important aspects of personality most
notably self-confidence and expectations are affected to a significant extent by
ones childhood social status and thus reinforce the dependence of opportunity
upon condition.

Jonathan Schwabish et al (2004) have examined the way these processes


operate in the connection between income inequality and social expenditures in a
set of fourteen relatively high-income countries (including observations on
several of those countries at different times). They work from the hypothesis
that high levels of income inequality reduce public support for redistributive
social spending and summarize their findings as follows: The results suggest
that as the rich become more distant from the middle and lower classes, they
find it easier to opt out of public programs and to either self insure or to buy
substitutes in the private market The conclusion is that higher economic
inequality produces lower levels of those publicly shared goods which foster
greater equality of opportunity, income insurance and greater upward mobility.
The power of those with high incomes, they suggest, works through the political
process to undermine mobility (very much in accord with the hypothesis
suggested by Erikson and Goldthorpe in the quotation above).

To the extent that income inequality (inequality of outcome) is in conflict


with equality of opportunity, we would expect a positive association between
relative equality in the distribution of income and a higher degree of social or
economic mobility, which would tend to indicate a higher degree of equality of
opportunity. While the data on these issues are sparse and contested and are
even less available for low-income countries than for high income countries, they
tend to be consistent with these expectations. For example, Robert Erikson and
John Goldthorpe present results of a multivariate analysis of social mobility
across class groupings for a dozen industrialized countries showing a
significant role for income inequality in reducing mobility. They are, however,
cautious about the significance of their results, and (as the quotation above
indicates) see the need for more examination of the issue.

Jo Blanden et al (2005, Table 2) report intergenerational partial


correlations for eight European and North American countries (Britain, Canada,
Denmark, Finland, Norway, Sweden, West Germany, and the United States).
Their data cover fathers and sons earnings, with data on sons born between
1958 and 1970 (depending on the country). Combining these data with Gini
coefficients from the World Bank (2006, Table A2), we obtain the results shown in
Figure 1 that is, a clear simple correlation between mobility and equality. These
results, of course, must be taken as only suggestive, as there are many problems
with the cross-country compatibility of the data, the number of observations is
very small, and the figure shows only the simple correlation.

Data for the U.S. at different points of time tend to support the same
conclusion. Daniel Aaronson and Bhashkar Mazumder (2005/2007) have
calculated the relationship between adult mens log annual earnings and log of
annual family income in the previous generation. Their regression coefficients, or
intergenerational elasticities (IGEs), describe how much economic differences
between families persists. They report (their Table 1) the IGE for forty year olds
at the beginning of each decade from 1950 to 2000. These IGEs show the same
pattern as do the Gini coefficients for family income for these years i.e., a
decline from 1950 into the 1970s and then a upward movement to 2000. The
two sets of data are shown in Figure 2. While the patterns are not identical, they
are certainly suggestive of the positive relationship between equality and mobility.
Using a different set of data and different methodology, Katherine Bradbury and
Jane Katz (2002) obtain similar results. They present calculations (their
Appendix Table A1) showing a notable reduction in mobility across income
quintiles for families from the 1970s through the 1990s. For example, they report
that in the 1970s 49.4 percent of families in the bottom income quintile were still
in the bottom quintile in 1979. For the 1980s and 1990s, the comparable figures
were 50.4 percent and 53.3 percent respectively. On the other extreme, while
49.1 percent of those families in the top quintile remained in the top quintile over
the 1970s, 50.9 percent remained there in the 1980s and 53.2 percent remained
there during the 1990s. The 1970s through the 1990s were of course a period of
rising income inequality in the United States, suggesting the inequality-immobility
connection. As noted, however, these findings of an equality-mobility connection
are not uncontested.

There is one study of a set of African countries that yields some support
for the equality-mobility connection. Denis Cogneau and Sandrine Mespl-
Somps (2008) examine equal opportunity in terms of social and economic
mobility in Ivory Coast, Ghana (at two points in time), Guinea, Madagascar and
Uganda. While the results are not strong, the authors conclude (p. 17):
Inequality of opportunity for income seems to correlate with overall income
inequality more than with national average income These results, however,
are confounded by numerous factors, including, for example, substantial regional
differences within countries and the difference associated with differences in
colonial history. Nonetheless, as with the results noted above for high-income
countries, this information is suggestive.

It would be reassuring to have more extensive data that would allow a


meaningful test of the hypothesis of an equality-mobility connection and thereby
support or undermine the argument that equality of opportunity is dependent on
equality of outcome/condition. However, given the implications of the data we do
have and the character of the argument for such a connection, there is good
basis to reject the idea that we can separate economic of opportunity from
equality of outcome.
Relative Equality as a Positive Instrument

Using income inequality as an indicator and determinant of the scale of


socioeconomic stratification in a society, we show that many problems
associated with relative deprivation are more prevalent in more unequal
societies. We summarise previously published evidence suggesting that this
may be true of morbidity and mortality, obesity, teenage birth rates, mental
illness, homicide, low social capital, hostility, and racism. To these we add new
analyses which suggest that this is also true of poor educational performance
among school children, the proportion of the population imprisoned, drug
overdose mortality and low social mobility.Richard Wilkinson and Kate E.
Pickett

Beyond questions of definition and beyond philosophic disputes over the value of
relative equality, the distribution of income appears to play some important roles
in affecting various social outcomes that are widely valued. In particular, for
example, a more equal distribution of income appears to be a causal factor
bringing about better health outcomes and a reduction in violent crime. More
precisely, a more equal distribution of income is an indicator (a marker) for and
a part of a set of social relations that tend to generate these favorable outcomes.
In this sense, income equality has instrumental value as can be shown using the
health and crime examples.
Equality and Health Outcomes

No one disputes that absolute poverty is bad for ones health. Better to be rich
and healthy than poor and sick, as the sardonic statement puts the matter.
Whether one examines the data within a particular society or across various
societies, the correlation between the level of income of an individual or a society
and health outcomes of the individual or society (e.g., morbidity or mortality) is
fairly clear. In both cases, however, the impact of income on health outcomes
appears to be much stronger at lower than at higher levels of income that is, at
low levels of income a small increase of income is associated with a large
improvement of health outcomes, but at high levels of income an increase of
income has little impact on health outcomes.

Yet it is also true that if we look across societies (leaving aside for the
moment how we define societies, which turns out to be an important issue),
there is a negative correlation between the degree of income inequality and
health outcomes. More unequal societies tend to have worse health outcomes.
This is a controversial statement, as recognized even by its proponents (e.g.,
Wilkinson and Pickett, 2006, and Subramanian and Kawachi, 2004), and some
aspects of the controversy will be taken up shortly. Before I do so, however, it
will be useful to consider the reasons why inequality may cause poor health.

First, there is the phenomenon that a change of income makes more


difference for health outcomes at low levels of income than at high levels of
income. Thus in two societies with the same average level of income we would
expect the more equal one to have better health outcomes on average, but only
at the (small) expense in terms of health outcomes of those at the top; overall
that is, the health outcomes of the more equal society would not be better at
every level.

Second, as noted above, more unequal societies appear to spend less on


social programs than do more equal societies. Accordingly, we would expect
public health services and the provision of health care for the low-income part of
the populace to be smaller in the more unequal societies. Thus, again we would
expect a more equal society to have better health outcomes on average, but
health outcomes would not necessarily be better for those at the upper income
levels or, at least, the impacts would be small at the upper income levels.

Third, more unequal societies tend to generate greater stress levels, and
stress can work through psychosocial pathways to generate poor health. Income
inequality pollutes the social environment (to use Subramanian and Kawachis
term), creating divisions, resentments, and worries at all levels. Those people in
subordinate positions tend to be in a chronic state of tension, as they are unable
to attain the material standards of the society; those people higher up tend to
worry that they may not be able to maintain their position. Fear, it has sometimes
been noted, is a powerful motivator; it is also a powerful generator of stress.
Stress, it is well recognized, is a factor in a great variety of health outcomes.
Perhaps the most important implication of the psychosocial explanation is that it
would explain the finding of some studies that health outcomes at all levels are
better in more equal societies (e.g., Banks et al, 2006)

In many ways the psychosocial explanation of the role of inequality in


affecting health is the most compelling, but it is also difficult to establish and
controversial (e.g., Lynch et al, 2000). Indeed, the entire argument that health
outcomes are significantly affected by income distribution is controversial. In an
extensive review, Angus Deaton (2003) maintains that income distribution itself is
not a major determinant of population health. When controlled for several other
social variables, the relation between income distribution and health, Deaton
argues, drops from sight. But it seems that Deaton does not recognize the point
that income distribution is a marker for a whole set of measures of social-
economic differentiation. Controlling for other measures of this differentiation will
reduce, if not eliminate the significance of income distribution itself, but the basic
connection between the differentiation (for which income distribution is marker)
will not be refuted.
Another source of dispute over the role of income distribution in affecting health
outcomes arises from the way society is defined in various studies. In general,
studies that focus on larger social units countries, states or provinces, and
large metropolitan areas find more support for the connection between
inequality and ill-health than do studies where the units of observations are small
e.g., towns or counties. Yet it would seem that the comparisons of hierarchy
and status that would affect stress tend to be derived from the larger society in
which people live. Social differences measured within the smaller units are less
likely, according to the psychosocial argument at least, to have a great impact on
health outcomes.

Although the equality-health connection remains controversial, the


evidence from a great many studies provides substantial support for the
argument that inequality (measured by income distribution or some other
indicators of social position) is a significant factor effecting negative health
outcomes. The points made by critics, while relevant, are not convincing. At the
same time, it is important to keep in mind that income level is still an important
factor affecting positive health. This is especially the case in low-income
countries, where rising per capita income is strongly associated with improved
health outcomes. This does not mean, however, that income distribution is
irrelevant for health outcomes in low-income countries. Not only does it appear
to have some direct effect outside the high-income countries (e.g., Subramanian
et al, 2003), but, in addition, patterns of inequality once established tend to
persist. As low-income countries experience economic growth, the impact of
inequalities already well-established will tend to have a greater role in health
conditions.
Equality and Crime

It seems likely that inequality would increase crime. With a high degree of
inequality, people at the bottom would tend to see themselves as especially
deprived and also see their position as unfair. They would then be more likely to
rationalize and engage in burglary and theft, crimes against property. Moreover,
the narrowly economic theories of crime, which see crime as a decision based on
a calculation of potential gains relative to potential costs (deriving from Gary
Becker, 1968), postulate a positive relation between income inequality and crime
based on the larger wealth differences between the rich and the poor and
therefore the greater potential gain.

Yet, it is the connection between inequality and crimes of violence that is


found to be strong in various studies. For example, Morgan Kelly (2000, p. 530)
in a study based on data for U.S. counties and cities, finds that, The behavior of
property and violent crime are quite different. Inequality has no effect on property
crime but a strong and robust impact on violent crimeBy contrast, [absolute]
poverty and police activity have significant effects on property crime, but little on
violent crime. In a cross-country study of inequality and violent crime, Daniel
Lederman et al (2002), using data from 39 countries, more than half of which are
low- or moderate-income countries, find a positive causal connection between
inequality and violent crime rates. (Both the studies by Kelly and by Lederman et
al control for a variety of related variables and use a variety of statistical tests.)
Gabriel Demombynes and Berk Ozler (2002) examine the crime-inequality
connection in South Africa, focusing on local areas. They find a positive
association between inequality and crime for both violent crime and crimes
against property.

While the argument based in the narrow economics approach pioneered


by Becker may have some relevance to the explanation of the inequality-crime
connection, it fails to come to grips with the strong relation between inequality
and violent crime. Explanations of the role of income inequality in effecting
violent crime tend to focus on the social impact of inequality, the impact of
inequality on social solidarity referred to earlier. In a 1982 article that has been a
reference point for the crime-distribution connection, Judith Blau and Peter Blau,
examining the issue in the United States, find a strong connection between
violent crime and racial and economic inequality. They offer as an explanation:
In a society founded on the principle that all men are created equal, economic
inequalities rooted in ascribed positions violate the spirit of democracy and are
likely to create alienation, despair, and conflict. (Blau and Blau, 1982, p. 126).
This argument overlaps with the explanation, offered above, regarding the
intrinsic value of economic equality.
RESEARCH METHODOLOGY

WHAT IS RESEARCH?

The process used to collect information and data for the purpose
of making business decisions.

In everyday life, human beings have to face problems viz social, economical and
financial problems. These problems in life call for acceptable and effective
solutions and for this purpose, research is required.

The methodology may include publication research, interviews, surveys and other
research techniques, and could include both present and historical information.

TYPES OF RESEARCH:-

Primary Data

It is the original piece of information collected by the researcher which is reliable


and accurate when collected properly.

It is prepared after gaining some insight into the issue by reviewing secondary
research or by analyzing previously collected primary data.

In my research, it was collected by distributing questionnaires to employees and


department managers. They were carefully designed by taking into account the
parameters of my study.

SECONDARY DATA

A secondary data is that data that is required to conduct the study and can be
obtained from books, journals, magazines, records etc.
Secondary data is data taken by the researcher from secondary sources, internal or
external.
Secondary data is collected from following sources: -
Magazines and journals
Company websites.
Internet

I have collected the Secondary data from following sources:-

Newspaper Hindustan Times, Times of India, Economic Times

Magazine - The Times. Harvard Business Review, 4Ps

Website/Internet from different website

Book Course book/ Philip Kotler

Notes- Professors Notes


CHAPTER-IV

ANALYSIS AND FINDINGS


In the eight year period from 2000 to 2007, the world inflation averaged 3.9 per
cent per annum. Even the emerging and developing economies (EDEs) which
traditionally had very high inflation showed an average annual inflation at 6.7 per
cent. Indias inflation performance was even better at 5.2 per cent as measured
by WPI and 4.6 per cent measured by the consumer price index (CPI-IW). In
2008 the global financial crisis struck following which inflation rose sharply both
in advanced countries and EDEs as commodity and oil prices rebounded ahead
of a sharp V shaped recovery. Thereafter, inflation rate moderated both in
advanced economies and EDEs. In India too the inflation rate rose from 4.7 per
cent in 2007-08 to 8.1 per cent in 2008-09 and fell to 3.8 per cent in 2009-10.
However, the inflation rate backed up and stayed near double digits during 2010-
11 and 2011-12 before showing some moderation in 2012-13. Given Indias good
track record of inflation management, the persistence of elevated inflation for
over two years is apparently puzzling.

Table 1: In recent years Indias inflation rate has been


higher than world average

(Year-on-year in per cent)

2000-07 2008 2009 2010 2011 2012 2008-12

Average Annual Average

Global Inflation

World 3.9 6.0 2.4 3.7 4.9 4.0 4.2

EDEs 6.7 9.3 5.1 6.1 7.2 6.1 6.8

Inflation in India

WPI 5.2 8.1 3.8 9.6 8.9 7.6 7.6

WPI-Food 3.8 8.9 14.6 11.1 7.2 9.1 10.2

WPI-NFMP 4.3 5.7 0.2 6.1 7.3 5.2 4.9


CPI-IW 4.6 9.1 12.2 10.5 8.4 9.9 10.0

Indian inflation data pertains to financial year, DEs: Emerging and


Developing Economies,
WPI: Wholesale Price Index, NFMP: Non-food manufactured
products,
CPI-IW: Consumer Price Index for Industrial Workers.

Second, the deceleration of growth and emergence of a significant negative


output gap has failed to contain inflation. It is understandable if inflation goes up
in an environment of accelerating economic growth. There could be a situation
when the real economy is growing above its potential growth that could trigger
inflation what economists call an overheating situation. It is like an electric cable
exploding if we overload it with appliances beyond its capacity. But, that is not the
case. The Reserve Bank estimates suggest that the potential output growth of
the Indian economy dropped from 8.5 per cent pre-crisis to 8.0 per cent post-
crisis and it may have further fallen to around 7.0 per cent in the recent period.
Even against this scaled down estimate of potential growth, actual year-on-year
GDP growth has decelerated significantly from 9.2 per cent in the fourth quarter
of 2010-11 to 5.3 per cent in the second quarter of 2012-13. The loss of growth
momentum that started in 2011-12 got extended into 2012-13.

During a boom, economic activity may for a time rise above this potential level
and the output gap becomes positive. During economic slowdown, the economy
drops below its potential level and the output gap is negative. Economic theory
puts a lot of emphasis on understanding the relationship between output gap and
inflation. A negative output gap implies a slack in the economy and hence a
downward pressure on inflation. So, Indias current low growth-high inflation
dynamics has been in contrast to this conventional economic theory. Real GDP
growth has moderated significantly below its potential. Yet inflation did not cool
off.

Third, the Reserve Bank raised its policy repo rate 13 times between March 2010
and October 2011 by a cumulative 375 basis points. The policy repo rate
increased from a low of 4.75 per cent to 8.5 per cent. Still it did not help contain
inflation. The critics of the Reserve Bank argue that monetary tightening rather
than lowering inflation has slowed growth. Interest rate is a blunt instrument. It
first slows growth and then inflation. But the growth slowdown has not been
commensurate with inflation control.

The above three considerations will suggest that the recent persistence of
inflation is a puzzle. I will come back to the causes of the recent bout of inflation;
but before that, let me address the question as to why do we need to worry about
high inflation?

Costs of inflation

Inflation, though a nominal variable, imposes real costs on the economy. Let me
elaborate.

First, inflation erodes the value of money. As I mentioned earlier, India is a


moderate inflation country with the 62-year long-term average inflation rate being
6.7 per cent, notwithstanding occasional spikes in inflation. Yet during this period
the overall price level has multiplied 45 times. This means that ` 100 now is worth
only ` 2.2 at 1950-51 prices. Since price stability is a key objective of monetary
policy, central banks are obviously concerned with inflation.

Second, high and persistent inflation imposes significant socio-economic costs.


Given that the burden of inflation is disproportionately large on the poor, and
considering that India has a large informal sector, high inflation by itself can lead
to distributional inequality. Therefore, for a welfare-oriented public policy, low
inflation becomes a critical element for ensuring a balanced progress.

Third, high inflation distorts economic incentives by diverting resources away


from productive investment to speculative activities. Fixed-income earners and
pensioners see a decline in their disposable income and standard of living.
Inflation reduces households savings as they try to maintain the real value of
their consumption. Consequent fall in overall investment in the economy reduces
its potential growth. With a high inflation of over two years we are already seeing
a fall in household savings in financial assets, particularly in bank deposits. At the
same time households preference for gold has increased. This is putting
additional pressure on our balance of payments.

Fourth, economic agents base their consumption and investment decisions on


their current and expected future income as well as their expectations on future
inflation rates. Persistent high inflation alters inflationary expectations and
apprehension arising from price uncertainty does lead to cut in spending by
individuals and slowdown in investment by corporates which hurts economic
growth in the long-run.

Fifth, as inflation rises and turns volatile, it raises the inflation risk premia in
financial transactions. Hence, nominal interest rates tend to be higher than they
would have been under low and stable inflation.

Sixth, if domestic inflation remains persistently higher than those of the trading
partners, it affects external competitiveness through appreciation of the real
exchange rate.

Finally, as inflation rises beyond a threshold, it has an adverse impact on overall


growth. The Reserve Banks technical assessment suggests that the threshold
level of inflation for India is in the range of 4 to 6 per cent. If inflation persists
beyond this level, it could lower economic growth over the medium-term.

Causes of recent inflation spike

Let me first identify the high inflation period. The WPI inflation rate accelerated
from 7.1 per cent in December 2009 to a peak of 10.9 per cent by April 2010,
thereafter it remained stubbornly close to double digits till November 2011. Thus,
we experienced two years of high inflation between January 2010 to December
2011. During this two-year period, WPI inflation averaged 9.5 per cent per
annum. All the major components of inflation contributed to this surge. The
trigger for inflation first emanated from the failure of South-West monsoon of
2009, following which food prices rose sharply. Concurrently, the global economy
made a sharp recovery from the recession of 2009. As a result, global commodity
prices including oil rose substantially. India being a net commodity importer,
particularly oil, the intermediate prices rose. This quickly spilled over to non-food
manufactured products inflation, making the inflation process fairly generalised.
In the subsequent one year between January 2012 to December 2012 the
average WPI inflation moderated to 7.5 per cent led by all its major components
except fuel and power

The high inflation during 2010 and 2011 was a combination of both adverse
global and domestic factors as well as supply and demand factors.

First, crude oil and other global commodity price trends as well as exchange rate
movements are increasingly playing an important role in defining domestic
prices. With the gradual external liberalization, the Indian economy is much more
open and globalised now than ever before. Currently, over 85 per cent of demand
for crude oil in India is met by imports. The imported Indian basket of crude oil
price rose from US $ 49 per barrel in April 2009 to an average of US $ 79 per
barrel in 2010 and further to US $ 108 per barrel in 2011 and remained high at
US $ 110 per barrel in 2012. Global metal prices, reflected in the IMF index, rose
by 48 per cent in 2010 and again by 14 per cent in 2011 before moderating by 17
per cent in 2012.
Moreover, the Rupee depreciated from an average of 45.7 per US dollar in 2010
to 46.7 in 2011. The depreciation of the Rupee was particularly sharp in 2012 as
the Rupee averaged 53.4 per US dollar. Empirical evidence suggests that one
percentage point change in the Rupee-dollar exchange rate has 10 basis points
impact on inflation. While, during 2010 and 2011, global commodity prices had an
adverse impact on domestic inflation, the depreciation of the Rupee more than
offset the beneficial impact of modest softening of global commodity prices on
domestic inflation in 2012.

There is another important dimension of Indias external sector linkage,


particularly towards explaining high non-food manufactured product inflation.
Analysis suggests that the pass-through from non-food international commodity
prices to domestic raw material prices has increased in the recent years
reflecting growing interconnectedness of domestic and global commodity
markets. This trend is also corroborated by corporate finance data which show
that the share of raw material costs as a percentage of both expenditure and
sales has been rising. Therefore, as the economy is increasingly getting
integrated, external sector developments are progressively becoming important
for domestic price behavior.

Second, while the growth in domestic agricultural production has stagnated


around 3 per cent per annum, the demand for food has increased. Although the
country currently has sufficient foodgrains stocks, it is not yet self-sufficient in
pulses and oilseeds. Further, demand for protein based products like meat, eggs,
milk and fish as well as fruits and vegetables has increased substantially with
rising per capita income. The protein inflation has assumed a structural
character. This has also resulted in substantial divergence between WPI and CPI
as food has a larger share in the consumer price index basket.

Further, with the increase in income, real consumption expenditure has grown
significantly. Recently released key results of the NSSO 68th round survey (2011-
12) on household consumption expenditure indicate that real per capita
consumption expenditure in rural areas increased at an average rate of 8.7 per
cent during 2009-12 as compared with 1.4 per cent during 2004-09. Similarly,
urban real per capita consumption increased by 6.7 per cent as against 2.4 per
cent in the corresponding period. The fact that real consumption expenditure
expanded during a period of high food inflation indicates that the demand
remains strong, feeding into higher price levels as supply elasticities remain low.

The high food prices are supported by increase in wages. The average nominal
rural wage increase was of the order of 17 per cent during 2008-09 to 2012-13 so
far. Even after adjusting for high rural consumer inflation, real wage increase over
6 per cent per annum was significant. In the formal sector, company finance data
suggest that the wage bill has risen at a faster rate since the middle of 2009-10.
As wages increase, entitlement goes up, and consequently demand and
preference for essential commodities increases.

Table 2: In recent years both fiscal deficit and current account


deficit have increased; while agricultural growth stagnated,
real rural wages increased sharply

(In per cent)

2000-08 08-09 09-10 10-11 11-12 12- 2008-13


13

Average Annual Average

Fiscal/External

GFD/GDP 4.4 6.0 6.5 4.8 5.7 5.1 5.6

CAD/GDP -0.04 -2.3 -2.8 -2.8 -4.2 -4.6 -3.3

Growth

GDP 7.2 6.7 8.6 9.3 6.2 - 7.7

Agricultural GDP 3.0 0.1 0.8 7.9 3.6 - 3.1

Rural Wages

Nominal 3.3 10.7 15.8 18.3 19.8 18.4 16.6

Real @ -0.4 0.6 2.1 8.3 11.5 9.2 6.3

- Not available, @ Nominal wages adjusted for consumer price index for
agricultural labourers,
GFD: Gross fiscal deficit of the centre, GDP: Gross domestic
product,
CAD: Current account deficit.

Third, with the persistence of near double-digit inflation in 2010 and 2011, the
medium- to long-term inflation expectations in the economy have risen,
underscoring the role of higher food prices in expectations formation. If inflation is
expected to be persistently high, workers bargain for higher nominal wages to
protect their real income. This creates a pressure on firms costs and they may in
turn increase prices to maintain their profits. Independently, the producers own
inflation expectations also affect inflation directly by influencing their pricing
behaviour. If companies expect general inflation to be higher in the future, they
may believe that they can increase their prices without suffering a drop in
demand for their output.

Fourth, there has also been added stimulus from the crisis driven fiscal and
monetary policy. Fiscal consolidation process was reversed in 2008-09 which
impacted the macroeconomic conditions . Higher fiscal expansion also impedes
efficacy of monetary policy transmission. The moderation in private demand
resulting from anti-inflationary monetary policy stance is partly offset by the fiscal
expansion. Let me now turn to the role of monetary policy in a little more detail.
Role of monetary policy

The current phase of high inflation followed the global financial crisis, which
affected Indias economy, though not with the same intensity as advanced
countries. India, though initially somewhat insulated from the global
developments, was eventually impacted significantly by the global shocks
through all the channels trade, finance and expectations channels. The
Reserve Bank, like most central banks, took a number of conventional and
unconventional measures to augment domestic and foreign currency liquidity,
and sharply reduced the policy rates. In a span of seven months between
October 2008 and April 2009, there was an unprecedented policy activism. For
example: (i) the repo rate was reduced by 425 basis points to 4.75 per cent, (ii)
the reverse repo rate was reduced by 275 basis points to 3.25 per cent, (iii) cash
reserve ratio (CRR) of banks was reduced by a cumulative 400 basis points of
their net demand and time liabilities (NDTL) to 5.0 per cent, and (iv) the total
amount of primary liquidity potentially made available to the financial system was
over ` 5.6 trillion or over 10 per cent of GDP. The Government also came up with
various fiscal stimulus measures.
The Reserve Bank, in October 2009, highlighted the need for exit from crisis-time
monetary policy stimulus. But it was not easy to exit from the excessively
accommodative monetary policy stance for two main reasons. First, the year-on-
year headline WPI inflation had just barely turned positive and was entirely driven
by food inflation . Industrial production had started to pick up but exports were
still declining. Hence, recovery was not assured. Second, globally, most central
banks were in favour of continuing stimulus. On the other hand, domestically,
consumer price inflation was high, households inflation expectations were rising
and surplus liquidity was substantial. These developments had inflationary
consequences.

Nevertheless, the Reserve Bank withdrew the unconventional liquidity support


measures and restored the statutory liquidity ratio (SLR) of banks to its pre-crisis
level. At the same time, monetary policy had to recognise that the economic
growth was recovering from the crisis time slowdown and any aggressive
monetary tightening at that point would have affected the recovery. Subsequently,
in January 2010, the CRR was raised by 75 basis points of banks net demand
and time liabilities (NDTL), and policy rate was increased for the first time in
March 2010 by 25 basis points. Between March 2010 and October 2011 the
policy repo rate was raised by 375 basis points to contain inflation and anchor
inflationary expectations. It may, however be emphasised that policy rate was
raised from a historically low level of 4.75 per cent. As inflation had already risen
sharply, the real policy rate during this period was negative. Thus, monetary
policy was still accommodative though the extent of accommodation was
gradually closing

Table 3: In recent years while the real bank lending rates remained relatively low,
the real policy rate turned mildly negative

(Year-on-year in per cent)

2000-08 08- 09- 10- 11- 12- 2009-13


09 10 11 12 13

Averag Annual Average


e

Monetary Block

Money Supply * 16.6 20.5 19.3 16.0 16.1 13. 17.0


3

Non-food Credit* 23.8 24.5 14.6 21.2 18.7 16. 19.1


5

Weighted Average Bank 12.9 11.5 10.5 11.4 12.6 - 11.5


lending rate

Real Weighted Average 7.7 3.4 6.7 1.8 3.7 - 3.9


lending rate @

Policy repo rate 7.0 7.4 4.8 5.9 8.1 8.0 6.8

Real Policy Rate @ 1.7 -0.7 0.9 -3.6 -0.8 0.4 -0.8

* Data for 2012-13 up to 11 January 2013, - Not available,


@ Nominal rate adjusted for average WPI inflation.

The policy rate was left unchanged at 8.5 per cent between October 2011 and
March 2012. Consequently, the inflation rate started trending down from October
2011 and the real policy rate tuned positive since January 2012. This enhanced
the efficiency of monetary policy which was reflected in easing of the inflation
rate. Accordingly, the Reserve Bank reduced the policy rate by 50 basis points in
April 2012 and again by 25 basis points in the last monetary policy review on
29th January 2013. Currently the CRR stands at a historically low level of 4 per
cent of NDTL of banks and policy repo rate is at 7.75 per cent.
FINDINGS AND INFERENCES

Inflation affects both the business cycle and unemployment. There is an inverse
relationship between rate of inflation and rate of unemployment. This relationship
involves a trade off that is paid a higher rate of inflation to reduce the
unemployment and for reducing the inflation, price in terms of a higher rate of
unemployment has to be borne. Yields of the airline industry are decreased with
an alarming rate because of Inflation, which will affect the financial state of the
airline industry and will result into a low employment position in the industry.
Inflation is causing an increase in the price of goods and services and decrease
in the purchasing power of the customers. Inflation will cause an increase in the
cost of the fuel and it will result into an increase in the prices of tickets and
cancellation of routes in the airline industry. Demand in the airline industry is
reduced significantly. Increase in the price of the fuel will cause an increase in
the overall costs of the airline industry (U.S. Airline Industry Headed toward
'Catastrophe' at Current Oil Prices, 2006).
Changes in the employment and interest rates also relate to the business cycle
or economic cycle. Business cycle is a pattern of different periods of economic
growth and a declining period in an industry (Dwivendi, 2006). Inflation will force
the industry towards fiscal decline and it will cause financial instability in the
industry.
Unemployment in the airline industry will affect the quality of the services
because new people will not be hired due to financial instability in the industry. To
provide better services to its customers, it is necessary for the company that
skilled employees should be there. But unemployment position will cause a poor
service and low demand in the industry. Unemployment will force the industry
towards the recession period.
Business cycle- Airline industry has a long-term business cycle and it causes low
profit and return to its shareholders. In expansion and boom cycle of business,
both the output and employment increase till the full employment of resources
and production at the highest possible level (Ahuja, 2007). This period is followed
by the depression period and then by revival period. In second stage, level of
employment will be decreased and the situation of unemployment will appear at
a large scale in the industry.
Currently, fuel prices are increasing and hitting the airline industry badly. Airline
industry is in the crisis situation and it has caused cuts and curtailment in
different airlines. Business model of the industry is not working with the fuel
prices and the current level of capacity (oil crisis in the Airline industry, 2008).
Airline industry is operating in a deregulated environment where firms
themselves decide prices and routes in a given market condition, which is
causing problems for the industry. To show how bad the airlines have suffered
through current economic conditions here is a chart that denotes aircraft type to
be grounded aswell as job cuts to remain afloat:

LIMITATIONS
Inflation is usually considered to be a problem when the inflation rate rises above
2%. The higher the inflation, the more serious the problem is. In extreme
circumstances hyper inflation can wipe away peoples savings and cause great
instability, e.g.INDIA The inflation rate in India was recorded at 6.1% (WPI) in
August 2013. Historically, from 1969 until 2013, the inflation rate in India
averaged 7.7% reaching an all time high of 34.7% in September 1974 and a
record low of -11.3% in May 1976.

The inflation rate for Primary Articles is currently at 9.8% (as of 2012). This
breaks down into a rate 7.3% for Food, 9.6% for Non-Food Agriculturals, and
26.6% for Mining Products. The inflation rate for Fuel and Power is at 14.0%.
Finally, the inflation rate for Manufactured Articles is currently at 7.3%.

. However, in a modern economy, this kind of hyper inflation is rare. Usually


inflation is accompanied with higher interest rates so savers do not see their
savings wiped away. However, inflation can still cause problems.
2. Interest rate affects the purchasing power of the people at retail level. But this
situation also is overcome by people at retail level with the help of increase in
money supply by government through increase in dearness allowance and other
monetary benefits.
CHAPTER-V

CONCLUSION AND RECOMMENDATION

RECOMMENDATION
The challenges to Indias sustained economic growth are considerable. Both internal and
external factors will weigh heavily as India strives to maintain current growth trends.
Poor infrastructure, stagnate reform, and underperforming industrial sectors will continue
to cost India considerably. These challenges are well within Indias realm to resolve,
however other challenges exist which are unfortunately, largely outside of Indias direct
influence. First, direct competition in the global economy could make other entrants more
attractive. China, for one, is closely studying the Indian model and hopes to overtake
Indias current position in software development by the end of the decade continuing
hostilities in Kashmir. Thomas Friedman contends that while the region is relatively
volatile, increasing trade and economic integration has helped and will continue to help
stave of future conflicts .
The Indian economy continues to grow as a global economic powerhouse. Indias
development is particularly impressive given the considerable obstacles in fostering
economic growth. These obstacles are truly epic with widespread poverty, limited natural
resources, and one of the largest populations. While this growth is impressive, India
continues to have hundreds of millions in abject poverty and much of the economic
prosperity has been fairly localized to specific regions and sectors. The booming software
and technology sector receives daily world attention, however those languishing in
poverty remain largely ignored. Thus, it is important to understand whether the nascent
economic prosperity has also caused an increase in income inequality. Economic theories
vary on both the causes and implications of income equality, however empirical evidence
indicates that India has been able to maintain low income inequality during periods of
significant economic growth. It is important to not, that Indias economic miracle is a
recent phenomenon and that future prospects are far from certain. How well the Indian
people and government will be able to channel current growth into long-term prosperity
remains to be seen.
CONCLUSION

In this part the secondary data regarding of the rate of the inflation and the price of the
various commodity we reached the conclusion that though the inflation got negative no
difference is in the level of the price rise in the economy. There is a strong negative
relationship between weekly inflation rate. The inflation of the both the year went in the
opposite direction.
India, the 12th largest and the second fastest growing major economy in the world, has
been experiencing significant price instability in the recent past. Even though, the sources
of the phenomenon can be attributed to both internal as well as external factors,
correction of the problem will have to take place mainly though effective domestic
economic policies for both the demand management and supply adjustment. But the
domestic policy measures initiated in India have not seen bringing any significant effects
in controlling price volatility in the country.
It is also an appropriate time to critically think about the quality of the official inflation
statistics published in India. No single price index will be able to provide a measure
inflation that can be used for all the purposes. Five official price indices are published in
India, of which one is WPI and the other four are CPIs. All the five indices suffer from
some inherent deficiencies. The most common deficiencies include importantly the fact
that our compilation procedures neither systematically incorporate new goods and
services as they enter the market nor adjust for changes in the quality of goods and
services over time. Consequently, our price indices could not be used to gauge inflation in
the economy.
Our headline inflation measure, WPI, is extremely inadequate to track the inflationary
pressure in the economy for it excludes services, and it is more susceptible to the problem
of base effect. Moreover, it does not adequately reflect the expansion and quality
improvement of commodities. Therefore, the reported inflationary situation in India,
determined using the WPI, is unreliable to a great extent. In the absence of a reliable
measurement of inflation it is difficult to analyze the exact impact of the
inflation/deflation and announce appropriate policies to ensure price stability. It is high
time for India to revise the method of calculating price index and inflation measurement
so as to enable a proper and periodic assessment and control of inflation in the economy.
It would be desirable to take into consideration the following points while preparing a
price index and measuring inflation in India.

APPENDICES
BIBLIOGRAPHY
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International Journal of Economies and Business, Vol. 7(3), pp. 245-61.
Gujrati, Damodar N. (2003), Basic Econometrics, Mc-Graw- Hill
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Multiproduct Firms: Use of a Hierarchy-of-Effects Advertising- Sales
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