INFLATION

Presented By Gourav Bhattacharjee Saurav Mahajan

INFLATION

What is an Ideal Economy?

An ideal economy is one in which there is: rapid growth of output per worker low unemployment, and low inflation.

INFLATION
Inflation is nothing more than a sharp upward rise in price level. Too much money chasing, too few goods. Inflation is a state in which the value of money is falling i.e. price are rising.

TYPES OF INFLATION

 Open Inflation -:
The rate where Costs rise due to Economic trends of Spending Products and Services.

Suppressed Inflation -: Existing inflation disguised

by government Price controls or other interferences in the economy such as subsidies. Such suppression, nevertheless, can only be temporary because no governmental measure can completely contain accelerating inflation in the long run. It is Also Called Repressed Inflation.

 Galloping Inflation -: Very Rapid Inflation which

is almost impossible to reduce.

Creeping Inflation -: Circumstance where the inflation of a nation increases gradually, but continually, over time. This tends to be a typically pattern for many nations. Although the increase is relatively small in the short-term, as it continues over time the effect will become greater and greater.

 Hyper Inflation -: Hyperinflation is caused mainly

by excessive deficit spending (financed by printing more money) by a government, some economists believe that social breakdown leads to hyperinflation (not vice versa), and that its roots lie in political rather than economic causes.

CAUSES OF INFLATION
Demand pull inflation Cost push inflation

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CAUSES OF INFLATION
FACTORS ON DEMAND SIDE:
o Increase in money supply o Increase in disposable income o Deficit financing o Foreign exchange reserves

Contd
FACTORS ON SUPPLY SIDE o Rise in administered prices o Erratic agriculture growth o Agricultural price policy o Inadequate industrial growth

Phillips Curve

Observation
When wage rate falls to the minimum some positive unemployment still prevails In case the unemployment rate reaches infinity the rate of change in wage becomes negative.

Nature & Causes of Inflation in India

Nature of the Inflation

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

Causes of Inflation in India

Rise in Food Prices: In May12 food prices rose an annual 10.74% compared to 8.25% in the year-ago period. Nature of the Agricultural Industry: For e.g. this year Karnataka, Maharashtra and Andhra Pradesh have had poor rains, which is crucial for the cultivation of pulses. Prices of Pulses contribute 0.72% of Indias Inflation. Supply Bottle Necks: Inflation is often attributed to supply bottlenecks such as in food distribution, where an estimated one third of fresh produce is wasted.

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

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

Measuring Inflation
Inflation is rate of change in the price level. If the price level in the current year is P1 and in the previous year P0. The inflation for the current year is

[(P1 - P0) / P0] x 100

Measuring Inflation
Consumer Price Index (CPI) Impact on household Basis of Cost-of-Living Adjustments (COLA)

Producer Price Index (PPI) Impact on business

GDP Deflator Impact on household, business, and govt.

REMEDIES FOR INFLATION IN INDIA

Controlling inflation
There are broadly two ways of controlling inflation in an economy: 1). Monetary measures 2). Fiscal measures

I)Monetary Measures The most important and commonly used method to control inflation is monetary policy of the Central Bank i.e RBI. Most central banks use high interest rates as the traditional way to fight or prevent inflation.

Monetary measures used to control inflation include: (i) bank rate policy (ii) CRR (iii) SLR (iv) open market operations

II) Fiscal Measures Fiscal measures to control inflation include taxation, government expenditure and public borrowings.

Fiscal measures used to control inflation include:

(i)Increase in Taxes (ii) Increase in savings (iii) surplus budgets i.e reduced government expenditure. (iv)Overvaluation of money.

Can Organized retailing in India reduce the Inflation?

India: Goldmine for retail investors

According to the A T Keaney Global Retail Development Index Report 2011 / 2012,

India is has a great opportunity for organized retailing because: Vast Population of approx 1.2 Billion with fast Labor force growth. Rapid Urbanization High Savings and Investment rates giving more purchasing power to Consumers Accelerated retail growth of 15 to 20 percent . Low Organized Retail penetration of about 5% to 6 % indicating room for growth. Changes in foreign direct investment (FDI) regulations favouring various international retailers' entry and expansion plans.

Impact of FDI : Structural/Institutional

Inclusion of 51% foreign direct investment in multi-brand retail Attract global supermarkets, such as Walmart, Tesco and Carrefour
(Min FDI - $100 million (Rs 450 crore)

Impact
Supply Chain Localized

Urban Retail Market

Increased Competitiveness Product Differentiation Price Wars Training Institutes & other ancillaries Employment for Middle / Upper Class Offset : Medium Size Retailer

Rural Retail Market

Increased Penetration of Markets Backward and Forward Linkages to Kirana Shops, Local Farmers, Local Stores in Villages Agriculture best practices Transportation & Administrative Jobs Offset : Local Supermarket store will face severe competition

Local Small Retailer

Harder to Compete Sales Based on -Convenience -Competitive Pricing Indirect competition minimal impact

Local Big Retailer

Harder to Compete Impetus to innovate Brand War eminent Direct competition impact eminent Survival of the fittest

Job Creation / Offset

Warehousing / PDS

Inclusion of multi brand stores will lead to localizing the supply chain & pds system will be impacted parallelly, adding best practices for supply chain management

IMPACT of FDI : Inflation Rate

SIMPLISTIC VIEW OF IMPACT OF INFLATION
Reduced Waste Middle Man Cut Out Offset of Existing Distributors Increased Income Of Farmers Increased Consumption Investment by Multi Brand Outlets Increased Competition Organized Supply Chain Inflation Decrease

Job Creation

Increased Disposable Income

Source : India Retail Report 2011-12

CONSEQUENCES OF INFLATION
Adverse effect on production Adverse effect on distribution of income Obstacle to development

Changes in relative prices

Adverse effect on the B.O.P

Comments/Queries are most welcome