1. DR. PATIL V.D. DEPARTMENT OF ECONOMICS, Rayat Shikshan Sanstha’s
Inflation & R.B.I Policy
DR. PATIL V.D.
DEPARTMENT OF ECONOMICS,
Rayat Shikshan Sanstha’s
S.M.JOSHI COLLEGE HADAPSAR, PUNE
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2. 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.”

3. Growth and Inflation in Indian Economy
The growth rate of GDP in India increased from 3.5% in the 1970s to 5.5% in the 1980s. This increase in growth has been attributed to both demand and supply side factors. But it has been suggested that “Keynesian expansion”, or the increase in aggregate demand due to higher government spending and larger fiscal deficits, was primarily responsible for pushing up growth rates.
In the early 1980s public investment was growing rapidly, but in the second half of the decade it slowed down and govt. consumption expenditure grew at a much faster pace. The revenue deficit trew, indicating the govt. consumption was being financing by borrowing, which entailed interest and repayment commitments.
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4. Historical Review of Inflation
Structuralists: Inflation is essential for economic growth
Monetarists: Inflation as harmful to economic progress.
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5. Historical Review of Inflation
Possible results regarding the impact of inflation on output and growth: A) None B) Positive C) Negative
A) Sidrauski (1967): established first result, showing that money is neutral and superneutral in an optimum control framework considering real money balances in the utility function.
B) Tobin (1965): assumed money as substitute to capital, established the positive impact of inflation on growth, his result being known as the Tobin effect.
C) Stockman (1981): The negative impact of inflation on growth, also known as the anti-Tobin effect, is associated mainly with cash in advance models which consider money as complementary to capital.
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6. Growth and Inflation in Indian Economy
The inflation rate accelerated steadily from an annual average of 1.7% during the 1950s to 6.4% during the 1960s and further to 9.0% on the 1970s before easing marginally 8.0% in the 1980s.
The pick up in inflation rate from 1970s onwards reflected the impact of a sharp rise in money supply growth and also partly supply shocks from crude oil prices and crop failures.
Demand pressures, emanating partly from the widening fiscal imbalances, also contributing to inflationary pressure in the 1980s.
The second half on the 1990s was marked by a significant turnaround in the inflation outcome reflecting the improved monetary-fiscal interface.
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7. Causes of Inflation Decrease in foodgrain production
Increase in price of petroleum products
Fiscal deficit
Low productivity of agriculture
Effect of economic growth
High rate of development of service sector
Speculation
Increasing input prices of agriculture
Corruption
Lack of Govt. Planning
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8. Theories of Inflation
Demand Pull Inflation – This occurs when there is excess aggregate demand in the economy (overall) or in a specific market or industry. Businesses respond to high demand by raising prices to increase their profit margin

9. Theories of Inflation
Cost – push Inflation : This occurs when costs of production or operation are increasing.
Cost Push inflation is mainly caused due to the following factors:
increase in wages.
  increase in cost of raw materials
   increased cost of imported components (import-push inflation)

10. HOW TO CONTROL INFLATION
Monetary Measures
Fiscal Measures
Other Measures

11. MEASURES OF INFLATION Monetary policy 2. Fiscal policy
Credit Control
Demonetization of Currency
Issue of New Currency
2. Fiscal policy
Reduction in Unnecessary Expenditure
Increase in Taxes
Increase in Savings
Surplus Budgets
Public Debt
3. Other Measures
To Increase Production
Rational Wage Policy
Price Control

12. Consumer Price Index
CPI is a measure estimating the average price of consumer goods and services purchased by households.
CPI measures a price change for a constant market basket of goods and services from one period to the next within the same area (city, region, or nation).
It is a price index determined by measuring the price of a standard group of goods meant to represent the typical market basket of a typical urban consumer. The percent change in the CPI is a measure estimating inflation.

13. Wholesale Price Index
WPI was introduced in 1902,and was one of the economic indicators available to policy makers until it was replaced by most developed countries by the CPI market. index in the 1970.
WPI is the index that is used to measure the change in the average price level of goods traded in wholesale market.
Some countries (like India and The Philippines) use WPI changes as a central measure of inflation. However, India and the United States now report a producer price index instead.

14. Indian Economic Situation Growth Rate of GDP (at factor cost at 2004-05 price) in %
Particulars
(AE)
Agricultural, Forestry and Fishing
5.1
4.2
5.8
0.1
0.8
7.9
3.5
1.8
Mining and Quarrying
1.3
7.5
3.7
2.1
5.9
4.9
-0.6
0.4
Manufacturing
10.1
14.3
10.3
4.3
11.3
9.7
2.7
1.9
Elect, Gas and water Supply
7.1
9.3
8.3
4.6
6.2
5.2
6.5
Constructions
12.8
10.8
5.3
6.7
10.2
5.6
Trade, Hotels, Transport and Communication
12.0
11.6
10.9
10.4
12.3
7.0
Financing, Insurance, Real Estate & Business Services
12.6
14.0
11.7
8.6
Community, Social & Personal Services
2.8
6.9
12.5
6.0
6.8
GDP (at factor Cost)
9.5
9.6
5.0

15. India’s Real GDP Growth Rate (in %) (at Factor Cost)
Sector
(p)
Agriculture
4.2
5.8
0.1
1.0
7.0
2.5
Industry
12.2
9.7
4.4
8.4
7.2
3.9
Service
10.1
10.3
10.0
10.5
9.3
9.4
Source : Data book for DCH, 10 April, 2012

16. G -20 Countries and Inflation
country
2006
2007
2008
2009
2010
2011
2012
2013
Argentina
9.84
8.47
7.24
7.70
10.92
9.51
10.84
Australia
3.34
2.89
3.70
2.06
2.76
2.99
2.20
Brazil
3.14
4.46
5.90
4.31
5.91
6.50
5.84
5.89
Canada
1.39
2.50
1.84
0.79
2.23
2.66
0.94
1.52
China
2.80
1.20
1.90
4.60
4.10
3.00
France
1.67
2.79
1.17
1.00
1.98
2.65
1.51
1.01
Germany
1.8
3.12
1.13
0.84
1.85
2.27
2.04
1.61
India
6.72
7.87
8.03
14.84
8.82
8.65
11.44
9.01
Indonesia
6.60
6.05
11.06
2.78
6.96
3.79
4.28
9.54
Italy
2.08
2.81
2.35
1.10
2.09
3.65
2.28
1.28
Japan
0.35
0.55
1.06
-1.98
-.26
-0.28
-0.23
0.68
Korea
3.61
4.14
3.03
4.16
1.43
1.80
Mexico
4.05
3.76
6.53
3.57
4.40
3.82
3.35

17. Cont………G 20 Countries and Inflation
country
2006
2007
2008
2009
2010
2011
2012
2013
Russia
9.00
11.90
13.30
8.81
8.78
6.10
6.57
6.20
Saudi Arabia
2.79
6.00
9.50
4.00
5.77
3.64
3.74
3.76
South Africa
Turkey
8.39
10.06
6.53
6.40
10.45
6.16
7.99
6.04
U.K
2.03
3.88
2.10
3.39
4.66
2.64
2.70
2.30
USA
4.08
0.71
1.91
1.67
3.07
1.79
1.18
Source :Data Book for DCG, 18 Dec, 2013

18. Inflation : Whole Price Index(WPI) (average) and Consumer Price Index (CPI) in India
Year
WPI
CPI
6.5
3.9
3.7
4.2
6.8
4.8
6.2 8
9.1
3.6
12.3
9.6
10.5
8.8
8.4
7.4
10.2

19. Growth vs. Inflation: India, 1951-2011
Period
Average annual growth rate of GDP at constant prices
(%)
Average annual rate of WPI inflation to
8.47
6.55 to
6.93
4.68 to
5.92
5.07 to
5.38
10.18 to
5.64
8.51 to
3.16
10.28 to
3.75
6.24 to
3.94
1.75 .

20. All India Annual Inflation Rate ( %) for Dec, 2013
Category
Rural
Urban
Combined
Cereals
12.25
11.77
12.14
pulses
4.08
-2.11
2.15
Oil and fats
2.82
-3.67
0.70
Egg, fish and meat
11.78
14.45
12.64
Milk and milk products
9.90
9.70
9.87
spices
6.95
10.55
7.97
Vegetables
38.40
39.63
38.76
Fruits
17.48
10.65
14.65
Sugar
-4.04
-9.34
-5.61
Non alcoholic beverages
7.94
8.71
8.33
Prepared meals etc.
9.17
9.26
9.18
Food and beverage (Total)
12.76
11.06
12.16
Fuel and light
7.72
5.95
6.68
Clothing, bedding and footwear
9.64
8.56
9.25

21. Interest Rate % Effective Date Repo Rate Reverse Repo Rate CRR SLR
20/4/2010
5.25
3.75
5.75
25.00
2/7/2010
5.50
4.0
6.0
25.0
27/7/2010
4.50
2/11/2010
6.25
6.00
25/01/2011
6.50
24.0
17/3/2011
6.75
3/3/2011
7.25
16/06/2011
7.50
26/7/2011
8.0
7.0
25/10/2012
8.50
17/4/2012
4.75
18/12/2012
4.25
23.0
09/02/2013
7.75
Source Economic Survey 2013 p 96

22. Trend in Central Govt. Deficit ( As % of GDP)
Year
Gross Fecal Deficit
Revenue Deficit
2.5
1.1
6.0
4.5
6.5
5.2
4.8
3.2
5.8
4.4
5.1
3.4
Source ; Annual Report of RBI

23. India’s External Debt ( Rs. Billion)
Items
2010
2011
2012
multilateral
1934
2167
2571
Bilateral
1020
1148
1364
IMF
273
282
315
Trade credit
760
831
1018
Commercial Borrowing
3192
3954
5341
NRI & FC Deposits
2171
2308
2998
Rupee Debt 75 71 69
Total ( Long Term Debt Above)
9425
10,761
16,677
Short term Debt
2,362
2,901
4,000
Gross Total
11,786
13,663
17,677

24. Black Money ( $ Billion)
Country
Black Money ( $ Billion)
China
2740
Mexico
476
Malaysia
285
Saudi Arabia
210
Philippines
138
Nigeria
129
India
123
Indonesia
109
UAE
107

25. Effects of Inflation
Impact on Output - In general inflation has major costs for the economy, the producer and the consumer.
∙ Inflation causes productive investment to fall because profitability falls, speculative investment rises which has a negative effect on employment, output and income. Inflation causes resources to be misallocated.
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26. Effects of Inflation
∙ Inflation causes uncertainty to increase which can erode business and consumer confidence. The drop in confidence can reduce investment and consumption which produce downward pressure on employment and production
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27. Effects of Inflation
Inflation leads to domestic interest rates increasing. Like other prices, the price of money rises to compensate suppliers of money (lenders/savers) for the falling value of the dollars they are repaid. This reduces investment and consumption leading to negative effects on employment and output.
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28. Effects of Inflation
If India’s inflation rate is greater than overseas inflation rates, exports decrease and imports increase. This reduces output and employment. India also becomes less internationally competitive, the Current Account deficit also rises.
Government may tighten fiscal and monetary policies to reduce inflation, thus causing unemployment to rise and production to decrease.
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29. Effects of Inflation
Inflation causes a redistribution and reallocation of resources to the following groups:
Speculators
Borrowers/Lenders
Strong Employee Groups in Key Industry
Monopolies / Oligopolies in Key Industries
Government
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30. Effects of Inflation
1. Speculators: buy and sell property, collectables (eg: art precious metals) etc. during inflationary periods because these items rise faster in price than the general price level which results in Speculator’s real income increasing.
Speculation of Gold, Onion etc.
2. Borrowers/Lenders - (depending on interest rates): borrowers benefit if the inflation rate is greater than the interest rates. They pay back dollars of less value and lenders lose.
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31. Effects of Inflation
3. Strong Employee Groups in Key Industries: can use industrial ‘muscle’ to gain wage/fee increases greater than other groups of employees and the inflation rate ( distributive effect).
4. Monopolies / Oligopolies in Key Industries: can raise their prices ahead of inflation and / or pass on cost increases to consumers to maintain or raise profits (distributive effects).
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32. Effects of Inflation
5. Government: revenue rises due to bracket creep, i.e: inflation lifts people into higher income and marginal tax brackets, where they pay a higher proportion of income tax to the government.
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33. Effects of Inflation
Inflation causes a redistribution and reallocation of resources away from the following groups:
Fixed Income Earners
Weak Union or Non-union Sections of the Workforce
Borrowers/Lenders
Firms in Highly Competitive or Depressed Industries
Savers
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34. Effects of Inflation
1. Fixed Income Earners: real incomes decrease as changes to money incomes lag well behind inflation e.g: the unemployed, public servants etc.
2. Weak Unions or Non-unionised Sections of the Workforce: their money incomes fall behind inflation because they lack industrial ‘muscle’.
Decrease in living standard of labour.
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35. Effects of Inflation
3. Borrowers/Lenders (depending on interest rates): borrowers lose if interest rates move ahead of inflation. Lenders anticipate inflation and raise rates to protect real returns.
4. Firms in Highly Competitive or Depressed Industries: rising costs reduce profits when firms cannot easily raise prices.
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36. Effects of Inflation
Savers: savings in conventional low interest bank deposits lose value.
Increase in hunger
Increase in unemployment, poverty and crime
Economic imbalance, Social effects
Adverse effects on welfare schemes
Unfavourable Balance of Payment
Inspiration to luxurious goods
Impact on Transportation and communication, energy etc.
Obstacles in Economic Development
Devaluation of currency
Black money and introduction of duplicate currency.
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37. Some Measures Investment in Agricultural sector, Agricultural policy
Control on consumption of petroleum products and need to develop alternate sources
Infrastructural development: (Agri. Industry and Service sector)
Control on speculation, black money, corruption etc.
Control on increasing population
Public Distribution System
Tax reforms
Control on Fiscal Deficit
Investment in Inflation Index Bond
Gold Deposit Scheme
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