NEHAL MEHTA SUPERVISOR-SUKANYA SARKHEL

ROOM -34 ROLL-136

Impact of inflation on a Developing Economy: A case study on India.

INTRODUCTION
Inflation is currently most important contemporary economic issue in the world. Inflation in the developing economies is associated with the developmental effort and the structural response to the effort. The socio-economic-political structure of the developing countries ultimately determines the sources and nature of inflation . Today, high and rising food prices pose a major policy challenge for developing countries.. Brazil, which saw triple-digit inflation in the late 1980s and early 1990s.

IMPORTANCE & OBJECTIVES.

IMPORTANCE
Inflation has very undesirable impacts on the economic growth and resource allocation. in India inflation has also led to the downfall of various governments who have been ineffective in controlling the rate of inflation having invoked the anger of the people. A high inflation rate is highly undesirable because it has negative and far reaching consequences on the economy. One estimate suggests that about 44 million people might be pushed into poverty.

OBJECTIVES
What Economic activity will produce general rise in prices? Is high inflation getting embedded in the Indian economy? Why inflation turns out to be more volatile in developing countries.

INFLATION
Inflation is a rise in the general level of prices of goods and services in an economy over a period of time. INFLATION RATE Inflation rate =[(PI for a current year - PI for a earlier year) / PI for a earlier year]*100 X 100

MEASUREMENT OF INFLATION
Measuring inflation is a difficult problem for government statisticians. A number of goods that are representative of the economy are put together into what is referred to as a "market basket. Some notable price indices include: Consumer price index Wholesale price index GDP deflator Across most countries, emerging and developed, the best indicator of overall inflation (as measured by GDP deflator) is the Consumer Price Index (CPI).

Inflation & Developing Economy

The rate of inflation and the economy are closely related to each other. Rise in consumption of goods and services without corresponding rise in supply leads to General Rise In Prices. Money is created out of thin air i.e., by the central bank. money out of thin air gives rise to an exchange of nothing for something or to consumption without preceding production. The growth of the economy of the nation is judged by the growth in the Gross domestic product but that is not enough. Most developing countries are prone to supply shocks due to their high dependence on agriculture and imported energy.

CAUSES OF INFLATION IN DEVELOPING ECONOMY

Increase in money supply. Deficit financing. Increase in public expenditure . Increase in investment expenditure. Increase in export demand Increase in population Higher wage rates Higher taxes Supply shocks Hoardings War or events causing inflation. Others (Black money spending, Global factors. Factors etc)

EFFECTS OF INFLATION IN DEVELOPING ECONOMY.

Inflation effects the different sectors of the economy-

Inflation effects the different classes of the people

Effects on the distribution of income and wealth, Effects on production, Effects on the Balance of Payment, Social and moral degradation Political instability. Confidence in currency Adverse effect on savings.
Effect on public revenue

Debtors & Creditors, Salaried Class, Wages earners, Fixed income group(pensioners), Investors and shareholders, Profit earners(Businessmen) Farmers (Agriculturists).

WAYS TO CONTROL INFLATION IN DEVELOPING ECONOMY.

Monetary Measures-The most important and commonly used method to control inflation is monetary policy of the Central Bank. 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) cash reserve ratio and (iii) open market operations. Fiscal Measures-Fiscal measures to control inflation include taxation, government expenditure and public borrowings. The government can also take some protectionist measures . Control on deficit financing. Income policy. Price controls and rationing Increasing the availablity of goods.

INFLATION & INDIAN ECONOMY

The Inflation rate in India often crosses six or seven percent. Outside of India in the developed countries the rates of seven percent and beyond are unheard of. The inflation rate is also a tool which helps us to witness what the common man is going through. Inflation rate was reported around 8.8% in Feb 2012. While the inflation rate (point to point, WPI) was 4.5 % in Jan 2008, it increased to 12.8%by Aug 2008. It was followed by a period of low inflation till October 2009. But from Nov onwards prices were on an accelerating trend again and by Apr 2010 inflation rate touched 11%. This is in sharp contrast to most of the 2000-2005 period when inflation rate hardly ever crossed 7%, and the last time inflation crossed double digit was in May 1995.

MEASURING INFLATION IN INDIA

Policy makers in India, including the RBI, have been erroneously using the Wholesale Price Index (WPI) as a surrogate for underlying inflation even when its ability to accurately forecast overall inflation is close to zero, especially in the presence of information on CPI inflation. Starting Feb. 20th 2011, a new national CPI index has been released with urban and rural All-India components. This series has wider coverage and attempts to accurately reflect changed expenditure pattern

Decadal Average Inflation

Decades 1971-72 to 198081 1981-82 to 199091 1991-92 to 200001 2001-02 to 200809
1971-72 to 200809

WPI
10.3 7.1 7.8 5.2 7.7

CPI-IW GDP Deflator

8.3 9 8.7 5.3 8 8.8 8.7 8.1 4.6 7.7

PFCE Deflator
8.4 8.3 8.5 4.4 7.6

12 10 8 6 4 WPI CPI-IW GDP Deflator 1971-72 to 1980- 1981-82 to 1990- 1991-92 to 2000- 2001-02 to 200881 91 01 09

2
0

PRICE TRENDS IN INDIA IN RECENT YEARS(WPI)

From 1970 until 2010, the average inflation rate in India was 7.99 % reaching an historical high of 34.68 % in September of 1974 and a record low of -9 percent (aprox.)in May of 1976.

PRICE TRENDS IN INDIA OVER THE YEARS (CONSUMER PRICE INDEX)

1975: -6.18% 1974-:25.40%

How inflation has been applicable in Indian economy?

India has already had 20 consecutive months of inflation in excess of 8%, from January 2010 to August 2011. . The previous inflationary episode in 2008 was more intense, with a higher peak. But it lasted for just seven consecutive months. The demand collapse after the economic crisis brought down inflation in the intervening 13 months, from December 2008 to December 2009. It is tempting to ask whether high inflation would have persisted in that period in case there had been no global economic crisis. If so, then India would have now had 40 months of high inflation in a row. The inflation expectations of households, which are surveyed by the Reserve Bank of India (RBI) every three months, are running ahead of actual inflation.

INDIA & FOOD INFLATION

PRICE BAROMETER COUNTRY GENERAL INFLATION INDIA SRI LANKA BANGLADESH PAKISTAN MALAYSIA THAILAND INDONESIA PHILLIPINES ARGENTINA BRAZIL CHINA RUSSIA 10.16 4.76 8.78 13.10 1.61 3.34 5.05 4.28 10.70 4.84 3.10 5.80 (IN %) FOOD INFLATION MONTH 16.49 10.80 14.80 2.50 11.92 10.27 3.06 6.10 4.50 MAY JUN MAR MAY MAY JUN JUN MAY MAY JUN MAY JUN

Standard explanations of India's inflation story has focused mostly on food grain prices and specific supply and policy shocks. Food Inflation is consistent driver of Non-food inflation and hence overall inflation. Besides conventional monetary policy responses, the immediate prescriptions to the problem have revolved around government buffer-stock operations, increasing imports and other efforts to increase food grain supplies

IMPACT OF FOOD INFLATION ON INDIA.

Food inflation has increased the greatest over the past period of years than the inflation of primary non-food articles, manufactured non-food products and fuel and power. Hence we will focus on impact food inflation in India . The graph explains food inflation>non food inflation. Its volatility is also greater than non food inflation.

IMPACT OF HIGH FOOD PRICE INFLATION ON INDIAN CONSUMER.

The chart gives the way the Indians spend. Nearly 43% of the personal disposable income goes into food products. this is the segment which is experiencing highest inflation A high food inflation ensures that consumers have to cut back on their spending This in turn will impact the consumption part of the GDP growth.

3.90% 3.90% 6.20% 8.80%

food

non routine

others

42.80%
5.85%

durables clothing education transport health

4.20% 8.20%

16.20%

housing

FOOD INFLATION IN INDIA

CAUSES
The immediate reason for the spurt in the prices of specific food items, is hoarding. the growing penetration of big corprates in the food economy, Not producing enough to meet the needs of a growing population. our income is rising a lot faster than food production. the cuts in subsidies and price hikes of inputs like diesel and fertilizer lack of post harvesting infrastructure such as cold chains, transportation, and storage facilities. bad monsoon in India, 60% of the country's total cropped area is not irrigated.

IMPACT
The social implications severe for the poor. the rise in input cost will increase the cost of production resulting in lower profitability cut down on other costs such as R&D, advertisement and promotion as well as the manpower cost. price increase which will reduce the demand for the products. consumers in general, will have less disposable income rise in prices has also resulted into short supply of the basic agricultural input. the rising cost of production will impact the exporters of processed food products. External balances of net commodity importers have deteriorated.

Commodity Food Price Index Monthly Price Index Number Price

180 175 170

165
160 155
Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12
Commodity Food Price Index - Monthly Price

Price

Month Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12

Price 175.53 165.95 164.28 162.14 164.19 169.43 174.01

Change -5.46% -1.01% -1.30% 1.26% 3.19% 2.70%

Description: Commodity Food Price Index, 2005 = 100, includes Cereal, Vegetable Oils, Meat, Seafood, Sugar, Bananas, and Oranges Price Indices

Retail Prices (Rs./kg)-Metro Cities

(Source :Department of Consumer Affairs-Govt. of India)

Product

2005

2007

Oct, 2009

Jan,2010

Rice Wheat Sugar Tur Dal

13

15

22

48

12

13

29

19

19

32

50

30

36

82

100

Retail Prices (Rs./kg)-Metro Cities

(Source :Department of Consumer Affairs-Govt. of India

100 80 60 40 20 0
Rice Wheat Sugar Tur Dal 2005 2007 Oct, 2009

Monthly budget of a common man is disturbed due to heavy food inflation. It has upset his routine life. 50% of the people are now having Dal one time in a day. Expenses on the childrens education has been curtailed. Expenses on medical treatment are reduced drastically. Operations/ surgeries are postponed.

FOOD INFLATION
Skyrocketing Retail Prices
Price Rs/kg

Item

2004

2008

January 2010

Wheat
Rice

9
10

20
22

29
48

Sugar
Edible Oil Dalda Chana Dal Mung Dal Besan Milk Kerosene/litre

14
40 40 25 24 20 14 18

20
95 72 40 48 48 20 35

50
100 85 56 100 60 30 35

FOOD INFLATION
Skyrocketing Retail Prices

RESTAURANTS TWEAK MENU AS FOOD PRICE INFLATION RAGES.

While eating at Pizza Hut is set to turn 4-5% more expensive, Your favorite cup at Costa Coffee will become costlier by 2-3% Yo! China is rejigging its menu to factor in soaring input prices, while Kwality Group which has quick-service restaurant brands like Kwality Express, Chopsticks Express, bakery outlets Bread & More and outdoor catering services has also increased its product prices by 5-7%. McDonalds is not looking at an increase in prices, its products have become tax-exclusive, which means the consumer pays extra in the form of taxes.

IMPACT OF ORGANISED FOOD RETAIL ON STREET VENDORS & SMALL STORES.

Basic food items such as are 30 % cheaper in organized retail stores than small stores or at street vendors. A study conducted in five big cities of India found that prices could be as much as 70% cheaper for fruits and vegetables, 50% for milk & 5-7% for branded flour in super markets. Large retailers have said that they will squeeze margins & do more promotions to counter inflation. Research shows that 60-70% of the price formation happens between the farmer and the consumer, due to the commissions of several layers of middlemen that leads to hike in prices. Although the retail biggies are taking a hit by selling food items at lower prices, they are able to offset losses with profit made in other products, an option not available to the hawkers. Bulk buying by retailers helps them in keeping their prices lower than street vendors.

STORY OF SUGAR
ENOUGH STOCK-AVAILABILITY YET PRICES TOUCHING SKY

Prices have gone up from Rs 22 to Rs 50/kg in just one year. A sugar exporting country is converted into importing country. India produced 573 lac tons sugar during 2007-10. The country had opening stock of 105 lac tons Total availability of sugar for these 3 years was 678 lac tons Yearly consumption of sugar including consumption by confectionary and sweet manufacturing industry was 213 to 220 lac tons. India exported 80 lac ton sugar @ Rs 12 to 14/kg during 2007 to 2009 & now we are importing 50 lac ton sugar @ Rs 38/kg Govt paid thousand crores subsidy of Rs 1.44/kg to these exporters Farmers got the same price of Rs 85/quintal for his sugarcane & consumer paying double rate

(Source: Indian Sugar Manufacturers Association

SUGAR PRODUCTION CONSUMPTION - AVAILABILITY in lakh tonnes

200304 200405 200506 200607 200708 (Est)

Opening Stock Production Imports Total Availability Off-take (a) Internal Consumption (b) For Exports Closing Stock as on 30th Sept.

116 140 4 260

85 127 21 233

40 193 233

36 283 319

92 263 355

173
2 85

185
0.04 48.25

185
11 36

210
17 92

225
48 82

SUGAR COMPANIES
SHARE PRICES AT BSE

Name of the Sugar Company Bajaj Hindustan Balrampur Chini Dhampur Sugar Shree Renuka Sugar Sir Shadilal Enterprises

Price as on 7.1.2010 35 143 152 243 176 11.11.2008 13 47 26 70 56

SUGAR COMPANIES
SHARE PRICES AT BSE

STEPS TO FIGHT FOOD INFLATION IN INDIA.

To strengthen state intervention in the food economy, both in food distribution and production. Raising agricultural productivity and modernization of storage and marketing of agricultural products cannot be left to private corporates and MNCs. Inflation cannot be controlled with liberalised trade and private profiteering in food items. The influence of private corporates and traders in the food economy needs to be curbed. Coordinate measures against hoarding and black-marketing. Prohibit commodity futures trading in food articles The costs of agricultural inputs like fuel and fertilisers have to be controlled by the government. Government must continue to subsidise fuel and fertiliser. rapid growth in organized food retail market, we can control inflation in food industries due to economies of scale.

CONCLUSION
A high inflation rate is highly undesirable because it has negative and far reaching consequences on our economy. Therefore, the government, its policy makers, the central bank of any country must diagnose its causes in depth by implementing pragmatic and effective policies to control inflation.

THANK YOU!