Inflation in India
The Situation
According to DSP Merrill Lynch the inflation in India will remain above 7 per cent irrespective of apex bank the Reserve Bank of India’s speculation of it remaining about 5.5 to 6 per cent range. In the month of August by the end of first week the wholesale price inflation was 7.96 per cent. This inflation was mere 3.89 per cent during the same period in the previous year.
Household communities are facing increased cost of living mainly due to price rise of essential commodities like diesel, petrol, vegetables and aviation turbine fuel. The WPI rose by 0.3 per cent to 186.6 points due to the impact of price rise of petrol (increased by 2 per cent) and diesel (increased by 5 per cent).
The index was 173.4 points a year ago. According to experts this trend will remain at the same level for some more time.
Increase in the international crude oil price making the situation worse. The reason for this sustained price rise is being taken as possible terror threats to oil pipelines in the Middle East, potential disruption in exports from Russia, Nigeria and Venezuela, along with the oil cartel. The rising demand from countries like USA, China, India, etc. is also a prime reason for the increase in the price. This indirectly is affecting the prices of essential commodities due to increased transportation cost. Moreover the strike by the transporters made the situation more precarious.
The Term Paper on Price Level Unemployment Inflation Demand
Macro-economics Most of the nations of the world today have a free economy. A free economy is one which operates automatically. However, this automatic regulation of the economy is actually achieved by the price level. Price level can be defined as the weighted average of all the final goods and services produced in an economy. A healthy economy is characterized by a stable price ...
Rising wholesale inflation may force manufacturers to hike prices, threatening to further choke demand and growth, already at risk from erratic monsoon rains. Industry, emerging from a three-year slowdown, is in a tight spot as rising input costs hurt profit margins but any move to raise retail prices may scare away consumers.
Delayed monsoon has added to the farm-dependent economy’s woes as prices of food items have risen sharply. Most analysts have cut their growth expectations for the year to March ’05 to 5.5-6.5% from pre-monsoon views of 7-8%. If the producers increase prices, it will lead to a domestic demand recession and if they don’t, they will see profits dwindling. Either way the consumer is going to suffer.
In 2003, rapid economic growth after the best monsoon in decades, and historically low interest rates prompted people to spend on attractive financing schemes for consumer durables. Manufacturing contributes nearly a quarter of the country’s GDP, while the services sector, which benefits from higher consumer demand, contributes almost 50%. The uneven monsoon is going to hurt farm output and will lead to a drop in income for the nearly 600 million people who live off the land. Rural purchasing power is crucial for the manufacturing sector and for overall growth.
Inflation may also eat away at demand, especially if the government is forced to take measures to curb rapidly rising prices.
The Remedies
To check the current situation the government has come with a two-fold plan.
It has announced that it will
Cut the duties on import of crude oil and steel which has seen spurt in the recent times in the international market.
It is likely that RBI will raise the repo (repurchase option) rate (the rate which banks get when they deposit excess cash with the Reserve Bank of India) and even the benchmark interest rate Increase Bank Rates">bank rate at which it lends to commercial banks to soak out excess money supply from the system.
The Essay on Exchange Rate Price Ppp Foreign
... price up. What in fact sets the exchange ratio between two currencies? Obviously supply and demand, but what causes supply and demand to set exchange rates ... to include the effects of disparate rates of inflation on the exchange rate. That is, since P (t+T) = ... rate when PPP does not hold. PPP calculations are used extensively when developing international trade and monetary policy. Central banks ...
Reserve Bank of India: Repo rateEuropean Central Bank: Refinance rate (currently 2 per cent)Bank of England: repo rate (currently 4.5 per cent)USA: Primary credit rate (currently 2.5 per cent) When the demand-supply situation is considered it is always desirable to make such a market situation where demand is equal to supply. Generally demand curve for funds on a graph slopes down and the supply curve slopes up. The intersection point of these curves gives the interest rate. Whenever apex bank increases the supply of high powered money more than the required the curve shifts downward and towards right. The new intersection point of both the curves gives the new interest rate (lower than the earlier) at which market will clear. Whenever the floor rate is fixed higher than the rate at equilibrium the market witnesses the excess supply of fund which generally remains as deposits and the market remains in the speculation of fall in the floor rate. The problem with India is that here the effective rate is more than often being taken as repo rate the only key available to have a control over the inflation. So, it is the repo rate where the government should take some serious steps because the only monetary instrument that can combat with the inflation is the price of credit.
The finance ministry had announced that it would cut import duties on commodities such as petroleum crude and steel. RBI measures while curbing money supply could also signal interest rates to move up. The rising inflation also made its impact on the share market when the sensex zoomed down by about 18 points on the date of announcement of inflation situation.
The Introspection
India is also looking at new and effective methods of calculation of inflation. For this the government is planning to revamp the method for measuring inflation with the help of World Bank’s technical assistance.
Moves are afoot in the government to come up with a more realistic way of measuring inflation through a Producers Price Index (PPI) that would replace Whole Price Index (WPI).
The Essay on Disposable Income Price Demand Supply
Explain what is meant by the term "an economic model" and outline a model of price and output determination in a free market. Examine the effect of a change in real disposable income on equilibrium price and output. An economic model or theory is a simplified explanation and analysis of economic behaviour. It allows us to predict, and therefore intervene, if we do not like the outcome of a ...
“WPI measures the prices of both inputs and outputs. The index also includes taxes paid by producers. But PPI would be based on prices of only outputs excluding intermediate costs and taxes.”
At present, WPI is calculated on the basis of prices of agriculture produce at the mandi level, while manufactured product prices are taken from major markets. However, PPI would be calculated on the basis of prices of agriculture products at the farm level while it would be ex-factory prices for manufactured products. But collection of the price quotes at the producers’ level every week for coming up with a point-to-point inflation would be uphill task for the government.
At the same time it is not impossible, as such method is used for drawing up the GDP deflator. The nominal value of GDP is divided by the deflator (the average inflation rate) to arrive at the real GDP. Since PPI also includes the price of services it will be more effective measure and it also filters off other costs that are added on to the products before they are bought by consumers.
