m
 


m


 


 


 



m 

  

 

„ is µA rise in the general level of prices
of goods and services in an economy over a
period of time¶.

„ Itwas originally referred to as, µThe increase in

the amount of money in circulation.¶

„ is an erosion in the purchasing power

of money ± a loss of real value in the internal
medium of exchange and unit of account in the
economy.
 
 
 

„ m

 

Êaused due to increase in aggregate demand due to
increased private and government spending etc.

„ 
 

 

Also called " !"#³. Êaused due to
drop in aggregate supply. This may be due to natural
disasters, or increased prices of inputs.

„ 0 

 

Õinked to the "price/wage spiral". Workers try to keep
their wages up with prices and firms pass these higher
labor costs on to their customers as higher prices, leading
to a 'vicious circle'.
   
m



½  
 A fall in the general price level.

½ 

 
 A decrease in the rate of
inflation.
½ 
 
 An out-of-control
inflationary spiral.
½
  
 A combination of inflation,
slow economic growth and high unemployment.
½  
 An attempt to raise the general
level of prices to counteract deflationary
pressures.
 m
m
 

 



„ Inflation in India is measured with the help of the
!$$%"$&$'()*
„ The WPI is compiled by the Government of India on a
weekly basis.
„ The WPI is a composite index of 447 commodities which
are divided in three groups :
(i) %+%  %"$ ± weightage ± 32.3 %
(ii) $% ± weightage ± 10.7%
(iii) m"%$&%&" ± weightage ± 57%
„ Êurrently, the WPI is estimated on the base year prices
of 1993-94.
„ The present %$ is ,*-.
 




The whole period 1951-99 can conveniently be broken
into three phases :-
() ./-.011

() ./110.//2*

() .//2%&

() 
 ./-.011
„ There was a rising trend of the WPI during this period
due to :
× Inflationary financing of the developmental
programmes and shortfall in output, specially of
agricultural products.
× Diversion of resources from development to defence
in wake of external aggressions..
() 
 ./110/2
„ Price variations cut across the plan periods and had
shown considerable volatility. Seven sub-phases of price
movements can be observed during the period 1966-90.
1. 1966-67 -- High rates of inflation were witnessed
(13.9%).
2. 1967-68 -- Declining or gently rising price levels up to
1971-72 (11.6 % ).
3. 1972-73 to 1974-75 -- sudden spurt in the general
price level.
4. 1975-76 to 1978-79 -- Relative price stability.

5. 1979-82 -- Prices shot up by 17.1 per cent in 1979-80,

then by 18.2 % in 1980-8 1 and then decelerated to 9.3
% in 1981-82.
6. 1982-83 to 1986-87 -- Price increases were moderate.

7. 1987-90 -- Price increases were high.

(iii) 
 .//2
 

„ Inflation has shown a dogged persistence in the post

reforms period.
„ In the first half-decade of the 90¶s the average inflation
rate was 10.6 per cent.
„ But then inflation dropped substantially as in 1997-2000
it was between 6-7 %.
 

 
 





Inflation in India has been a mixture of both demand-pull

and cost-push factors.

  

 m

 00
„ % "334$%+$&$": The
inflow of new currency to meet the rising expenditure of
the government fuelled demand for goods and services,
resulting in an upward movement on the general price
level.
„ %3$ 5#"%$&The credit had been
required to meet the growing needs of the production
sector in the growth process.
„ %3$0&$5%$3" Yactor incomes
from abroad, direct and portfolio investment generate new
demand for goods and services.
„ 0"#+$  Transactions involving black money divert
resources from productive uses to unproductive uses, and
hence are responsible for not getting the supply of goods and
services increase to their maximum.

  



 
„ $&+$%$&%"$A large part of the inflation in
lndia is explained by a periodical rise in the administered prices
as a large part of the market is influenced and regulated by
government action.
„ "%%"%"$This has created a
gap between demand and supply having dampening effects on
 overall production and supply of goods resulting in
higher unemployment and a lower rate of real output.
„ 3+%%"$$$"++&$
Domestic cost and price structure rises due to increase in
the international price levels.
„  &$$"4$+3$+$Hoarding and
other practices undertaken by the private entrepreneurs
for making higher profits are also one of the causes of
inflation.
m  
 





 
An increase in the general level of prices implies a
decrease in the purchasing power of the currency. The
effect of inflation is not distributed evenly in the
economy. There are hidden costs to some and benefits to
others from this decrease in the purchasing power of
money.

 6m 
00
„ Êhange in buying habits.

„ Êutting down of production.

„ Worsening of poverty.
„ ëconomic uncertainity.
„ Dramatic decrease in demand.

„ Yorcing the producers to be out of business due to less profit or no

profit in some extreme cases.
„ No incentive to invest in new equipment and new technology for
the manufacturers.
„ Alleviation in the burden of debt.

„ Êonsolidation and expansion of a parallel economy .

„ The rising levels of non-plan expenditure by the government

„ Êreation of a high-cost economy

„ Hoarding - People withdraw money from the bank and convert it

into products with long lasting value like gold, artifacts. This
creates shortage of the hoarded objects.
„ Growth potential of a developing economy is desirously
undermined by chronic inflation.

6m 

„ Some inflation is good for the economy, as it would
allow labor markets to reach equilibrium faster.
„ Debtors who have debts with a fixed nominal rate of
interest will see a reduction in the "real" interest rate as
the inflation rate rises.
„ A moderate level of inflation tends to ensure that
nominal interest rates stay sufficiently above zero so that
if the need arises the bank can cut the nominal interest
rate.
 m 

The remedies of inflation are :-

„ m
  

It is the policy of the Êentral Bank of a country to control

credit and money supply. Instruments of monetary policy are
broadly classified as :
.* 74$%+$

8* 74$%+$

These are also called µInstruments of credit control¶.

The aim of this policy is to %$&"$5#%$ and "!
%$$%4$%thereby helping to control inflation*
„ 
  
It comprises expenditure policy and taxation policy of the
government. The main tools of fiscal policy are :
.* '$&%$"
8* $4$$"
9* $""3
:* 5"5%%3
This aims at increasing investment and reducing taxes, thereby
helping in curing inflation.

„  

 
0
 
%&"" aims at increased production and
productivity both in the agricultural and industrial sectors of
the economy.
 In %5" , there are two extreme forms of
distribution system-
1. Total dependence on private entrepreneurs - To
undertake the distribution of goods
2. Total nationalisation of wholesale trade in foodgrains.

„ m

  
The price policy to be followed by the government is to
be such as to break the tendency to move the
administered prices upwards at regular intervals.

„  mm  

The export orientation of commercial policy and
encouragement to inward inflow of foreign exchange
has been established in more recent years. This concern
for exports arises largely out of balance of payments
considerations.
„ 
 m 00
Yor maintaining price stability it is important that a proper
relationship between different prices, between different
incomes and between price structure and income structure be
evolved. Given a proper price-income structure, any rise in the
income of any factor should be consistent with the rise in
productivity.
p