Group No: 11 Bijal Darji (16) Bhavika Desai (17) Deepika Gabani (22) Anita Gandhi (24) Nikita

Mehta (50) Revathi Nair (57)

Submitted to: Mrs Ranjan Sabhya

Inflation is a rise in the level of prices of goods and/or services in an economy over a certain period of time. When the price level rises, each unit of currency will buy fewer goods and services; consequently, leading to erosion in the purchasing power of money. It is a loss of real value in internal medium of exchange and a unit of account in the economy. The inflation rate is a chief measure of price inflation. It is the annualized percentage change in the general price index (normally Consumer Price Index and wholesale price index) over time.

Famous economist Friedman said that Inflation is always and everywhere a monetary phenomenon and it increases due to rapid increase in the quantity of money than output.
DEGREES OF INFLATION

Creeping - inflation of about 3 % annually which is good for an economy. Trotting - inflation of about 4% - 7% which needs to be controlled. Running - 10% - 20% increase in the price level. Hyperinflation - 20% - 30% increase in price level which may lead to breakdown of the economy.

As explained by Friedman Step 1 - increase in the money supply (wages) Step 2 - increase in demand

Step 3 - derived demand for factors of production increases, example-labour.

Step 4 - workers settle for higher wages and other factors of production also become costly. Step 5 - profit margins decrease, thus manufacturers increase the price of finished goods to maintain the profit margins.

Inflation can have positive and/or negative effects on an economy. Negative effects of inflation could be a decrease in the real value of money and other monetary items over time; uncertainty about future inflation can also discourage investment and savings, and high inflation might lead to shortages of goods if the consumers begin hoarding out of concern that the prices will increase in the future. Positive effects of inflation include a mitigation of economic recessions and debt relief by way of reducing the real level of debt.

Inflation is such a situation where in too many people chase too few goods and/or too few services, that automatically leads to rise in the prices of the goods and services because of the high demand. On the other hand, when inflation drops below the desired mark, then too few people chase too many goods and services, leading to underpricing of goods and services.

For the past few years in the global economic scenario owing to its varying inflation patterns. In the fiscal year 2004-05 and 2007-2008, India experienced an average growth rate of more than 9%.

Till February inflation rate was between 9 to 11 % which dropped below

1% during the 3rd week of March, 2009 i.e. 8.03%.

Year 2008
March April May June July August September October November December

Inflation rate 7.87 7.75 7.75 7.69 8.33 9.02 9.77 10.45 10.45 9.70

Year 2009
January February March April May June July Aug

Inflation rate 10.45 9.63 8.03 8.70 8.63 9.29 11.89 11.72

Inflation rate
14

12

10

Inflation rate

Economic factors causing inflation: If the government of a country prints money in excess, then the prices increase to keep up with this increase in currency that leads to inflation. An increase in production costs and labour costs, have a direct impact on prices of the final product, also resulting in inflation. When countries borrow money, they need to cope with the interest burden. This interest burden causes inflation. High tax rates on consumer products can also result in inflation. High demands can pull inflation, wherein the economy demands more number of goods and services as compared to what is produced. Costs push inflation or supply shock inflation, wherein the non-availability of a commodity leads to increase in prices.

Inflation in India is calculated as per Wholesale Price Index 435 commodities are used for the WPI based inflation calculation and base year for the WPI calculation is 1993-94 WPI is available at the end of every week (generally Saturdays. There's a time lag of 2 weeks After several years of rapid growth, 2009 proves to be a testing year for India.

In this method, a set of 435 commodities and their price changes are used for the calculation. The selected commodities are supposed to represent various strata of the economy and are supposed to give a comprehensive WPI value for the economy. WPI is calculated on a base year and WPI for the base year is assumed to be 100.

As on today, India uses a basket of 435 commodities and a base year of 1993-94 for its WIP based inflation rate calculation. The 435 commodities used for finding WPI range from food items like rice, wheat to petroleum products to medicines and are given weightages depending upon their importance and impact on the economy. Discussions are going on to revise the number of commodities to 980 and base year 2004 2005.

The 435 commodities are divided to various groups and subgroups. Individual commodities, and as a result, groups and subgroups have weightages. On a broader level, the 435 commodities are grouped into, 1. Primary Articles 2. Fuel, Power, Light & Lubricants 3. Manufactured Products

Primary Articles consist of food grains, fruits and vegetables, milk, eggs, meats and fishes, condiments and spices, fibres, oil seeds and minerals. Fuel, Power, Light & Lubricants consist of coal and petroleum related products, lubricants, electricity etc. Manufactured Products consist of dairy products, atta, biscuits, edible oils, liquors, cloth, toothpaste, batteries, automobiles etc.

After reaching a growth of 9.8% in 2007-08, growth is expected to slow down to 7%. It may not be a bad thing since it will avoid inflationary pressures building further. However, the global credit crunch might reduce growth much more. Inflation continues posing a threat. Inflation was 12% in early August 08. Inflation has been caused by rapid growth [demand pull factors] but, also due to the cost push inflation factors [rising oil prices]. Hopefully, a fall in oil prices and higher interest rates will lead to reduction in inflation without causing much of a slowdown.

It appears that Japan, Europe, and the US are entering into recession. The falling house prices and crisis in the financial system could lead to a sharp downturn, with the worst still to come. Many believe that India's growth is not so much dependent on growth in the West. But the Indian stock markets have been affected by the global crisis. India's service sector and manufacturing sector will be adversely impacted by the global downturn.

Getting inflation under control Spreading the growth benefits more equitably. Completing investment projects that are essential for the long term development of economy. Dealing with global financial uncertainty that will make the capital flows and exports more difficult.

The Indian Rupee has had a weak year. The Rupee had fallen from 39 Rupee to 1$ in January 2008, to 44 Rupee in month of September. Real interest rates in India were still negative. However, if the Indian inflation rate is reduced, and the government does not go all out for growth, the Rupee may possibly rebound, at least against the dollar, that faced more difficulties in 2009.

In order to keep a check on the high inflation rate, the Reserve Bank of India (RBI) was planning to increase the rate of interest. The inflation rate touched 7.41% in March 29, the highest in the last three years. The prices of some essential commodities like fruits, vegetables and pulses were rising constantly and the UPA government has failed to check prices. Government says that it doesn't have any magic stick in order to stop inflation.

However the government planned to take hard measures to curb inflation. The government is planning to ban the export of cement and steel which are the main causes of rising prices. It's also planning to lower the excise duty on steel from 14% to 8%. The prices of vegetables have grown by 16% in the past 1 year whereas the prices of cereals have risen by 6.6%. The measures taken by RBI and the government are expected to curb inflation that has broken the backbone of the common man.

 Government launched a new series of wholesale price index (WPI) with 2004-05 as base year. At present, 1993-94 is used as base year to calculate WPI. The new series of WPI will have 676 items as against 435 items in the previous series. Consumer items widely used by the middle class like ice-cream, mineral water, flowers, microwave oven, washing machine, gold and silver will be reflected in the new series of WPI.

''This would give better picture of the price variation," a senior official said. Readymade food, computer stationary, refrigerators, dish antenna, VCD, petroleum products and computers will also be part of the new series.