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Inflation

(English Project Report)

Submitted by:

Submitted to:

Mrs Alka Mehta

Ishu Deshmukh

(Faculty of English)

B. A. LL. B. (Hons.)
Semester I, Section B, Roll No.-81

Date of Submission: 26.08.2015

Hidayatullah National Law University

Uparwara Post, Abhanpur, New Raipur 493661 (C.G.)Declaration

I, Ishu Deshmukh of Hidayatullah National Law University Raipur, hereby declares that I
have completed my project, titled Inflation .The information submitted herein is true and
original to the best of my knowledge.

Name Ishu Deshmukh


Semester -1st
Section B

Acknowledgement
Thanks to the Almighty who gave me the strength to accomplish the project with sheer hard
work and honesty. This research venture has been made possible due to the generous cooperation of various persons. To list them all is not practicable, even to repay them in words
is beyond the domain of my lexicon.
This project wouldnt have been possible without the help of my teacher Mrs. Alka Mehta the
Faculty of English at HNLU, who had always been there at my side whenever I needed some
help regarding any information. She has been my mentor in the truest sense of the term. The
administration has also been kind enough to let me use their facilities for research work. I
thank them for this.

Name Ishu Deshmukh


Semester -1st
Section B

Abstract

Inflation is burning issue which hinders the economic growth of the country. It is becoming
more hectic to economists, politicians and even people also. It is very dangerous because it is
directly impacting on standard of living of the people. The responsibility for government and
politicians, economists is to protect/safe guard common man from inflation. According to
statistical data the inflation in India is higher specifically in food items. Causes might be
demand/supply side, which reduces the purchasing power of people, which impacting on
savings of the people also. This paper explains about as per given statistics, the agricultural
productivity and sophisticated techniques and reforms in retail industry which helps to protect
people from inflation. Government polices like monetary policy and industrial policy should
be prepared in such a manner which decreases inflation in India.

Objectives

The project focuses on Inflation. The objectives of the projects are as follows:
1)
2)
3)
4)
5)
6)
7)
8)

To study the inflation.


To study the impact of inflation.
To study the factors affecting inflation.
To study the problems of inflation.
To study the causes of inflation.
To study the effect of inflation.
To study the measure to control inflation.
To study inflation in India.

Methodology

This Doctrinal research is descriptive and analytical in nature. Secondary and


Electronic resources have been largely used to gather information and data about the topic.
Books and other reference as guided by Faculty of Economics have been primarily
helpful in giving this project a firm structure. Websites, dictionaries and articles have also
been referred.

Table of Contents

1.
2.
3.
4.
5.

Declaration
Acknowledgement
Abstract
Objectives and methodology
Introduction01-02
a) Inflation.03-04
b) Factors Affecting Inflation. 05-06
c) Impact of Inflation06-07
d) Problems of Inflation08
e) Causes of Inflation09
f) Kinds of Inflation. 10-11
g) Effects of Inflation
12
h) Measure to Control Inflation in India.13-14
i) Inflation in India.......15
6. Conclusion...16
7. Bibliography17

Deshmukh |1

Introduction

Inflation means generally a considerable and persistent rise in the general level of prices.
However, a precise meaning of inflation has been a matter of economists opinion. There is

no universally acceptable definition of inflation. The definition of inflation has been changing
over time depending on the perception of the economists.
Pigou1 defined inflation in the following words:Inflation exists when money income is
expanding more than in proportion to increase in earning activity. To Coulborn, inflation is a
situation of too much money chasing too few goods. Modern economists have tried to
define inflation more meaningfully. According to Ackley, Inflation is a persistent and
appreciable rise in the general level or average of prices. 2Harry G. Johnson defines inflation
as a sustained rise in prices.3 According to Samuelson, Inflation denotes a rise in the
general level of prices.4 Bronfenbrenner and Holzman5 have suggested a number of
alternative definitions of inflation which are mostly modified versions of earlier definitions.
Their alternative definitions make things more fuzzy rather than adding clarity to inflation.
However, economists seem to agree that inflation is a situation in which there is a persistent

1 A.C. Pigou, Types of War Inflation, E.J., December 1947, p.409 and in his The Veil of

Money,34.
2 Ackley, Gardner, Macroeconomic Theory, op. Cit., 421.
3 Harry G. Johnson,A survey of Theory of Inflation, Ind. Eco. Rev., Vol. VI, No. 4, August

1963, reprinted in his Essays in Monetary Economics (George Allen & Unwin Ltd., London,
1966),p. 104.
4 Samuelson, P.A. and Nordhaus, W.A. Economics, 15th International Edn., 1955, p.574

Martin Bronfenbrenner and Franklin D. Holzman, A Survey of Inflation Theory, in


Surveys of Monetary Theory, Vol. I,1965.
5

Deshmukh |2

appreciable sustasined, considerable, continuing and prolonged are not precisely


defined. In practice, however, the term persistent implies that the price rise exhibits a secular
trend or continues to rise over a period of one to two years, and does not respond to antiinflationary policies. The term appreciable is more ambiguous because it does not specify as
to what rate of increase in the price level is to be considered as appreciable or
considerable.

Deshmukh |3

INFLATION
There is hardly a thing or commodity whose price has not gone up in the recent times.
Rise in prices has become a common feature in India and the people are reconciled to this
fact. Rise in prices is called inflation.
There are various factors that contribute to this rise in prices. Some are natural factors
like unfavorable weather conditions which affect the food production and lead to the shortage
of commodities in the market. With more money chasing fewer goods, the prices take to the
wings.
Compounding this natural problem are other man-made problems like hoarding which
contribute to the escalation of prices. The moment the trading community senses a shortage
of certain commodities or products, especially the essential commodities; they resort to large
scale hoarding. They release the hoarded commodities after escalation of the prices and make
a neat margin over their investment in the hoarded commodities. Though the government has
the necessary powers to check hoarding it does not have the necessary manpower to contain
the despicable acts like hoarding.
Apart from the natural factors and the man-made factors like hoarding that add to the
rise in prices or inflation, the government too contributes its bit to the escalation of prices by
imposing higher taxes on raw materials and finished products. With the government nature
and hoarders adding their bit to the inflationary trends, is it any surprise then that rise in
prices has become a common feature in India?
In the recent times the rate of inflation has been hovering around 4 to 5 per cent. This
is, of course, the official rate of inflation. But the rising prices in the retail market do not
actually reflect this modest rate of inflation as these figures relate to the Wholesale Price
Index and have no relation to the exorbitant retail prices .To keep the prices of essential
commodities under control, and within reasonable limits, the Indian government had
constituted the Cabinet Committee on Prices and the Special Committee of Secretaries on
Monitoring Prices. These bodies monitor the prices and supplies of essential commodities

Deshmukh |4

regularly. Apart from these, the Department of Consumer affairs monitors the prices of 12
essential commodities viz; wheat, rice, sugar, arhar, gram, groundnut oil, mustard oil,
vanaspati, salt, tea, potatoes and onions on a daily and weekly basis. Those commodities that
are in short supply are imported.
Though the governments steps to check inflation are laudable, these measures will
have a positive impact on the prices only when they are coupled with a massive drive against
hoarders, black marketers and anti-social elements. The unprecedented rise in the prices of
onions and tamarind in 1999 testifies to the power of the hoarders who can play havoc with
the market. Unless hoarding and black marketing are effectively checked, prices will continue
to rise.

Deshmukh|5

Factors
There are several factors which becomes determinants to measure inflation in India, are
Demand factors, Supply factors, Domestic factors, External factors, which become reasons
for increasing inflation India .These determents which influence in different manner.

Demand Factors: This is the condition where total demand exceeds the total supply. This is
the condition where huge money is available for few products, because supply is less. For
example country has a capacity to produce 10lakh products where demand is 20lakh
products, if this is the condition the inflation will happen, here product demand is becoming
major factor for inflation.

Supply Factors: This is a kind of inflation which happens due to Supply factors. This is the
conditions which happen where unable to supply the products. The reasons might be Scarcity
(or) drought (or) natural disaster. The scarcity in agricultural sector may leads to high prices.
If labour expects more wages, this might be cause for higher prices of the products. This is
also one of the considerable factor which effect on Inflation.

Domestic Factors: Inflation impact is high in the countries of developing economies and
underdeveloped economies, because the financial market which creates a weak bounding
between the interest rates and aggregate demand. In India this situation can be seen, the

Deshmukh |6

supply of money rapidly increasing where as the supply of goods takes due time which
causes increased inflation in India. There are several other factors for the gold and silver
commodities and their price hike. Surplus money and few products which causes, inflation in
India. Thats reason why money markets and capital markets plays prominent role in the
creation of inflation in India

External Factors: The exchange rate also one of the main determinant for inflationary
pressures that arises in India. When prices of thee goods rises, which import from United
States of America, those goods which are importing from USA to India automatically
Increase. The exchange rates can be Fixed exchange and Flexible exchange rates, which
impact on Inflation in India.

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Impact
There are some impacts of inflation in many sectors, here are some:Impact on Household Sector: inflation directly reduces the purchasing power of the
household sector-first, non-essential/ luxury exp. cut-real income falls- expenses on some
essentials also cut-lower standard of living-cash saving discouraged, stocking physical goods
(gold)-fixed income groups suffer the most-Sectors where income is related to prices
(businessman) not affected in the short run.
Impact on Business Sector: Moderate inflation (2-3per cent) good, initially-Firms benefit
from rising prices. Soon, demand falls as consumers reduce consumption. Fall different for
different commodities depending on the price elasticity of demand. Production costs go up,
especially if wages are linked to inflation index-Costs increase, squeezes profits. Remedy:
cost cutting and efficiency building, new investment risky, realigned to shift in consumer
patterns-Govt.

policies

important-Competitive

environment

changes-composition

of

industrial outputs change. Some firms make profits-Competitiveness in exports affected and
possibility of depreciation and rise in costs of imported raw materials.
Impact on Debtors and Creditors: Redistribution of income from creditors to debtorsrepaid debt in depreciated value as purchasing power has eroded to the extent of inflation.
Impact on Government: Government expense goes up in tandem with increase in price
level-austerity measures. Fiscal deficit (gap between govt. revence and exp.). Induction of
more currency (to cut-deficit) may worsen inflatory pressures. Govt. may initiate restrictive
policies wage freeze, tight money policy (higher interest rate) etc.

Deshmukh |
8

Problem
It has been reported that the manufacturing capacity in India is running around 95 per
cent, which usually means it is running at full capacity. Therefore, when the price of
manufactured products is increasing, it means that demand is usually higher than supply and
that is a clear case of demand-pull inflation. On the primary goods front, which consists of
fruits, vegetables, food-grains etc. it is not that straight-forward. It has certainly been all over
the news that the prices of fruits and vegetables are increasing and a trip to the supermarket
or local grocery shop will testify to that. Although it is a clear case of demand-pull inflation,
on the other, it is also a bit of a supply shock when one considers the fact that there is an
abnormally high percentage of fruits and vegetables that goes to waste because of the lack of
cold-storage facilities. Some estimates say 50 per cent of produce goes to waste and that is a
conservative number.
The fuel price hike is a straight example of cost push inflation. When OPEC (The
Organization of the Petroleum Exporting Countries) was formed, it squeezed the supply of oil
and this caused oil prices to rise, contributing to higher inflation. Since oil is used in every
industry, a sharp rise in the price of oil leads to an increase in the prices of all commodities.
There is depth problems due to inflation which would be when the balance between supply
and demand goes out of control, consumers could change their buying habits, forcing
manufacturers to cut down production. Inflation can create major problems in the economy.
Price increase can worsen the poverty affecting low income household. Inflation creates
economic uncertainty and is a dampener to the investment climate slowing growth and finally
it reduce savings and thereby consumption.

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Causes
Over- Expansion of Money Supply: Many a times a remarkable degree of correlation
between the increase in money and rise in the price level may be observed. The Central
Bank (Indias RBI) should maintain a balance between money supply and production and
supply of goods and services in the economy. Money supply exceeds the availability of
goods and services in the economy, it would lead to inflation.
Increase in Population: Increase in population leads to increased demand for goods and
services. If supplies of commodities are short, increased demand will lead to increase in
price and inflation. Andrapid expansion of bank credit is also responsible for the
inflationary trend in a country.
Deficit Financing: Deficit financing means spending more than revenue. In this case
government of India accepts more amount of money from the Reserve Bank India (RBI)
to spend for undertaking public projects and only the government of India can practice
deficit financing in India. The high doses of deficit financing which may cause reckless
spending, may also contribute to the growth of the inflationary spiral in a country.

High Indirect Taxes: Incidence of high commodity taxation. Prices tend to rise on
account of high excise duties imposed by the Government on raw materials and
essentials. Black Money is widely condemned that black money in the hands of tax
evaders and black marketers as an important source of inflation in a country. Black
money encourages lavish spending, which causes excess demand and a rise in prices.
Poor Performance of Farm Sectorin agricultural production especially foodgrains
production is very low, it would lead to shortage of foodgrains, will lead to inflation.

D e s h m u k h | 10

Kinds of Inflation
Inflation is generally classified on the basis of its rate and causes. The types of inflation on
basis of its rate and causes. The types of inflation on basis of its cause will be discussed under
the causes of inflation. Here, we take a look at the kinds of inflation based on the rate of
inflation. Inflation on the basis of rate is classified as i) Moderate inflation ii) Galloping
inflation, and iii) Hyper inflation.

I.

Moderate Inflation: A single digit rate of annual inflation is called moderate


inflation or creeping inflation. During the period of moderate inflation, prices
increase but at a moderate rate. The moderate rate may vary from country to country.
However, important feature of moderate inflation is that it is predictable and people
hold money as a store of value. By this definition, India has had a moderate of
inflation during the post-independence period, except in few years.

II.

Galloping Inflation: A very high rate of inflation is called galloping inflation.


How high should be the rate of inflation to be called galloping inflation is not defined
precisely. According to Baumol and Blinder ,6 Galloping inflation refers to an
inflation that proceeds at an exceptionally high rate. They do not specify what rate of
inflation is exceptionally high. Samuelson and Nordhaus 7 define galloping inflation
more precisely. According to them,Inflation in the double or triple-digit range of
20,100, or 200 percent a year is labelled galloping inflation. This definition is not
less imprecise because the double-triple digit inflation varies from 10% to 999%. A
country with 900 percent inflation will have devastating effects whereas a country with

6 Baumal, W.J. and Blinder, A.S, Economics: Principles and Policy, op. Cit..,p.109.
7 Economics, 15th Edn.,p.579.

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20-30 per cent inflation can manage without pressing the alarm bell. The post-War I
inflation in Germany is an example of galloping inflation. The wholesale prices in
Germany increased 140 per cent in 1921 and a colossal 4100 per cent in 1922.

III.

Hyper Inflation: Hyper inflation takes place when prices shoot up at more than
three digit rate per annum. During the period of hyper inflation, paper currency
becomes worthless. Germany had hyper inflation in 1922 and 1923 when wholesale
price index shot up by 100 million per cent between December 1922 and November
1923.8 November 1923, the price index rose from 1 to10,000,000,000.9

IV.

Suppressed Inflation: Another category of inflation often come acrossin the


contemporary writings on the subject is suppressed inflation. In contrast to open
inflation (i.e. price rise without any control and regulation), when price rise is
prevented from rising at its potential rate, there exists suppressed inflation. Price
control measure has become a common feature of economic policy of most developed
and developing economies. Price controls take the form of statutory fixation of the
price or fixation of a price ceiling; rationing the consumption of scarce goods,
controlled distributions of goods through public distribution system; subsidization of
commodities with high inflation potentials. In spite of these control measures, prices
do rise and inflation does take place but at a rate lower than the potential rate the open
system. This kind of inflation is called suppressed inflation.

8 Baumol, W.J. and Blinder, A.S., Economics: Principles and Policy, op.cit., p. 109.
9 Samuelson, P.A. and Nordhaus, W.D.,op. Cit., p. 109.

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Effect
An effect of Inflation on Business Community is welcomed by entrepreneurs and
businessmen because they stand to profit by rising prices. They find that the value of their
inventories and stock of goods is rising in money terms. They also find that prices are rising
faster than the costs of production, so that their profit is greatly enhanced. Fixed Income Groups:
Inflation hits wage-earners and salaried people very hard. Although wage- earners, by the grace
of trade unions, can chase galloping prices, they seldom win the race. Since wages do not rise at
the same rate and at the same time as the general price level, the cost of living index rises, and
the real income of the wage earner decreases. Farmers usually gain during inflation, because
they can get better prices for their harvest during inflation. Investors invest in debentures and
fixed-interest bearing securities, bonds, etc. lose during inflation. However, investors in equities
benefit because more dividend is yielded on account of high profit made by joint-stock
companies during inflation. Inflation will lead to deterioration of gross domestic savings and
less capital formation in the economy and less long term economic growth rate of the economy.
Inflation leads to a handful of the consumers in making extensive speculation, to derive
advantage of the high price levels. Since some of the purchases are high-risk investments, they
result in diversion of the expenditures from regular channels, giving birth to little structural
unemployment. Inflation changes the allocation of income. Those with fixed income are affected
deeply as the prices of goods and services increases but their incomes remain constant.

D e s h m u k h | 13

Measure To Control

Inflation is caused when the aggregate demand is not equal to the aggregate supply of an
economy of a country.
There are broadly two ways of controlling inflation in an economy Firstly, Monetary
Measure 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. Under this policy there are some sub heads. Firstly, Bank rate
policy. Secondly, Cash reserve ratio and lastly, Open market operation.
.
Bank rate policy is used as the main instrument of monetary control during the period of
inflation. When the central bank raises the bank rate, it is said to have adopted a dear money
policy. The increase in bank rate increases the cost of borrowing which reduces commercial
banks borrowing from the central bank. Consequently, the flow of money from the
commercial banks to the public gets reduced. Therefore, inflation is controlled to the extent it
is caused by the bank credit.

Case Reserve Ratios control inflation, the central bank raises the CRR which reduces the
lending capacity of the commercial banks. Consequently, flow of money from commercial
banks to public decreases. In the process, it halts the rise in prices to the extent it is caused by
banks credits to the public.

Desh
mukh

| 14

Open Market Operations to sale and purchase of government securities and bonds by the
central bank. To control inflation, central bank sells the government securities to the public
through the banks. This result in transfer of a part of bank deposits to central bank account
and reduces credit creation capacity of the commercial banks.

Secondly is a fiscal measure to control inflation include taxation, government expenditure


and public borrowings. The government can also take some protectionist measures (such as
banning the export of essential items such as pulses, cereals and oils to support the domestic
consumption, encourage imports by lowering duties on import items etc.)

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Inflation in India
Inflation is often one of the most misunderstood economic indicators. While inflation is
broadly understood as the general rise in the prices of goods and services year on year,
inflation is a more complex phenomena associated with the money supply and currency
values. An increase in the money supply, or currency in circulation in simple terms, leads to a
decrease in the value associated with the currency a persistent decrease in the purchasing
power of money. This decrease in the value increases the prices of goods and services, i.e.,
more of the currency is required to buy the same goods and services as compared to the prior
year. Inflation in India has seen a drastic rise over the last few years, with consistently over 5
per cent inflation rate (measured by annual change on consumer price index) since mid-2006
a matter of concern for the common man as well for the government trying to rein in the
high inflation. According to December 2009 monthly report released by Department of
Economic Affairs, Year-on-year inflation measured in terms of WPI for December 2009 at
7.31 per cent showed an acceleration of 253 basis points compared to November 2009. The
reasons for these high numbers have been many folds, most important of these being the
rising demand for goods and services owing to the fast growing economy leading to a
systematic inflation. Other factors include high commodity prices, rise in global inflation
levels due to a shortfall in supply to meet the demand of growing economies, growing money
supply due to increase in government spending and the pressure to meet deficit financing,
increase in wages and tax rates leading to increase in overall prices for goods and services,
among others.

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Conclusion
Inflation is a sustained increase in the general level of prices for goods and services. When
inflation goes up, there is a decline in the purchasing power of money. Variations on inflation
include deflation, hyperinflation and stagflation. Two theories as to the cause of inflation are
demand-pull inflation and cost-push inflation. When there is unanticipated inflation, creditors
lose, people on a fixed-income lose, "menu costs" go up, uncertainty reduces spending and
exporters aren't as competitive. Lack of inflation (or deflation) is not necessarily a good
thing. Inflation is measured with a price index. The two main groups of price indexes that
measure inflation are the Consumer Price Index and the Producer Price Indexes. In the long
term, stocks are good protection against inflation. Inflation is a serious problem for fixed
income investors. It's important to understand the difference between nominal interest rates
and real interest rates. Inflation-indexed securities offer protection against inflation but offer
low returns.

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Bibliography

BOOKS
DN Dwivedi Principles of Economics, second edition, Vikas Publishing House Pvt
Ltd, New Delhi.
WEBSITES

http://business.mapsofindia.com
http://www.freeonlineresearchpapers.com
http://www.preservearticles.com

http://www.investopedia.com