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INFLATION A Curse For Indian Economy ?

December 2008 Rs 45/- litre July 2012 Rs 72.65/- litre

Approx 62% increase over the 3 years making the annual increase close to 15%. This data was no shocker to anyone. Let me put another statistic before you. Veggie prices.. The YoY inflation as recorded in April this year is an unbelievable 60.97% Potato prices rose 53.44% year-on-year in April Price of pulses also shot up an annual 11.29% in April Yes as you all might have guessed what I am talking about is INFLATION. Inflation is bringing us true democracy. For the first time in history, necessity, comfort and luxury are selling at the same price. Not so far ago there was a time. Onions 65/kg, Petrol 65/liter and Beer 65/bottle !!! A very good afternoon to the respected jury members and my fellow mates and colleagues. I am KUNAL BINDRA and for the next few minutes I am going to speak on the Topic Inflation A Curse for Indian Economy?

What is Inflation ?
Inflation is when you pay Rs five hundred for the fifty rupees haircut you used to get for rupees five when you had hair. Coming on to a serious noteWe believe that rise in prices is termed as inflation and to some extent IT IS TRUE. Actually, a sustained rise in the prices of commodities that leads to fall in the purchasing power of a nation is called inflation. Although inflation is part of the normal economic phenomena of any country, any increase in inflation above predetermined level is a cause of concern.

In pre-independence era India was ruled by British and post-independence era made India to stand proudly for its erudite progress in diverse domains in this globalization age. Amongst some constraints, inflation bottleneck is not easily getting digested since 2010 and gravely hindering Indian economy even though India is showing progress in gross domestic product growth.

Method to measure Inflation

In India, inflation is calculated on a weekly basis. India uses the Wholesale Price Index (WPI) to calculate and then decide the inflation rate in the economy. WPI is the index that is used to measure the change in the average price level of goods traded in wholesale market. In India, a total of 435 commodities data on price level is tracked through WPI which is an indicator of movement in prices of commodities in all trade and transactions. It is also the price index which is available on a weekly basis with the shortest possible time lag only two weeks. The Indian government has taken WPI as an indicator of the rate of inflation in the economy. This method also is not free from criticism. The drawback of the system that widely challenges is the ignorance of the service sector. Though Consumer price index happens to be a more advanced instrument for the measurement of inflation. There occurs several problems for India to shift from the current Wholesale Price Index. The Consumer Price Index is not viable to be used in India because there happens to be too much of a lag in reporting the Consumer Price Index numbers. Another debate points that contradicts the application of Consumer Price Index is the fact that it is calculated on a monthly basis while the Wholesale Price Index is calculated on a weekly basis. A system which India adopts at present. However when the index for consumers are to be recorded than the wholesalers this system should be adopted.

Interest Rate and Inflation

I would also like to touch upon the relationship between Interest Rate and inflation. Both are intricately linked and interest rates is one of the most important methods to control inflation. Inflation is an autonomous occurrence that is impacted by money supply in an economy. Central governments use the interest rate to control money supply and, consequently, the inflation rate. The logic is simple When interest rates are high, it becomes more expensive to borrow money and savings become attractive. When interest rates are low, banks are able to lend more, resulting in an increased supply of money.

Alteration in the rate of interest can be used to control inflation by controlling the supply of money in the following ways: A high interest rate influences spending patterns and shifts consumers and businesses from borrowing to saving mode. This influences money supply. A rise in interest rates boosts the return on savings in building societies and banks. Low interest rates encourage investments in shares. Thus, the rate of interest can impact the holding of particular assets. A rise in the interest rate in a particular country fuels the inflow of funds. Investors with funds in other countries now see investment in this country as a more profitable option than before.

Now coming to the main aspect as to what is causing inflation and the effect it is having on the Indian economy. But before that I would like to share with you the Law of inflation. Is anybody aware what is it? You might have heard What goes up.. comes downthat can be called as the law of gravity. The law of Inflation beats that It says.. Whatever goes up. will go up some more. K coming to the factors and its impact

Factors that are causing Inflation and its Impact

Inflation has aroused due to both external and internal sources in India. The major setback in external forces has been fueled by global crisis in 2007 that has entangled all developed countries as well as developing countries in its own venom. Before the onset of global crisis there were excessive capital inflows which led to increase in foreign exchange reserves that ignited liquidity growth more fiercely. The increased foreign currency in domestic market heated the public demand asking for more production. But India could not insulate itself from the adverse developments in the international financial markets. The effect of the crisis on the Indian economy was not significant in the beginning. The initial effect of the sub prime crisis was, in fact, positive, as the country received accelerated Foreign Institutional Investment (FII) flows during September 2007 to January 2008.

The argument soon proved baseless as the global crisis intensified and spread to the emerging economies through capital and current account of the balance of payments. The net portfolio flows to India soon turned negative as Foreign Institutional Investors rushed to sell equity stakes in a bid to replenish overseas cash balances. This had a knock-on effect on the stock market and the exchange rates through creating the supply demand imbalance in the foreign exchange market. The current account was affected mainly after September 2008 through slowdown in exports. The financial crisis has affected developing countries in two possible ways: First, there could be financial contagion and spillovers for stock markets in emerging markets. The India stock market dropped by 8% in one day at the same time as stock markets in the USA and Brazil plunged. Stock markets across the world developed and developing have all dropped substantially since May 2008. Second, the economic downturn in developed countries may also have significant impact on developing countries.

The two possible ways described above have led to hike in oil and commodities price. Depleting government revenues, investment from foreign companies and FDI have raised prices and taxes in order to replenish the cost of these commodities from consumers. This burdensome hike has caused inflation in India. Rupee value is depreciating against dollar that posed bad effect on import commodities as it raised the commodity price in domestic market of India. Such circumstances drive cost pull inflation which occurs when the production costs of goods and services rise. The increase in production costs can be due to different factors, including wage increases and an increased cost of raw materials. Prices rise during cost-push inflation because manufacturers often pass on the increased cost of the production of goods onto the consumer. Demand generally remains unchanged during cost-pull inflation and manufacturers often decide to cut production. This global crisis turmoil has drowned many developing nations along with developed countries responsible for its root and evolved into a hurdle for economic growth in the form of inflation. Food inflation has come up due to internal sources in India. As we all are aware of the fact that maximum output in Indian economy comes from agriculture sector but if the roots of this sector is contaminated then how can we obtain a good yield out of it. Food inflation turns up from demand pull

inflation. It occurs when consumer demand for goods and services is greater than the supply. During this time, the total value of goods and services produced in the country, GDP is rising. But if it becomes difficult to meet the rising demand of consumers due to low production then government increases price of consumer commodities in order to decrease their ability to buy. This is what happening in agriculture sector of India due to which consumers are facing vulnerable situation. We can easily analyze four main reasons instigating food inflation in our country.
1. The immediate reason for the spurt in the prices of specific food items,

like onions today or earlier in the case of sugar and pulses, is hoarding. Trader cartels, encouraged by an inept Government, are mainly responsible for this. Assured of inaction, hoarders are creating artificial shortages and cheating people from time to time. 2. Secondly, the growing penetration of big corporate in the food economy, international trade in food items and speculative futures trading in agricultural commodities has weakened the governments capacity to control food prices. The share of corporate retail in food distribution has tripled over the past four years. The Government has manipulated trade policies to allow big traders to make huge profits through export and import of essential food items like wheat, sugar and onions. On the other hand, the PDS has been weakened considerably through targeting. In most states, the role of the ration shops, state agencies like the NAFED etc. and consumer cooperatives in food distribution, has been cut down. Therefore, the profit margins of private traders have also increased, reflected in growing gaps between wholesale and retail prices as well as farm gate and wholesale prices. 3. There are medium and long-term reasons too. Our agriculture is in a crisis. Our productivity levels are low and we are not producing enough to meet the demands of a growing population. Moreover, our agricultural production is heavily dependent on the weather and above or below normal rainfall (floods and drought), significantly affects the supply of agricultural commodities. Storage capacity in India is also limited and many food items cannot be stored because of lack of modern storage facilities. In this backdrop, futures trading in food items distort the price signals and encourage speculation and hoarding, thus contributing to food inflation. The peasantry continues to be in distress, with 2.5 lakh farmers committing suicide over the past 15 years. State intervention in raising agricultural productivity has been weakened. The Government is more interested in handing over this role to big agribusinesses and retail giants

like Walmart and Monsanto in the name of a second green revolution. That will further marginalize the small peasants. 4. Finally, the cuts in subsidies and price hikes of inputs like diesel and fertilizer are also contributing to food inflation. The deregulation of petrol prices has led to very steep hikes in the recent weeks. High inflation has an adverse effect on growth due to a number of factors: distortion of relative prices which lowers economic efficiency; redistribution of wealth between debtors and creditors; aversion to long-term contracts and excessive resources are devoted to hedging inflation risks. In developing economies, in particular, an additional cost of high inflation originates from its adverse effects on the poor population.

Indias wholesale inflation rate galloped towards a worrisome 7.23% in April amid fears that rain-induced supply constraints and a possible increase in fuel prices will further knock up prices of food and other items. Besides, a falling rupee, which closed at an all-time low of 53.97 to a dollar on Monday is likely to push up prices of most imported goods, including crude oil, fanning inflation. At 10.49% in April, food inflation has already reached uncomfortable levels, prompting calls for better infrastructure and reforms to bolster supplies. Food inflation is a matter of concern, particularly since it has reached the double digit, said Pranab Mukherjee, finance minister. Food inflation can be tackled by creating storing facilities and cold chains. Also required are institutional reforms in agricultural marketing. Higher inflation, in turn, may stall any further moves by the Reserve Bank of India (RBI) to cut interest rates. In the continuing tug-of-war between rising prices and sliding growth, the RBI last month slashed the repo rate its main lending rate for the first time in nearly three years. The RBI had slashed the repo rate or the rate at which banks borrow from the central bank by 0.50 percentage points to 8%. To conclusion, it can be said that global crisis and degrading agriculture sector policies as well as condition are contributing factors towards rising inflation. India has to soon find ways to curb inflation before our growing economy collapses.

It would be apt to end with this quote. Remember there used to be saying constantly taught to us by r parents/grandparents that A penny saved is worth many.Yeahwell Nowadays a penny saved. is ridiculous & for those whose portfolios are going into red by the daya simple advice. Invest in inflation. Its the only thing going up. !!!