General Awareness

April 04, 2017 @ 01:15 PM

Inflation in India and measures to control

General Awareness will be tested in most of MBA entrance exams hence; MBA aspirants must update their GK or General Awareness at regular intervals.

Today, you will read General Awareness Topic :Inflation in India and measures to control
 
Inflation rate refers to a persistent rise in general prices level. Historically, from 1969 until 2012, India Inflation Rate averaged 7.75 percent reaching an all time high of 34.68 Percent in September of 1974 and a record low of -11.31 Percent in May of 1976.
 
The inflation rate in India measured by Wholesale Price Index (WPI) was recorded at 7.55 percent in August of 2012 [Wholesale Price Index measures the average of the changes of goods and services price on the basis of wholesale price. 
 
Presently 435 commodities price level is being tracked through whole sale price index in India]. Moreover, the Consumer Price Index (CPI) inflation (retail inflation) also entered double digits after a gap of two months.
 
It rose to 10.03 per cent in August from 9.86 per cent in July, as the rate of price rise in food articles escalated to 12.03 per cent, from 11.53 per cent the previous month. India's retail inflation is the highest among the BRICS group of emerging economies - Brazil, Russia, China, and South Africa - and is way above what the Reserve Bank of India (RBI) calls its comfort level.
 
Price pressures were felt more on urban areas, where inflation was 10.19 per cent, compared to 9.9 per cent in rural areas. Inflation in vegetables came down to 20.79 per cent in August from 27.33 per cent in July. However, the rate of price rise in pulses went up to 16.04 per cent from 12.49 per cent in the previous month. 
 
Fuel and light inflation stood at 7.55 per cent in August, up from 7.36 per cent in July. The pressure on food articles will only rise from here, due to the steep Rs 5 per litre increase in diesel announced last week. This will be captured partially in the September inflation number and the full impact seen in the October figures. It is believed that the government decision on fuel, including the cap on cooking gas subsidy, would raise inflation by 1.3-1.5 percentage points.
 
Theoretically, inflation arises due to demand and supply mismatch. Whenever demand of a particular commodity exceeds the supply, price of the said commodity is likely to increase. This mismatch may be due to excess demand or the supply constraints.
 
If food prices rise due to poor monsoon or the strike by transporters, it is inflation due to supply constraint while if demand rises due to increased income or population, it can be called as demand induced inflation. 
 
Apart from aforesaid factors, two more causes are responsible for the price rise – 1) if consumer expects a price rise in future; he indulges in more purchases thus further increasing the demand and thereby fuelling the inflation, 2) speculative activities, forward trading etc. 
In India, all the four causes are found to playing their role in the price rise and therefore, no single measure  is taken  by Reserve Bank or the Government.
 
Generally, in case of slow down, RBI reduces the interest rates and increases in case of inflation. But, currently India is facing a peculiar situation of low growth rate along with high rate of inflation which further put a dilemma before the monitory authority.
 
Recently, while cutting the CRR rates by 0.25 basis points, RBI said higher diesel prices would increase inflation in the short term, but the reform measures were “significant” as they would strengthen the country’s economic fundamentals. 
 
The central bank said the government’s recent actions had paved the way for more favourable economic conditions by initiating a shift in expenditure away from consumption by reducing fuel subsidies and toward investment, including through foreign direct investment. Further, RBI is supposedly did not reduced the interest rates just to not to put pressure on the inflation.
 
Measures to control Inflation
 
There are broadly two ways of controlling inflation in an economy:
1). Monetary measures and
2). Fiscal measures
 
I).Monetary Measures
 
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.
 
Monetary measures used to control inflation include:
(i) bank rate policy
(ii) cash reserve ratio and
(iii) open market operations.
 
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.
 
Cash Reserve Ratio (CRR) : To 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.
 
Open Market Operations: Open market operations refer 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 results in transfer of a part of bank deposits to central bank account and reduces credit creation capacity of the commercial banks.
 
II). Fiscal Measures
 
Fiscal measures 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.).
 
Since inflation in India is caused by many factors, a mix of aforesaid measures is necessary  
 
 
 
 

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