A

Project Report
On

CAUSES OF INFLATION AND MEASURES TO CONROL

INFLATIONARY IN INDIAN ECONOMY
In

Macro Economics

IN PARTIAL FULFILLMENTOF THE REQUIRMENT OF THE AWARD

FOR THE DEGREE OF
Master of Business Administration
UNDER
Lovely Professional University, Punjab
(Session: -2019-2021)

CAUSES OF INFLATION AND MEASURES TO CONROL

INFLATIONARY IN INDIAN ECONOMY

Introduction

As we know that inflation generally means rise in Prices. In a correct word, we can say that

inflation is the persistent rise in a general or common price level instead of a once- for-all rise

in it, and deflation is also known as persistent in falling price.

The situation is shown as inflationary when either the prices or the supply of money are

rising, but in return both will rise together.

Now-a-days whether the country’s economy is under developed, developing or well

developed, they suffer from inflation. It is always pretend that the rising prices are the major

problem today in the world.

Inflation is not strange for Indian economy. The Indian economy is being showing

stupendous growth after the liberalization of Indian economy. But for the long time, they

ignored the inflation. But it became a priority for the India to control the inflation. They

increased the industrial output in the mid1990s. Inflation today is caused more by global

instead of the domestic factors. Along with that the Indian economy is undergoing the several

the several structural changes. The main cause of the rise in the rate of Inflation in India is the

price disparity of the agricultural products between the producers and the consumers.

As of now, the inflation rate in India was 5.5 % according to May 2019 (Ministry of Statistics

and programme implementation).

And in general way, the inflation is also called as Wholesale Price Index(WPI), for all

commodities. It is being followed in India. But many of the countries follow the consumer

price index(CPI) because of their central measure of Inflation.

As India is a developing economy, and there are several challenges the developing economy

faces such as monetary policy with central bank, the inflation and the price stability

phenomenon. And the monetary policy in India is determined as a total key factor element in

the depicting and the controlling inflation.

The former governor of RBI C. Rangarajan comes out with a point that there is a long-term

trade-off between the output and the inflation too.

Inflation in India by and large happens as an absolute results of worldwide exchanged wares

and the few endeavours made by the Reserve Bank of India(RBI) just to debilitate the rupee

against the dollar.

According to some experts, the policy of RBI that has to be absorb all dollars that is coming

into the Indian economy is contributing just to appreciate the rupee.

Statistical Data:

The issue of inflation to an inappropriate structure and execution of arranging, other than

excess of development in cash supply

Inflation statistical of India

Year 2015 2016 2017 2018 2019 2020

Inflation(% 4.9 4.5 3.6 3.48 3.88 4.25

)
 Inflation(%)
6

5 1
1
1
4 1
1 1
3

0
2014 2015 2016 2017 2018 2019 2020 2021

Causes of Inflation in Indian Economy:

In simple words Inflation or persistently rising prices is a major problem in India today.

When price level rises due to inflation the value of money falls. When there is a persistent

rise in price level, the people need more and more money to buy goods and services. There

are mainly three types of inflation in context to economics such as ‘Demand-pull inflation,

Cost-push inflation, and Structuralist inflation’.

1. Demand-Pull Inflation:

This represents a situation where the basic factor at work is the increase in aggregate demand

for output either from the households or the entrepreneurs or government organized The

outcome is that the weight of interest is with the end goal that it can't be met by the at present

accessible inventory of yield. Model: As expressed above interest pull expansion happens

when there is increment in any segment of total interest, to be specific, utilization request by

family units, speculation by business firms, increment in government use unrivaled by

increment in charges. Because of the measures embraced to forestall the spread of the

Coronavirus Disease 2019 (Covid-19), particularly social removing and lockdown,

superfluous consumptions are being delayed. This is making total interest breakdown over

the worldwide. there will likewise be far reaching inventory network disturbances, as certain

individuals remain at home, others return to their towns, imports are upset, and remote travel

is halted. This will contrarily influence creation in practically all ventures to the interest

decrease.

2. Cost-Push Inflation:

We can imagine circumstances where despite the fact that there is no expansion in total

interest, costs may in any case rise. This may occur if there is beginning increment in

costs autonomous of any expansion in total interest.

Example: In the seventies the supply shocks causing increase in marginal cost of production

became more important in bringing about cost-push inflation. Some of the products such as

these farm products are raw materials for various industries such as sugar industry, other agro

processing industries, cotton textile industry, jute industry and as a result when prices of farm

products rise they lead to rise in prices of goods which use the farm products as raw

materials.

When there is increase in Import price the cost of production of the producers who in turn

raise the prices of final products produced by them. This inflation is the result of import price

shock. It may be noted that as a result of cost-push effect of higher wages short-run aggregate

supply curve of output shifts to the left and given the aggregate demand curve results in
higher price of output. So, if the inflation is increases then the purchasing power of the

consumer decreases credit becomes increases.

Right now, the shock will spread to manufacturing, mining, agriculture, public

administration, and construction all sectors of the economy. This will unfavorably influence

speculation, work, salary and utilization pulling down the total development pace of the

economy. We are as of now observing some early numbers that feature the seriousness and

span of the emergency the economy may encounter going ahead.

Analysis: this chart represents the relationship between inflation rate and oil price rate effect on

GDP. In 2012-2013 inflation rate 10 % and oil price 11% and change in 2018-2019 inflation rate3.9%

and oil price rate 5.2%. then analysis the data is defined inflation rate and oil price rate decline from

2012 to 2019.
3. Structuralist Theory of Inflation:

The Structuralist contend that expansion in venture use and the extension of cash supply to

back it are the main proximate and not a definitive elements liable for swelling in the creating

nations

Example: The individual generally influenced by rising swelling is the last purchaser of

products. The costs of merchandise and enterprises are continually rising. In any case, the pay

rates and salary of purchaser don't rise proportionately, there is a slack. Thus, the products

and ventures become more expensive to these last buyers. Furthermore, the populace in the

least salary bunch are the most influenced. They can't manage the cost of essential

necessities. The rising costs imply that the components of creation like work and crude

materials have likewise gotten costly. The overall revenues of the organizations are

diminishing. As should be obvious that due to Covid-19 pandemic the inflation rate is

increments in 2020 as the costs of the merchandise are expands quickly and there is

increment in the rate up to 1.33% contrast with a year ago.

Controlling Inflation:

Some of the important measures to control inflation are as follows:

1. Monetary Measures

2. Fiscal Measures

3. Other Measures.
Inflation is brought about by the disappointment of total inventory to rise to the expansion in

total interest. Expansion can be constrained by expanding the provisions of products and

enterprises and diminishing cash wages so as to control total expansion.

1. Monetary Measures:

Monetary measures aim at reducing money incomes.

(a) Credit Control:

One of the significant money related measures is fiscal arrangement. The national bank of the

nation embraces various strategies to control the amount and nature of credit. For this reason,

it raises the bank rates sells protections in the open market raises the save proportion and

embraces various particular acknowledge control estimates, for example, raising edge

necessities and controlling purchaser credit. Fiscal approach may not be viable in controlling

swelling if expansion is because of cost-push factors. Fiscal arrangement must be useful in

controlling swelling because of interest pull factors.

(b) Demonetisation of Currency:

one of the fiscal measures is to demonetize money of higher sections. Such a measures is

typically received when there is plenitude of dark cash in the nation. While demonetisation

was a large enough fiscal stun, it didn't in a general sense upset interest and supply

components for a really long time. We currently know looking back that individuals

discovered workarounds in the types of electronic installments, casual credit, changing over

dark cash into white, utilizing old notes and so forth.

(c) Issue of New Currency:

The most extraordinary fiscal measure is the issue of new money instead of the old money.

Under this framework, one new note is traded for various notes of the old money. The

estimation of bank stores is additionally fixed as needs be. Such a measure is received when

there is an unreasonable issue of notes and there is hyperinflation in the nation. It is an

exceptionally viable measure. Be that as it may, is biased for its damages the little

contributors the most.

2. Fiscal Measures:

Monetary approach alone is unequipped for controlling expansion. It should, in this way, be

enhanced by monetary measures. Monetary measures are profoundly powerful for controlling

government use, individual utilization consumption, and private and open speculation.

(a) Reduction in Unnecessary Expenditure:

The administration ought to decrease superfluous consumption on non-improvement

exercises so as to control swelling. This will likewise put a keep an eye on private use which

is reliant upon government interest for merchandise and enterprises. In any case, it is difficult

to cut government use. Despite the fact that this measure is constantly welcome however it

gets hard to recognize fundamental and unnecessary consumption. Consequently, this

measure ought to be enhanced by tax assessment.

(b) Increase in Taxes:

To cut individual utilization consumption, the paces of individual, corporate and item

expenses ought to be raised and even new charges ought to be assessable yet the paces of

duties ought not be so high as to debilitate sparing, venture and creation. Or maybe, the

assessment framework ought to give bigger motivators to the individuals who spare,

contribute and produce more. Further, to carry more income into the duty net, the
administration ought to punish the expense dodgers by forcing substantial fines. Such

measures will undoubtedly be viable in controlling swelling. To build the inventory of

products inside the nation, the administration ought to lessen import obligations and

increment trade obligations.

(c) Increase in Savings:

Another measure is to build investment funds with respect to the individuals. This will in

general diminish discretionary cashflow with the individuals and henceforth close to home

utilization consumption. Be that as it may, because of the increasing average cost for basic

items individuals are not in a situation to spare much intentionally.

Keynes, in this manner, upheld obligatory investment funds or what he called 'conceded

installment' where the saver recovers his cash after certain years. For this reason, the

administration should drift open advances conveying high paces of premium beginning

setting aside conspires with prize cash or lottery for extensive stretches and so on. It ought to

likewise present mandatory fortunate store, opportune reserve cum-benefits plans, and so on.

Every single such measure increment reserve funds and are probably going to be powerful in

controlling expansion.

(d) Surplus Budgets:

A significant measure is to embrace against inflationary budgetary strategy. For this reason,

the legislature should surrender shortage financing and rather have surplus spending plans. It

implies gathering more in incomes and spending less.

(e) Public Debt:
simultaneously, it should stop reimbursement of open obligation and delay it to some future

date till inflationary weights are controlled inside the economy. the legislature ought to

acquire more to diminish cash supply with the general population. Like money related

measures, financial estimates alone can't help in controlling swelling. They ought to be

enhanced by financial, non-money related and non-monetary measures.

3. Other Measures:

Different sorts of measures are those which target expanding total stockpile and diminishing

total interest straightforwardly.

(a) To Increase Production:

The following measures should be adopted to increase production:

(i) One of the foremost measures to control inflation is to increase the production of essential

consumer goods like food, clothing, kerosene oil, sugar, vegetable oils, etc.

(ii) If there is need, raw materials for such products may be imported on preferential basis to

increase the production of essential commodities,

(iii) Efforts should also be made to increase productivity. For this purpose, industrial peace

should be maintained through agreements with trade unions, binding them not to resort to

strikes for some time.

(iv) The policy of rationalisation of industries should be adopted as a long-term measure.

Rationalisation increases productivity and production of industries through the use of brain,

brawn and bullion,

(v) All possible help in the form of latest technology, raw materials, financial help, subsidies,

etc. should be provided to different consumer goods sectors to increase production.

(b) Rational Wage Policy:

Another important measure is to adopt a rational wage and income policy. Under

hyperinflation, there is a wage-price spiral. To control this, the government should freeze

wages, incomes, profits, dividends, bonus, etc.

But such a drastic measure can only be adopted for a short period as it is likely to antagonise

both workers and industrialists. Therefore, the best course is to link increase in wages to

increase in productivity. This will have a dual effect. It will control wages and at the same

time increase productivity, and hence raise production of goods in the economy.

(c) Price Control:

Price control and proportioning is another proportion of direct control to check swelling.

Value control implies fixing a maximum breaking point at the costs of basic purchaser

products. They are the greatest costs fixed by law and anyone charging more than these costs

is rebuffed by law. Be that as it may, it is hard to regulate value control.

(d) Rationing:

Rationing targets dispersing utilization of rare merchandise in order to make them accessible

to an enormous number of buyers. It is applied to basic purchaser merchandise, for example,

wheat, rice, sugar, lamp oil, and so on. It is intended to balance out the costs of necessaries

and guarantee distributive equity. Be that as it may, it is exceptionally badly designed for

customers since it prompts lines, counterfeit deficiencies, debasement and dark advertising.
Keynes didn't support proportioning for it includes a lot of waste, both of assets and of

business.

Practical Application and Concept:

Precarious situation of India

If there should be an occurrence of India, the issue could be progressively intense and longer

enduring attributable to the troublesome express the economy was in before Covid-19 struck.

1. India has a tremendous casual division which is pregnable to the Covid-19 stun. The casual

part works in an unexpected way. It relies upon individuals' day by day request. With an

enormous piece of the potential clients of the casual part remaining at home at the present

time and pulling back from superfluous consumptions. the endurance of casual area units will

get flawed as time passes that the wellbeing emergency and the related lockdown delays. In

the proper segment to the degree that organizations don't shut down representatives will even

now have their employments and get their compensations. While demonetisation was a large

enough financial stun, it didn't in a general sense disturb request and supply systems for a

really long time. We currently know looking back that individuals discovered workarounds in

the types of electronic instalments, casual credit changing over dark cash into white, utilizing

old notes and so forth. On account of the present emergency, it's anything but an issue of

finding a workaround for instalments: the interest isn't there, the inventory isn't there, and

subsequently, the basic incomes are not there. Numerous organizations in the casual part will

be compelled to close down which thus will put weight on the enormous microfinance area

that offers help to incalculable little and miniaturized scale endeavors all through the nation.
2. There was extensive worry in the corporate area one portion of the notable Twin Balance

Sheet (TBS) issue. The organizations in the private corporate division which have been

deleveraging throughout the previous hardly any years in light of the TBS emergency and

those with moderately profound money related pockets will maybe have the option to hold

over this scene additionally relying upon which area they are work. An enormous number of

firms will battle to endure. They need to pay rents, pay rates, obligations as their incomes will

consistently continue falling as individuals change ways of life and cut back on

consumptions. The organizations that were close to indebtedness will wind up in the chapter

11 procedure and those that were experiencing bankruptcy goals process under the

Insolvency and Bankruptcy Code (IBC) will doubtlessly get pushed to liquidation as the IBC

strategies will back off significantly further

3. The Indian financial framework is gravely broken the other portion of the TBS issue. In

typical conditions, a solid financial framework makes a qualification between great firms and

terrible firms while broadening credit. The previous are firms whose budgetary possibilities

are solid and who can reimburse advances regardless of whether they don't have a lot of

incomes for state a specific timeframe. The last are firms that are on the edge who can't

reimburse an advance regardless of whether income stops for state only seven days. The more

extended the wellbeing emergency endures less firms will be left in the previous class and

more firms will wind up in the last classification. So the quantity of firm passing will rely

upon to what extent the wellbeing emergency runs. It will likewise rely upon how careful the

banks are in making their suitability evaluations.

Indeed, even before the wellbeing emergency, banks were extraordinarily careful in light of

the fact that their capital positions are feeble. Presently with such unprecedented degrees of

vulnerability, banks will doubtlessly be considerably increasingly cautious in expanding

credit, bringing about numerous pointless and avoidable passing’s in the private corporate

division. In addition, even before the past NPA emergency could be settled, banks will be hit

by another round of NPAs as an ever increasing number of monetarily focused on firms begin

defaulting on their duty. Private banks may observer an expansion in defaults by customers

on unbound advances. This will make it harder for most banks to make new credits.

4. Indian families were at that point utilized going into the present emergency. When

joblessness goes up and salary vanishes. they will think that it’s hard to reimburse existing

credits not to mention make new uses.

5. Given the condition of the economy and particularly the condition of the monetary

establishments, the approach switches accessible to the legislature to manage the financial

emergency are restricted.

Measure to Control Inflationary in Indian Economy:

Policies to avoid:

Policies to maintain a strategic distance from: In such conditions, it is appealing to address

the issues utilizing succession and radical measures, for example, forcing coordinated

loaning, bans, or value controls. These measures viably evacuate the market system with a

politically determined distribution of assets. Now and again, this may be essential. It is

conceivable that a few ventures, for example, flying should be rescued utilizing State assets.

However, these cases ought to be not many.

As a rule, the objective ought to be to make the market framework work all the more

successfully, helping it as opposed to controlling it. Model: the designs to force further

standards on banks, coordinating their loaning, revealing to them which credits to excuse
teaching them not to order reprobate advances as non-performing resources (NPAs, etc. The

point of such measures is calculable. The goal is to guarantee that more firms are spared. The

impacts anyway are probably going to be counterproductive. To the degree that feeble banks

are being approached to spare certain frail firms, the previous will attempt to ensure

themselves by being progressively wary in their loaning to the more grounded firms.

Accordingly, more grounded firms might be prevented credit in favor from securing the more

fragile ones, something contrary to what we have to occur. As a rule, care must be taken to

dodge gauges that may have a few advantages however will likewise have extreme reactions

which can harm the economy and society. In particular, it is basic to keep up the believability

of establishments during these disturbed occasions. It takes a very long time to fabricate

organizations and months to dissolve their ability and believability.

Possible policy options:

Here are a couple of thoughts that the policymakers can consider as they gear up to manage

the monetary emergency.

(I) The primary measure must be to secure the laborers in the casual part who will be

seriously influenced but then have little reserve funds to hold them over the stun. This won't

be anything but difficult to do yet there are two systems that could be used: MNREGA1

(Mahatma Gandhi National Rural Employment Guarantee Act) and Jan Dhan2 accounts.

Partially, the MNREGA framework fills in as a programmed stabilizer in such a case that

individuals need employments they can simply apply. The limitation here is that if social

separating must be kept up because of the Covid-19 flare-up and since financial action will

get slowed down, even MNREGA may not be a suitable choice at the present time. There will

be to guarantee that the subsidizing is accessible and in the hands of the states and

panchayats, with the end goal that when the proper opportunity arrives and enormous number
of laborers pursue MNREGA, the instrument functions as planned. Another choice will be for

the administration to give enormous scope direct money moves utilizing the Jan Dhan

accounts and to begin this immediately to enable the casual segment to adapt to the stun. The

ideal structure of the money move program should be made sense of as far as focused

beneficiaries, sums, and length.

(ii) In organized sector, the objective should be to make the banks somewhat less risk averse

in their overall lending, while preserving their authority to distinguish between viable and

non-viable firms. Perhaps the best way to do this is by providing the public sector banks with

additional capital to give them a larger cushion to fall back on in case they make lending

mistakes given the prevalent uncertainty. It might be harder for private banks to raise capital

from the market given that they are already experiencing declines in share prices.

The government could also improve corporate cash flows by speeding up GST refunds and

delaying payments of corporate taxes.

(iii) In sorted out part, the target ought to be to make the banks to some degree less hazard

opposed in their general loaning, while at the same time saving their power to recognize

reasonable and non-suitable firms. Maybe the most ideal approach to do this is by furnishing

the open division keeps money with extra funding to give them a bigger pad to count on in

the event that they commit loaning errors given the predominant vulnerability. It may be

more diligently for private banks to raise capital from the market given that they are as of

now encountering decreases in share costs. The administration could likewise improve

corporate incomes by accelerating GST discounts and postponing installments of corporate

charges.

(iv) All these programmes will cost money raising the most important question: where will

the government obtain the funds from? Fortunately, the ongoing global crisis has had a silver
lining for India, in the form of considerably lower oil prices. In normal times, there would be

a strong argument for allowing the benefits to go to the consumers. These are not normal

times. The windfall should be taken into the budget and redirected to those most in need.

Given the extraordinary circumstances and the uncertainty about how long the health shock

will last, it may also be advisable to temporarily increase the budget deficit and let the debt-

to-GDP (gross domestic product) ratio go up, provided when the crisis is over, the

commitment would be to bring this down and get back to the fiscal consolidation path. The

private sector investment demand is currently low and it is unlikely to get revived soon

because firms will focus on surviving, instead of making new investments.

Therefore, the scope of crowding out private investment is relatively low. when households

have already incurred losses from real estate and equity investments, there could be a flight to

safety to government bonds, directly or indirectly through bank deposits. At the same time

foreign funding is drying up and tax revenues will fall substantially. Therefore, it will be

important to think through the financing of any increase in deficit.

(v) Monetary policy is the design of inflation targeting (IT) is well suited for such crisis

times. IT support inflation expectations, thereby giving monetary policy more room to trick

during downturns. Accordingly, efforts must be put into retaining and even enhancing the

credibility of this mechanism. What is required is accurate inflation forecast targeting. Given

the slump in aggregate demand and fall in oil prices, consumer price index (CPI) inflation

will come down, creating ample room to cut rates. Once interest rates are reduced drastically,

banks will cut their lending rates sharply (even taking into account the weak transmission

mechanism), thereby reducing the stress of servicing debt for corporates and households,

helping them to survive the crisis.

Conclusion:

India’s annual GDP saw a growth rate of approx. 6.6% last year. This is actually lower than

in the previous few years. Now there are a lot of factors for the slowdown in growth. One of

them is increasing inflation rates. Prices of product and services, rent and local duties vary

from city to city. Rendering national inflation numbers almost meaningless for the common

man. a true indicator of how household budgets are hit by price rise is best gauged by city

inflation rate. Here’s how widely city inflation varied in May.

Retail inflation continued to ease in March on lower food and fuel prices and a fall in demand

for non-essential items amid a nationwide lockdown to combat the coronavirus pandemic.

The Consumer Price Index-based inflation stood at 5.91 percent in March compared with

6.58 percent in February, according to data released by the Ministry of Statistics and Program

Implementation on Monday. A Bloomberg poll of 31 economists had pegged inflation at 5.9

percent for March.

The drop was led by continued easing in vegetable prices. Vegetables inflation stood at 18.63

percent in March against 31.61 percent in February. Inflation in food and beverages eased to

7.82 percent from 9.45 percent in February.

Agricultural commodities continued to see supply-side disruptions amid the lockdown. While

inflation in fuel and light rose in March, it is expected to fall in April because of low demand,

along with a deflationary pressure on prices of non-essential items.

According to economic report inflation impact in many sector by covid-19, Inflation in fuel

and light eased to 6.59 percent in March from 6.36 percent in February. Clothing and

footwear inflation stood at 2.11 percent compared with 2.05 percent in February. Inflation in

housing stood at 4.23 percent in March compared with 4.24 percent in the preceding month.
Household goods and services inflation stood at 1.81 percent against 1.88 percent in

February. Health inflation stood at 4.17 percent against 4.19 percent. Inflation in recreation

andQ1213@1 amusement stood at 4.36 percent against 4.45 percent in February.

References:

1. Hajra, S. (1975): “Inflation & Indian Economy: 1951-52 to1973-74”, Economic and

Scientific Research Foundation, New Delhi.

2. Reddy, Y.V. (1999): “Inflation in India: Status & Issues”, in Reddy Y.V. (2000):

“Monetary and Financial Sector Reforms in India – A Central Banker’s Perspective”, UBS

Publishers & Distributers Ltd., New Delhi.

3. www.yourarticlelibrary.com/inflation/inflation...causes and-effects-effects-of- inflation...

4. www.economicsdiscussion.net/inflation/india-inflation/ inflation-in-India-causes- effect.

5. Nahata Pallavi, (2019):” India CPI Data and Retail Inflation/causes and effect.

6. The Hindu,” economists expect food prices “, www.thehindu.com/business/businesslive-14-april-

2020/article31336174.