SESSION: 2021-22

SUBJECT: ECONOMICS SEMESTER: 1

TOPIC: Causes of inflation in India

SUBMITTED TO:
POOJA GROVER, Professor (NMIMS)

SUBMITTED BY: Balveer Godara

ROLL. NO: B057
Snap id: 81012100247

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Table Of Content:
1. Introduction
2. Research question
3. Research objective
4. Analysis: 1. Demand-Pull Inflation
2.Cost-push Approaches
3. the structural of inflation
4.Measures of Inflation in India

5. Conclusion
6. Findings
7. References

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INTRODUCTION: The first paragraph is an introduction. In recent
years, inflation has become a big concern for India's economic authorities and
inhabitants. Between 2001 and 2010, the inflation rate (measured as the change
in the consumer price index over a twelve-month period) jumped from 3.7
percent to 12.1 percent, causing concern. Inflation has dropped from 5.2 percent
in early 2015 to 6.18 percent in 2020, raising questions about whether this trend
will continue or whether inflation will rise again. What factors influence India's
inflation rate? Economists, lawmakers, and journalists have all proposed various
remedies to this dilemma. Many individuals are concerned about the impact of
rising and dropping food prices, especially for staples such as cereals, milk,
fruits, and vegetables. 2 Food patterns are shifting, rural salaries are rising, and a
number of government policies, such as price subsidies and the rural
unemployment guarantee plan, are being implemented. Some think that post-
crisis monetary and fiscal stimulus raised inflation, while others say that policy
bottlenecks caused supply-side constraints (Economic Survey, 2013). GDP
growth fell to a nine-year low of 4.7 percent in the fiscal year ending March
2014, while inflation rose significantly in the years after the global financial
crisis. The RBI strengthened its dependence on an approach that has failed to
keep inflation under control rather than reviewing its use. In February 2015, it
formally embraced inflation targeting, setting the target for consumer price
inflation at 6% for 2016 and 4% with a two-percentage-point tolerance zone
for the next years (Ministry of Finance, Government of India, and RBI 2015).
The move was seen as a historic shift in the RBI's monetary policy toward a
sole focus on inflation, as opposed to the previous "multi-indicator approach,"
in which the central bank considered a variety of other variables, such as
economic growth and the exchange rate, when making monetary policy
decisions.

RESEARCH QUESTION: 1 What are main factors that causes

inflation in India?
2. Is it likely that inflation targeting will be effective in controlling India?

RESEARCH OBJECTIVE: objective of the paper to understand

cause of inflation in past 20 years and find solution of this and study do we have
frequently used gauges for inflation

Analysis:

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 1. Demand-Pull Inflation: This is a situation in which the primary
force at work is an increase in aggregate demand for production, which
can come from households, businesses, or the government. As a result,
demand has reached a point where it can no longer be fulfilled by the
current quantity of output.
If, for example, government spending or private investment increases in a
scenario of full employment, the economy is bound to experience inflationary
pressure. According to Keynes, inflation happens when the economy
experiences an inflationary gap, which occurs when aggregate demand for
goods and services exceeds aggregate supply at full employment. Inflation is
defined as a scenario in which aggregate demand for goods and services
outstrips the available supply of production (both being counted at the prices
ruling at the beginning of a period). The rise in price level is a logical result of
such a situation. This disparity between aggregate demand and supply could
now be the result of multiple forces at work. Aggregate demand, as we all
know, is the sum of consumer spending on goods and services, government
spending on goods and services, and enterprises' net investment plans.
There is an increase in price level when aggregate demand for all purposes—
consumption, investment, and government expenditure—exceeds the supply of
commodities at current prices. Sustained inflation necessitates a continual
increase in aggregate demand, as inflation is a continuous rise in the price level
rather than a one-time rise.

2.Cost-push Approaches: The concept that distributional conflicts over

income, which are an inherent component of market economies, play a role in
the inflation process is a common thread connecting cost-push inflation
theories. structure of the economy cause changes in the price of certain products
relative to others which are propagated to the general price level due to
downward rigidity of wages and prices As a result of fast industrialization,
demand in one area rises while demand in another diminishes. (I)However, due
to government policy, trade unions, and other factors, wages in the industry
with diminishing demand do not move downwards.
ii) The export instability hypothesis states that rising export receipts lead to
wage increases in the export industry, which then spread to other sectors,
resulting in inflation.
iii) Agriculture bottleneck hypothesis: In developing countries, this is the
"tendency for food supply to lag behind demand caused by growth in the non-
agricultural sector." Non-farm workers' real income falls as a result of

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increasing food prices, prompting them to demand pay increases and beginning
an inflationary spiral import in local currency, resulting in inflation.

3.The structural of inflation: is particularly concerned with

developing economies. Structural theory's basic premise is that structural
rigidities and social tensions are the primary causes of inflation. "Economic
progress necessitates ongoing changes in the form of production, the economic
and social structure, and income distribution patterns," writes Raul Prebatch.
Failure to implement these changes on time, or to do so partially and entirely,
results in misalignments and strains, releasing the country's long-suppressed and
immensely potent inflationary forces."

4.Measures of Inflation in India: in India, inflation is measured

using various types of price indices. Two main indices used for measuring price
level changes in India are – Wholesale Price Index (WPI) and Consumer price
index). WPI is published by Office of Economic Adviser, Ministry of
Commerce and Industry. It is being published regularly from 1947. In WPI,
prices are quoted from the wholesalers. Traditionally, the wholesale price index
has been used as the main gauge for inflation analysis in India on the grounds
that the legacy consumer price indices weren’t representative of the whole
population. According to the previous RBI governor, D. Subramanian, the CPI
is a better indicator of changes in the cost of living and "therefore is viewed to
be better reflecting the welfare objective of monetary policy. "Subbarao is a
term used to describe a person who (2013). With the publication of the CPI's
new series in 2011, the With the RBI stating its inflation objective, the focus has
shifted from the WPI to the CPI.in terms of the Consumer Price Index (CPI).
However, given the CPI's large weighting of food, it is more likely, rather than
the overall price level, it reflects sectoral (food) pricing. Along the same lines.
The wholesale price index can be viewed as a manufactured goods sectoral
price indicator product. Only the structuralist approach explains food and
industrial prices separately. The inference is that the aggregate price level is
explained by demand-pull techniques. As a result, while evaluating demand-pull
strategies, the aggregate price level should be employed. The GDP deflator is
the broadest measure of inflation. The GDP deflator is the percentage difference
between real GDP growth and nominal GDP growth, which includes both
quantity and price changes.

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Conclusion: Inflation in general and food price inflation in particular has
been persistent India over past few years. price stability is crucial for
sustainable growth structure and factors influencing food inflation; therefore, it
is crucial for any rational policy decision to contain it within comfortable
limits .it is essential that economic policies should be backed up with statical
information and understanding of economic theory. collective action from but
international coordination is important not just for achieving strong, sustainable
and balanced growth but for maintain enough liquidity in the economy On the
empirical front, the structuralist variety of the cost-push school, which was
proposed as an alternative, outperformed both mainstream approaches. In the
industrial sector, expenses appear to be more important than the output gap or
excess money growth in determining prices. Prices in the agriculture sector
appeared to be influenced by supply conditions in the agricultural sector as well
as demand from the non-agricultural sector throughout the post-crisis period. To
be sure, the structuralist approach has flaws, such as the lack of an explanation
for how the mark-up in the industrial sector is established .

Finding: we seek understanding India ‘s inflation by examining interactions

among core inflation, headline inflation appears to influence expected inflation
and hence future levels of core inflation. as a result, one time supply shock,
such as a large spike in food prices, can have a president effect on inflation

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growth-it-wants/?
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3. https://qz.com/india/2071113/why-inflation-in-india-is-so-high/
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%20fish%20amid%20supply%20disruptions.
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