You are on page 1of 35

1.

1 Introduction
In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time. When the price level rises, each unit of currency buys fewer goods and services; consequently, inflation is also erosion in the purchasing power of money a loss of real value in the internal medium of exchange and unit of ac in the economy. A chief measure of price inflation is the inflation rate, the annualized percentage change in a general price index (normally the Consumer Price Index) over time. Inflation can have many effects that can simultaneously have positive and negative effects on an economy. Negative effects of inflation include a decrease in the real value of money and other monetary items over time; uncertainty about future inflation may discourage investment and saving, or may lead to reductions in investment of productive capital and increase savings in non-producing assets. e.g. selling stocks and buying gold. This can reduce overall economic productivity rates, as the capital required to retool companies becomes more expensive. High inflation may lead to shortages of goods if consumers begin hoarding out of concern that prices will increase in the future. Positive effects include a mitigation of economic recessions, and debt relief by reducing the real level of debt. Economists generally agree that high rates of inflation and hyperinflation are caused by an excessive growth of the money supply. Views on which factors determine low to moderate rates of inflation are more varied. Low or moderate inflation may be attributed to fluctuations in real demand for goods and services, or changes in available supplies such as during scarcities, as well as to growth in the money supply. However, the consensus view is that a long sustained period of inflation is caused by money supply growing faster than the rate of economic growth. Today, most mainstream economists favor a low steady rate of inflation. Low (as opposed to zero or negative) inflation may reduce the severity of economic recessions by enabling the labor market to adjust more quickly in a downturn, and reduce the risk that a liquidity trap prevents monetary policy from stabilizing the economy. The task of keeping the rate of inflation low and stable is usually given to monetary authorities. Generally, these monetary authorities are the central banks that control the size of the money supply through the setting of interest rates, through open market operations and through the setting of banking reserve requirements.

1.2 History of Inflation


Inflation originally referred to increases in the amount of money in circulation. For instance, when gold was used as currency, the government could collect gold coins, melt them down, mix them with other metals such as silver, copper or lead, and reissue them at the same nominal value. By diluting the gold with other metals, the government could issue more coins without also needing to increase the amount of gold used to make them. When the cost of each coin is lowered in this way, the government profits from an increase in seignior age. This practice would increase the money supply but at the same time the relative value of each coin would be lowered. As the relative value of the coins becomes less, consumers would need to give more coins in exchange for the same goods and services as before. These goods and services would experience a price increase as the value of each coin is reduced. From second half of the 15th century to the first half of the 17th, Western Europe experienced a major inflationary cycle referred to as "price revolution", with prices on average rising perhaps six fold over 150 years. It was thought that this was caused by the increase in wealth of Habsburg Spain, with a large influx of gold and silver from the New World. The spent silver, suddenly spread throughout a previously cash starved Europe, caused widespread inflation. Demographic factors also contributed to upward pressure on prices, with European population growth after depopulation caused by the Black Death pandemic. By the 19th century, economists categorized three separate factors that cause a rise or fall in the price of goods: a change in the value or resource costs of the good, a change in the price of money which then was usually a fluctuation in the commodity price of the metallic content in the currency, and currency depreciation resulting from an increased supply of currency relative to the quantity of redeemable metal backing the currency. Following the proliferation of private bank note currency printed during the American Civil War, the term "inflation" started to appear as a direct reference to the currency depreciation that occurred as the quantity of redeemable bank notes outstripped the quantity of metal available for their redemption. The term inflation then referred to the devaluation of the currency, and not to a rise in the price of goods. This relationship between the over-supply of bank notes and a resulting depreciation in their value was noted by earlier classical economists such as David Hume and David Ricardo, who would go on to examine and debate to what effect a currency devaluation (later termed monetary inflation) has on the price of goods (later termed price inflation, and eventually just inflation).

1.3 Inflation in India


India has been a cynosure for the past few years in the global economic scenario owing to its varying inflation patterns. In the fiscal year 2004-05 and 2007-2008, India experienced an average growth rate of more than 9%. However the global crunch pinched the economy so badly that the economy gave in to the adverse external shocks and some sectors experienced a slump. Inflation in India 2009 meaning the current rate of inflation in India stands at 11.49% Y-o-Y. In 2008 industrial bodies, policy makers all were worried with the steadily rising inflation. The middle of the year augmented the tension, as majority of the population was wary about a double-digit inflation. However things changed within a few months. Inflation in India actually dropped below 1% during the 3rd week of March 2009. Inflation is such a situation where in too many people chase too few goods and/or too few services that automatically leads to rise in the prices of the goods and services because of the high demand. On the other hand, when inflation drops below the desired mark, then too few people chase too many goods and services, leading to under pricing of goods and services. The India inflation is measured by the Y-o-Y variation of the Wholesale Price Index. While the inflation as measured by WPI is currently at a very low level, the inflation measured by CPI that is Consumer Price Index is at higher levels of 9 to 10%.
Inflation in India statistics
Year 2009 2008 2007 2006 Jan 10.45 5.51 6.72 4.39 Feb 9.63 5.47 7.56 5.31 Mar 8.03 7.87 6.72 5.31 Apr 8.70 7.81 6.67 5.26 May 8.63 7.75 6.61 6.14 Jun 9.29 7.69 5.69 7.89 Jul 11.89 8.33 6.45 6.90 Aug 11.72 9.02 7.26 5.98 Sep 11.64 9.77 6.40 6.84 Oct 11.49 10.45 5.51 7.63 10.45 5.51 6.72 Nov Dec 9.70 5.51 6.72

Source: www.Tax4India.com

1.4 Calculation of inflation:


Some economists assert that Indias method of calculating inflation is wrong as there are serious flaws in the methodologies used by the government. India uses the Wholesale Price Index (WPI) to calculate and then decide the inflation rate in the economy. Most developed countries use the Consumer Price Index (CPI) to calculate inflation.

1.4.1 Wholesale Price Index (WPI)


WPI was first published in 1902, and was one of the more economic indicators available to policy makers until most developed countries by the Consumer Price Index replaced it in the 1970s. 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.

1.4.2 Consumer Price Index (CPI)


CPI is a statistical time-series measure of a weighted average of prices of a specified set of goods and services purchased by consumers. It is a price index that tracks the prices of a specified basket of consumer goods and services, providing a measure of inflation. CPI is a fixed quantity price index and considered by some a cost of living index. Under CPI, an index is scaled so that it is equal to 100 at a chosen point in time, so that all other values of the index are a percentage relative to this one. Economists V Shunmugam and D G Prasad say it is high time that India abandoned WPI and adopted CPI to calculate inflation. India is the only major country that uses a wholesale index to

measure inflation. Most countries use the CPI as a measure of inflation, as this actually measures the increase in price that a consumer will ultimately have to pay for.

1.4.3 How WPI (Wholesale Price Index) is calculated?


In this method, a set of 435 commodities and their price changes are used for the calculation. The selected commodities are supposed to represent various strata of the economy and are supposed to give a comprehensive WPI value for the economy. WPI is calculated on a base year and WPI for the base year is assumed to be 100. To show the calculation, lets assume the base year to be 1970. The data of wholesale prices of all the 435 commodities in the base year and the time for which WPI is to be calculated is gathered. Let's calculate WPI for the year 1980 for a particular commodity, say wheat. Assume that the price of a kilogram of wheat in 1970 = Rs 5.75 and in 1980 = Rs 6.10 The WPI of wheat for the year 1980 is: (Price of Wheat in 1980 Price of Wheat in 1970)/ Price of Wheat in 1970 x 100 i.e. (6.10 5.75)/5.75 x 100 = 6.09Since WPI for the base year is assumed as 100, WPI for 1980 will become 100 + 6.09 =106.09.In this way individual WPI values for the remaining 434 commodities are calculated and then the weighted average of individual WPI figures are found out to arrive at the overall Wholesale Price Index. Commodities are given weight-age depending upon its influence in the economy

1.4.4 How is inflation rate calculated?


If we have the WPI values of two time zones, say, beginning and end of year, the inflation rate for the year will be, (WPI of end of year WPI of beginning of year)/WPI of beginning of year x 100 For example, WPI on Jan 1st 1980 is 106.09 and WPI of Jan 1st 1981 is 109.72 then inflation rate for the year 1981 is, (109.72 106.09)/106.09 x 100 = 3.42% and we say the inflation rate for the year 1981 is 3.42%. Since WPI figures are available every week, inflation for a particular week (which usually means inflation for a period of one year ended on the given week) is calculated based on the above method using WPI of the given week and WPI of the week one year before. This is how we get weekly inflation rates in India. 5

1.4.5 Characteristics of WPI


Following are the few characteristics of Wholesale Price Index: WPI uses a sample set of 435 commodities for inflation calculation The price from wholesale market is taken for the calculation WPI is available for every week It has a time lag of two weeks, which means WPI of the week two weeks back will be available now.

LITERATURE REVIEW

Bicchal, Motilal. Sharma,Naresh Kumar and Kamaiah Bandi Evaluating Core Inflation Measures for India. (2007).In their study they discussed various existing
approaches of measuring core inflation, evaluating their potential advantages and disadvantages. Then a variety of measures of core inflation for India based on three methods are constructed. Among these measures, three are based on conventional ex-food and energy principle and one measure that exclude fifteen of most volatile components are constructed. While constructing exclusion based indices of core inflation, measures are constructed such that only a small weight remains excluded from the index of the core inflation. The other two core measures are variations of Neo-Edgeworthian Index are constructed by reweighting 69 disaggregated components series of WPI. Then another class of core measures are computed based on weighted exponential smoothing which was primarily developed by Cogley (2002). Estimates of core inflation based on their indices are then calculated for 1995 to 2007 (on monthly basis).

Jha, Raghbendra.Inflation Targeting in India: Issues and Prospects. (2007).


Inflation targeting (henceforth IT) has emerged as a significant monetary policy framework in both developed and transition economies. Some authors have argued that for transition economies undergoing sustained financial liberalization and integration in world financial markets IT is an attractive monetary policy framework. The present paper evaluates the case for IT in India. It begins by stating the objectives of monetary policy in India and argues that inflation control cannot be an exclusive concern of monetary policy with widespread poverty still present. The rationale for IT is then spelt out and found to be incomplete. The paper provides some evidence on the effects of IT in developed and transition economies and argues that although IT may have been responsible for maintaining a low inflation regime it has not brought down the inflation rate itself substantially. Further, the volatility of exchange rate and output movements in transition ries adopting IT has been higher than in developed market economies. I then discuss Indias experience with using rules-based policy measures (nominal targets) and discuss why India is not ready for IT. I show that even if the Reserve Bank of India (RBI) wanted to, it could not pursue IT since the short-term interest rate (the principal policy tool used to affect inflation in ries working with IT) does not have significant effects on the rate of inflation. The paper concludes by listing monetary policy options for India at the current time

Cochrane, John H. Inflation Determination with Taylor Rules: A Critical Review. (2007).The new-Keynesian, Taylor-rule theory of inflation determination relies on
explosive dynamics. By raising interest rates in response to inflation, the Fed does not directly stabilize future inflation. Rather, the Fed threatens hyperinflation or deflation, unless inflation jumps to one particular value on each date. However, there is nothing in economics to rule out hyperinflationary or deflationary solutions. Therefore, inflation is just as indeterminate under active interest rate targets as it is under standard fixed interest rate targets. Inflation determination requires ingredients beyond an interest-rate policy that follows the Taylor principle.

Saad-Filho, Alfredo. Inflation theory: a critical Literature review and a new Research agenda. (2007). Marxian analyses of inflation tend to fall under three broad
categories, those that emphasize primarily the role distributive conflicts, monopoly power, or state intervention on the dynamics of credit money. This article reviews these interpretations, and indicates how they can be integrated. The proposed approach, based on the 'extra money' view, departs from the circuit of capital and the endogeneity of credit money in order to explain inflation in inconvertible paper money systems.

Bleaney, Michael and Francisco, Manuela. Exchange rate regimes and inflation Only hard pegs make a difference. (2007). Previous research has suggested
that pegged exchange rates are associated with lower inflation than floating rates. In which direction does the causality run? Using data from a large sample of developing countries from 1984 to 2000, we confirm that hard pegs (currency boards or a shared currency) reduce inflation and money growth. There is no evidence that soft pegs confer any monetary discipline. The choice between soft pegs and floats is determined by inflation: when inflation is low, pegs tend to be chosen and sustained, and when inflation is high, either floats are chosen or there are frequent regime switches.

Bruno, Michael and Easterly, William. Inflation and Growth: In Search of a Stable Relationship. (2007).Are inflation and growth inversely associated, directly
associated, or not associated? Is the empirical inflation growth relationship primarily a long-run

relationship across ries, a short run relationship across time, or both? Like a bickering couple, inflation and growth just cannot seem to decide what their relationship should be.

Mihir, Rakshit. Inflation in a Developing Economy Theory and Policy. (2007).


Over the last one decade inflation in India has been due mostly to oil price shocks or below normal harvests; only in 200607 did aggregate demand pressure seem to play a role in raising the general price level. Inflation originating in supply shocks is generally transitory and represents a movement from one equilibrium price level to another. Only when aggregate demand exceeds the economy's production potential and the monetary policy is accommodative can inflation be of a continuing nature. The two types of inflation call for quite different policy responses. Anti-inflationary fiscal or monetary measures are required when there is an excess demand situation, not when there is a sectoral shock. Nor are policies like oil price freeze or cuts in customs-cum-excise duties on cement or metals appropriate for containing an increase in the general price level: such measures are distortion and counterproductive in as much as they reduce the country's full employment output and growth potential. Only in the case of shortage of food and other essential items of poor men's consumption is it necessary to undertake supply side management through reliance on PDS as well as open market sale of food grains by FCI. The purpose of the present paper is to examine the nature of supply and demand side factors causing inflation in the Indian economy and the efficacy of alternative anti-inflationary measures. In order to motivate the discussion we summarize in Section I the main features of two recent inflationary episodes with special reference to their official diagnosis and the policies pursued to reduce the price pressure. In the context of this survey we pose in Section II some theoretical and policy issues, which appear important, but do not seem to have been properly addressed. Sections III to V attempt at a resolution of these issues and provide in the process a critique of the anti-inflationary policy response of the fiscal and monetary authorities, the final section concludes.

Singh,Anushree. Inflation Hits Middle Class. (2008). In his study he stated that
The prices of basic commodities like fuel, food, education and a interest rates on loans for durables are going up. The average Indian is now paying more on their loans as the interest rates on home loans have gone up by 300 points in the past few months. As such the middle

class cannot afford those goods that they had previously been able to, he adds. It adversely effect their life style.

Butel,Christopher.

Inflation

Jeopardizes

Middle

Class

Education

Requirements. (2008). In his study he stated that in longer term, high inflation could also
weaken the private education sector that has been playing a critical role in raising the quality of Indias workforce. More significantly it, has been the route for people to achieve middle class status. Inflation will jack up the expense of private education for which fees already taking up large proportion of household income because of the inability of supply to keep with demand in the private sector. A lot of people will not be able to afford to send their childrens to private schools anymore.

Shah, Jaksha. Indian Middle Class Expenses. (2009).In his study he stated that
middle class is concerned mainly about childrens educations and health of family. High fees do not guarantee good education. In the same way, when someone in the family is ill, doctors, pathologists and chemists are there to make sure the budget of the family gets disturbed.

Trikha, Peeush. Inflation in India and Its Impact on the People. (2009). In his
study he stated that, almost all the Indian states are reeling under high inflation rate-nearly 18% as of the December. Prices of essential items like sugar, pulses, vegetables, fruits as well as cooking oil are under pressure. Electricity charges have also been increased especially in Delhi and water charges are also expected to increase. The Delhi government is doing this to cover some of the expenses for the commonwealth games, to be held in New Delhi in October 2010.Some of these fare rises are justified, since the last raise was quit a number of years ago. However,the timing has put an overwhelming burden on people. Yet, the unexplained ever rising food p[rices is shameful. High prices dent common mens saving, many of whom live on rent, or are aying monthly installments for their homes. They even have to check whether they are spending INR 10 on item X or INR 25 more on item Y. All this leads to a spiraling effect as it becomes more difficult for poor people to improve their conditions and lead a life where they are not devoid of basic amenities like food, water, shelter and sanitation. There is already vast gap between the poor and rich also rises further. It also leads to rise in cases of burglaries, theft and 10

related crimes, while there are the dynamics of demand and supply in this case of ever rising inflation, there is also a lack of planning and lack of will to act against hoarders and middlemarket man who inflate prices many a times to make big profits and cheat others. Let us hope that Indian central as well as state governments take strong steps tackle this rising inflation and keep it within suitable limits.

Jaiswal, Om Prakash. Inflation in India: A threat to the economy. (2010).


Currently India is under intolerable pressure of mounting inflation having one of the highest consumer inflation in the world. Consumer price index stood at 13.19 in Sep. 2009. Price rise has created serious problem such as discourage investment, loss confidence in domestic currency, and hindering growth of country and causing disappointment in the economy etc. Economic having opinion that inflation today is also caused by global factor beside domestic factors. India is continuously paying the price for not having long-term strategy to tackle inflation. Inflation in India is emerging major threat to the economy. This paper explains in detail about inflation in India with defining it and adds types of inflation, trends of inflation, myth about the inflation and critically evaluates the steps taken by the government to control inflation. Further this paper investigates the causes and effects of inflation to various groups of society and exploring solutions to check inflation.

Rana, MP. Inflation Affecting Middle Class Spending Patterns. (2011). In his
study he discussed that the middle class has been hard hit by the rising inflation, a survey titled "Impact of Inflation among the middle class" conducted by Assocham said that the group had curtailed its spending on entertainment, shopping and eating out by 65 per cent to manage their monthly budgets. The Survey was conducted in major metropolitan cities such as Delhi, Mumbai, Chennai, Kolkata, Ahmedabad, Hyderabad, Pune, Chandigarh and Dehradun. The Survey also noted the bitter fact that the double digit inflation did not affect the higher income group as it did not affect their earnings and thereby spending. According to the survey, the average middle class household in India spent roughly 4000 to 6000 rupees per month on entertainment, shopping and eating out which it has been forced to reduce to Rs 2500 due to the rising market prices. On the other hand, the average amount of money that the high income group spent on entertainment, shopping and eating out during the period of single digit inflation

11

was Rs 10,000 to 20,000 per month which remained unchanged even during the times of double digit inflation. The people in Delhi were the most hit with inflation followed by Ahmedabad, Chandigarh, Mumbai and Chennai. Roughly 500 people from each of the metropolitan cities were picked up for the survey.

RESEARCH METHODOLOGY

3.1 RESEARCH
12

Research is a way to systematically solve the research problem. The research methodology includes the various methods and techniques for conducting a research.

Defining the Research Problem and Objective:


It is said A problem well defined is half-solved. The first step in research methodology is to define the problem and deciding the research objective. The objective of my study is to know Impact of inflation on middle class.

3.2 RESEARCH OBJECTIVES


To study the impact of inflation on budget and standard of living of middle class. To find out the changes in saving pattern of middle class. To study the steps taken by government to control the inflation.

3.3 SOURCES OF DATA


For systematic research, information is required from different sources of data Primary Source & Secondary Source.

3.3.1 Secondary Data:


Secondary data are those which have already been collected by someone else and which have already been passed through the statistical process. In this case it is not confronted with the problems that are usually associated with the collection of original data.Secondary data means the data which are readily available from different sources. In our study secondary data was easily available so we have used secondary data and findings and suggestions have been based on such information. We have gathered these data from the websites, journals, newspapers, books etc..

Impact of Inflation on Middle Class 4.1 Effect of Inflation


Inflation is not considered bad so long as it creates additional employment to the factors of production. It becomes bad the moment it goes out of control. Inflation may be compared to a

13

robber. It deprives the victim of some possession with the difference that robber is visible, inflation is invisible. The robber's victim may be one or a few at a time. But the victim of inflation is the whole nation. The robber may be dragged to a court of law but inflation is legal. Inflation disrupts the economy and paves the way for social and economic upheavals, besides being highly demoralizing. The entrepreneur faced with the demand for higher wages and trying to keep up with such a demand, a retired person trying to manage his living on a fixed pension, a person with fixed income meeting his needs of household expenditure by borrowing from banks and other financial organizations, and the housewife struggling hard to serve food in a period of rising prices are aware of the effects of inflation without being told about it. Effects of inflation on distribution: Inflation has the effect of redistributing income because prices of all factors do not in the same proportion. Entrepreneurs stand to gain more than wage earners or fixed income groups. Speculators, hoarders, black marketers and smugglers gain on account of windfall profits. Change in the value of money also result in the redistribution of wealth, partly because during inflation there is no uniform rise in prices and partly because debts are expressed in terms of money. Inflation is a kind of hidden tad, highly harmful to the poorer sections of society. Thus, poor become poorer. Effects of inflation on wage earners: Wage earners generally suffer during inflation, despite the fact that they obtain a wage rise to counter the rise in the cost of living. However, wages do not rise as much as the rise in price of those commodities, which the workers consume. Further, wages are allowed to rise much later than the rise in prices. Thus, there is a lag between the two, which works to the disadvantage of the worker. If the workers are organized, they may not suffer much during inflation but if they are unorganized like the agricultural laborers they may suffer more as they may not find it easy to get their wages increased. Effects of inflation on middle class and salaried persons: The hardest hits are the persons who receive fixed income, usually called the middle class. Persons who live on past savings, fixed interest or rent, pensions, salaries etc., suffer during periods or rising price, as their incomes remain fixed. The middle class who by hard work take care of children's education, livelihood in

14

the times of sickness and old age and accommodate day to day expenses find it difficult to survive the times of serious inflation. Effects of inflation on public morale: inflation result in arbitrary redistribution of wealth favoring businessmen and debts, and hurting consumers, creditors, petty shop-keepers, small investors and fixed income earners. This lowers the public morale. The ethical standards and the public morale fall to miserably low levels during the period of hyperinflation. Effects of inflation on debtors and creditors: Debtors borrow from creditors to repay with interest at some future date. Changes in price level affect them differently at different time periods. During inflation when the prices rise and the real value of money goes down, the debtors pay back less in real terms than what they had borrowed and thus, to that extent they are gainers. On the other hand, the creditors get less in terms of goods and services than what they had lent and lose to that extent. Effects of inflation on Farmers: The prices of farm products go up faster than costs. Costs lag behind prices of product received by the farmers. It has been observed in India that inflationary tendencies during war and post-war periods have helped farmers in paying off their old debts. Moreover, farmers are generally debtors and have to pay less in real terms, while the land revenue, taxes, etc., do not rise much. Thus farmers generally gain during the periods of inflation. Effects of inflation on the entrepreneurs: When prices rise, producers, traders, speculators and entrepreneurs gain on account of windfall profits because prices rise at a faster rate than the cost of production. Besides, there is time lag between the price rise and the increase in cost. Moreover producers gain because the prices of their stock go up due to inflation. Also they generally being borrowers of money for business purpose, stand to gain. Effects of inflation on Investors: Different kinds of investors are affected differently by inflation. An investor may invest in bonds and debentures which yield a fixed rate of interest or in real estate or equities (shares) whose returns (dividends) rise and fall with profits earned by

15

the companies concerned. When prices rise, the returns on equities go up on account of the rise in profits, while the bond and debenture holders gain nothing, as their income remains fixed. By the same logic, holders will lose during depression, while the debenture and bondholders gain. Effects of inflation on Government: In a mixed economy, the public sector is affected by fluctuations in price level. As prices rise, the Government has to spend more on goods and services, including raw materials, for carrying through their projects. Estimates are revised and taxes are raised during the period of inflation.

4.2 Impact of Inflation


Inflation is a very important aspect that needs to be considered since it impacts ones earnings, investments, purchasing power & lifestyle. In March 2010 a number of agencies are expected to assess inflation for the fiscal year of 20092010 at anywhere between 6.5% (RBI estimate as of October 2009 policy review) to 8% [Economic Times] This means that on average goods and services in India will cost from 6.5% to 8% more as compared to the previous year. Consider your investments. If you have been holding a diversified portfolio with debt and equity and earned around 15%, then you are doing well because you earned money in real terms. Anything more than 15% is icing on the cake. If you have been holding all your money in FDs yielding around 6% to 7% or in a cash account at bank earning about 3% to 4%, then you have actually lost money this year. You will purchase less for the same price than you could in the previous year. Inflation is more important in emerging markets like India than developed markets. The currency, prices, economy, and the general economic system are more volatile and they are growing faster and will generally produce sharp swings in inflation that need to be closely monitored. If you watch carefully, invest well and are well advised, you can do well. In a highly inflationary environment, investments also tend to earn higher returns to reward investors. Inflation is not static. Inflation for the assessment year 2007-2008 was 4.5%. It changes all the time and it is difficult to predict it with great accuracy. 16

Another factor to be aware of is how uneven inflation can be. Education costs in both the USA and in India have far outpaced average inflation for many years. This is very important while planning your childs higher education, whether in India or abroad. Food prices worldwide also come under the higher inflation rates (for November increase was 19% as per the Economic Times of Dec 14) Retirement is a key area to watch out for. One needs to save large amounts & save early to get the retirement benefits to support in old age. The era of company-offered pensions is declining and one needs to take care of himself/herself. Even those persons with a pension will soon find its value eroding if the pension amount is fixed but the economy is not. Whatever is the strategy used, one needs to be aware of the inflation rate and make sure he/she is keeping up with it, if not surpassing it, in their investments and other earnings.

17

Year 2009 2008 2007 2006

Jan 10.45 5.51 6.72 4.39

Feb 9.63 5.47 7.56 5.31

Mar 8.03 7.87 6.72 5.31

Apr 8.70 7.81 6.67 5.26

May 8.63 7.75 6.61 6.14

Jun 9.29 7.69 5.69 7.89

Jul 11.89 8.33 6.45 6.90

Aug 11.72 9.02 7.26 5.98

Sep 11.64 9.77 6.40 6.84

Oct 11.49 10.45 5.51 7.63 -

Nov

Dec 9.70 5.51 6.72

10.45 5.51 6.72

Source: www.Tax4India.com

18

FINDINGS AND SUGGESTIONS


FINDINGS: During the year 2006 in the month of October the inflation rate was 7.63% and it increases to 11.49% in the year 2009,inflation rate has increased by 3.86%in this period. Debtors borrow from creditors to repay with interest at some future date, but during inflation when the prices rise and the real value of money goes down, the debtors pay back less in real terms than what they had borrowed. The prices of basic commodities like fuel, food and interest rates on loans for durables has gone up; as a result middle class cannot afford those goods that they had previously been able to afford. Inflation results in reduction/decrease in the savings of the middle class people. The ethical standards and the public morale fall due to low levels during the period of hyperinflation. Inflation had adversely affected the life style of middle class people. When the prices rise, producers, traders, speculators and entrepreneurs gain on account of windfall gains because prices rises at a faster rate than cost of production. Inflation jack up the expense of private education as results a lot of parents are unable to send their children to private schools. Wages of wage earners has not increase in the same proportion in which their cost of living has increased. Health care sector is also affected because of inflation. Middle class people cant afford to pay high medical charges as the treatment of various diseases like cancer, diabetes, heart diseases etc has also increased.

SUGGESTIONS:
RBI needs to adopt monetary measures for controlling inflation like increasing the discount rate higher reserve ratio, open market operations and selective credit control.

19

The government should reduce public expenditure or increase public revenue to keep a check on inflation. There is need to stop corruption. Export duties imposed on various items need to be reduced. Hoarding of basic commodities like food: vegetables, pulses; fuel etc should be stopped. Public expenditure should be reduced and savings need to be encouraged. Conservative policy is to be followed by RBI. Bank rate need to be increased, control the flow of money in the economy.

20

21

Inflation Affecting Middle Class Spending Patterns

M P Ra na , T ue sd ay 05t h A pri l 2011

Highlighting the fact that the middle class has been hard hit by the rising inflation, a survey titled \"Impact of Inflation among the middle class\" conducted by Assocham said that the group had curtailed its spending on entertainment, shopping and eating out by 65 per cent to manage their monthly budgets. The Survey was conducted in major metropolitan cities such as Delhi, Mumbai, Chennai, Kolkata, Ahemedabad, Hyderabad, Pune, Chandigarh and Dehradun.

The Survey also noted the bitter fact that the double digit inflation did not affect the higher income group as it did not affect their earnings and thereby spending. According to the survey, the average middle class household in India spent roughly 4000 to 6000 rupees per month on entertainment, shopping and eating out which it has been forced to reduce to Rs 2500 due to the rising market prices. On the other hand, the average amount of money that the high income group spent on entertainment, shopping and eating out during the period of single digit inflation was Rs 10,000 to 20,000 per month which remained unchanged even during the times of double digit inflation.

The people in Delhi were the most hit with inflation followed by Ahemedabad, Chandigarh, Mumbai and Chennai. Roughly 500 people from each of the metropolitan cities were picked up for the survey.

22

Money & Finance Year : 2007, Volume : 3, Issue : 2

Inflation in a developing economy theory and policy


RakshitMihir
We are all structuralists, knowingly or unknowingly.
Adapted from Molier, The Would-be Gentleman

Abstract

Over the last one decade inflation in India has been due mostly to oil price shocks or below normal harvests; only in 200607 did aggregate demand pressure seem to play a role in raising the general price level. Inflation originating in supply shocks is generally transitory and represents a movement from one equilibrium price level to another. Only when aggregate demand exceeds the economy's production potential and the monetary policy is accommodative can inflation be of a continuing nature. The two types of inflation call for quite different policy responses. Anti-inflationary fiscal or monetary measures are required when there is an excess demand situation, not when there is a sectoral shock. Nor are policies like oil price freeze or cuts in customs-cum-excise duties on cement or metals appropriate for containing an increase in the general price level: such measures are distortionary and counterproductive in as much as they reduce the country's full employment output and growth potential. Only in the case of shortage of food and other essential items of poor men's consumption is it necessary to undertake supply side management through reliance on PDS as well as open market sale of foodgrains by FCI. The purpose of the present paper is to examine the nature of supply and demand side factors causing inflation in the Indian economy and the efficacy of alternative anti-inflationary measures. In order to motivate the discussion we summarize in Section I the main features of two recent inflationary episodes with special reference to their official diagnosis and the policies pursued to reduce the price pressure. In the context of this survey we pose in Section II some theoretical and policy issues which appear important, but do not seem to have been properly addressed. Sections III to V attempt at a resolution of

23

these issues and provide in the process a critique of the anti-inflationary policy response of the fiscal and monetary authorities. The final section concludes.

24

Inflation In India: Threat To Economy


Submitted by: sonujaiswal Date Submitted: 07/01/2010 Category: Business Words: 3584 Pages: 15 Views: 1271 Popularity Rank: 1138

INFLATION IN INDIA: A THREAT TO THE ECONOMY * Om Prakash Jaiswal ABSTRACT Currently India is under intolerable pressure of mounting inflation having one of the highest consumer inflation in the world. Consumer price index stood at 13.19 in Sep. 2009. Price rise has created serious problem such as discourage investment, loss confidence in domestic currency, and hindering growth of country and causing disappointment in the economy etc. Economic having opinion that inflation today is also caused by global factor beside domestic factors. India is continuously paying the price for not having long term strategy to tackle inflation. Inflation in India is emerging major threat to the economy. This paper explains in detail about inflation in India with defining it and adds types of inflation, trends of inflation, myth about the inflation and critically evaluates the steps taken by the government to control inflation. Further this paper investigates the causes and effects of inflation to various groups of society and exploring solutions to check inflation.

25

WPI Inflation in India at 7% and climbing?


April 5, 2008 Prax (posted by)
The WPI inflation is now at 7% and climbing, putting the Govt the fm and the RBI in a tight spot. I had expected this to happen as i wasnt quite sure of the FMs management skills and mentioned it in my budget post Budget what matters most. It is hurting the middle classes as everything is getting expensive, be it vegi oil or rice wheat, pulses, milk or other essentials. Summers mean more Electricity bills in a power deficit nation of ours. I worry about the millions that have 3/4 children to feed living on 2$ a day not getting what they were promised by the UPA during the last general elections, in terms of subsidised food promised in BPL cards on account of shortages due to mismanagement and huge divergence from open market prices leading to black marketing. And it shows, cause it is now affecting budgets of the upper middle class too, many of who have also been burned by the market fall, and purchased their second house at atrocious prices on floating rate loans. The press has woken up quite late as normal and is doing the round of shopping malls and markets, counting each rupee spent in a days shopping, instead of the regular cricket updates, Bacchan updates, scandals gossip and interviews with successful entrepreneurs in 5 star hotels rediff has a wierd articles like this one. Looks like real returns on deposits after effects of inflation based on real prices or CPI , compliance costs and taxes should now be negative, for the aam admi. Pushing Subsidy burden on PSU Oil cos and Banks in terms of expecting them to cushion the Governments populous decisions is old news. Looks like we are knocking on the Diktat / Control raj doors, as the Govt is in a hurry to cut inflation by attacking the prices of the WPI basket constituents like steel , cement etc by some closed door coercion to Pvt Companies, and some threat of stern action and invoking provisions of draconian price fixing laws of the prohibition era, while the rail ministry on the other end increases freight rate, increasing their costs.

26

The RBI is attempting to suck out liquidity through mkt operations and an expected CRR hike, but will it be enough? Worse we are importing US inflation by holding the Rupee to the dollar at close to Rs40. Read Ilas post on dollar purchase by RBI and watch Ajay Shah for his excellent analysis on Worldwide Inflation of commodities. Things are going to be interesting, and markets fragile. I think sooner than later the Property markets will also start to correct by a fair bit.

27

28

29

30

31

32

33

34

35