MANAGERIAL ECONOMICS

AMITY INTERNATIONAL BUSINESS SCHOOL

ASSIGNMENT : Inflation in India

Submitted By: Nitish Rathor Form No: 1156561

Introduction
In economics, inflation or price inflation is a rise in the general level of prices of goods and services over a period of time. The term "inflation" originally referred to increases in the money supply (monetary inflation); however, debates regarding cause

and effect have led to its primary use today in describing price inflation. Inflation can also be described as a decline in the real value of moneya loss of purchasing power. When the general level of prices rises, each unit of currency buys fewer goods and services. Price inflation is usually measured by calculating the inflation rate, which is the percentage change in a price index, such as the consumer price index. Inflation causes certain adverse effects in the economy. For example, uncertainty about future inflation may discourage investment and saving. Inflation also shifts income from those on fixed incomes to those with variable incomes. Fixed nominal payments (e.g. rents and wages) are eroded if they are not inflation-adjusted. High inflation may cause hoarding by households as they buy consumer durables as stores of wealth. Economists generally agree that high rates of inflation and hyperinflation are caused by high growth rates of the money supply. Views on the factors that determine moderate rates of inflation are more varied: changes in inflation are sometimes attributed to fluctuations in real demand for goods and services or in available supplies (i.e. changes in scarcity) and sometimes to changes in the money supply (i.e. the amount of units of currency). However, there is general consensus that in the long run, inflation is caused by money supply increasing faster than the growth rate of the economy. Most central banks (who control money supply) are tasked with keeping inflation at a low level. There are a number of methods that have been suggested to control it. Inflation can be affected to a significant extent through setting interest rates and through other central bank actions (that is, through monetary policy). Others advocate fighting inflation by fixing the exchange rate between the currency and some other reference currency, such as the Euro, U.S. dollar or gold (see fixed exchange rate). Another method attempted in the past has been wage and price controls (incomes policies). Inflation originally referred to the debasement of the currency, where gold coins were collected by the government (e.g. the king or the ruler of the region), melted down, mixed with other metals (e.g. silver, copper or lead) and reissued at the same nominal value. By mixing gold with other metals, the government could increase the total number of coins issued using the same amount of gold, and thus gained a profit known as seigniorage. However, this action increased the money supply, and lowered the relative value of money. As the real value of each coin had decreased, the consumer had to pay more coins in exchange for goods and services of the same value (i.e. prices had increased). In the 19th century, the word inflation started to appear as a direct reference to the action of increasing the amount of currency units by the central bank. Classical political economists from Hume to Ricardo did distinguish between and debate the cause and effect: the Bullionists, for example, argued that the Bank of England had over-issued banknotes (over-increased the money supply) and caused 'the depreciation of banknotes' (price inflation).

While "inflation" usually refers to a rise in some broad price index like the consumer price index that indicates the overall level of prices, it is also used to refer to a rise in the prices of some specific set of goods or services, as in "commodities inflation" "food inflation or "house price inflation or core inflation (a measure of inflation of some sub-set of the broader index, usually excluding goods with higher volatility or strong seasonality). Related economic concepts include: deflation, a fall in the general price level; disinflation, a decrease in the rate of inflation; hyperinflation, an out-of-control inflationary spiral; stagflation, a combination of inflation and slow economic growth and rising unemployment; and reflation, which is an attempt to raise the general level of prices to counteract deflationary pressures. While economic theory before the "marginal revolution" is no longer the basis for current economic theory, many of the institutions, concepts, and terms used in economics come from the "classical" period of political economy, including monetary policy, quantity and quality theories of economics, central banking, velocity of money, price levels and division of the economy into production and consumption. For this reason, debates about present economics often reference problems of classical political economy, and the currency versus banking debates of that period.

Effects of Inflation
An increase in the general level of prices implies a decrease in the purchasing power of the currency. That is, when the general level of prices rises, each monetary unit buys fewer goods and service. In general, high or unpredictable inflation rates are regarded as bad for the following reasons: Uncertainty about future inflation may discourage investment and saving. Redistribution - Inflation redistributes income from those on fixed incomes, such as pensioners, and shifts it to those who draw a variable income, for example from wages and current profits which may keep pace with inflation. However, debtors may be helped by inflation due to reduction of the real value of debt burden. Implicit taxation - A particular form of inflation as a tax is Bracket Creep (also called fiscal drag). By allowing inflation to move upwards, certain sticky aspects of the tax code are met by more and more people. For example, income tax brackets, where the next dollar of income is taxed at a higher rate than previous dollars, tend to become distorted. Governments that allow inflation to "bump" people over these thresholds are, in effect, allowing a tax increase because the same real purchasing power is being taxed at a higher rate. International trade: Where fixed exchange rates are imposed, higher inflation than in trading partners' economies will make exports more expensive and tend toward a

weakening balance of trade. A sustained higher level of inflation than in the trading partners' economies will also, over the long run, put upward pressure on the implicit exchange rate (what the exchange rate would be if left to be decided in the market) making the fix unsustainable and potentially inviting a an exchange rate crisis. Hoarding: people buy consumer durables as stores of wealth in the absence of viable alternatives as a means of getting rid of excess cash before it is devalued, creating shortages of the hoarded objects. Hyperinflation: if inflation gets totally out of control (in the upward direction), it can grossly interfere with the normal workings of the economy, hurting its ability to supply. Shoe leather cost: High inflation increases the opportunity cost of holding cash balances and can induce people to hold a greater portion of their assets in interest paying accounts. However, since cash is still needed in order to carry out transactions this means that more "trips to the bank" are necessary in order to make withdrawals, proverbially wearing out the "shoe leather" with each trip. Menu costs: With high inflation, firms must change their prices often in order to keep up with economy wide changes. But often changing prices is itself a costly activity whether explicitly, as with the need to print new menus, or implicitly. Austrian School explanation of business cycles: According to the Austrian Business Cycle Theory, inflation sets off the business cycle. Austrian economists hold this to be the most damaging effect of inflation. According to Austrian theory, artificially low interest rates and the associated increase in the money supply lead to reckless, speculative borrowing, resulting in clusters of mal-investments, which eventually have to be liquidated as they become unsustainable. Inflation erodes the real value of nominally fixed payments: The real value of fixed nominal payments (like rents, pensions, wages, interest, and taxes) is eroded by inflation. In many countries, such payments are adjusted for inflation on an annual basis. Inflation erodes the real value of historical cost accounting items - In accounting, the real values of non-monetary assets and liabilities stated at historical cost, (e.g. retained earnings, issued share capital, capital reserves, provisions, taxes, dividends, trade payables and receivables ,etc.) - are eroded when they are not inflationadjusted. The real values of historical cost non-monetary items are completely eroded over time. Two percent inflation - the European Central Banks definition of price stability - will destroy 51 percent of the real value of historical cost non-monetary items over 35 years. Some positive effects of (moderate) inflation:-

 Labour Market Adjustments: Keynesians believe that nominal wages are slow to adjust downwards. This can lead to prolonged disequilibrium and high unemployment in the labour market. Since inflation would lower the real wage if nominal wages are kept constant, Keynesian argue that some inflation is good for the economy, as it would allow labour markets to reach equilibrium faster. Room to maneuver: The primary tools for controlling the money supply are the ability to set the discount rate, the rate at which banks can borrow from the central bank, and open market operations which are the central bank's interventions into the bonds market with the aim of affecting the nominal interest rate. If an economy finds itself in a recession with already low, or even zero, nominal interest rates, then the bank cannot cut these rates further (since negative nominal interest rates are impossible) in order to stimulate the economy - this situation is known as a liquidity trap. A moderate level of inflation tends to ensure that nominal interest rates stay sufficiently above zero so that if the need arises the bank can cut the nominal interest rate. Tobin effect: The Nobel prize winning economist James Tobin at one point had argued that a moderate level of inflation can increase investment in an economy leading to faster growth or at least higher steady state level of income. This is due to the fact that inflation lowers the return on monetary assets relative to real assets, such as physical capital. To avoid inflation, investors would switch from holding their assets as money (or a similar, susceptible to inflation, form) to investing in real capital projects. See Tobin monetary model Inflation erodes the real value of government debt.

Causes of Inflation
The Bank of England, central bank of the United Kingdom, monitors causes and attempts to control inflation. There is broad agreement among economists that in the long run, inflation is essentially a monetary phenomenon. However, in the short and medium term inflation may be affected by supply and demand pressures in the economy, and influenced by the relative elasticity of wages, prices and interest rates. The question of whether the short-term effects last long enough to be important is the central topic of debate between monetarist and Keynesian schools. In monetarism prices and wages adjust quickly enough to make other factors merely marginal behavior on a general trend-line. In the Keynesian view, prices and wages adjust at different rates, and these differences have enough effects on real output to be "long term" in the view of people in an economy. A great deal of economic literature concerns the question of what causes inflation and what effect it has. There are different schools of thought as to what causes inflation.

Most can be divided into two broad areas: quality theories of inflation and quantity theories of inflation. Many theories of inflation combine the two. The quality theory of inflation rests on the expectation of a seller accepting currency to be able to exchange that currency at a later time for goods that are desirable as a buyer. The quantity theory of inflation rests on the equation of the money supply, its velocity, and exchanges. Adam Smith and David Hume proposed a quantity theory of inflation for money, and a quality theory of inflation for production.

Keynesian view
Keynesian economic theory proposes that money is transparent to real forces in the economy, and that visible inflation is the result of pressures in the economy expressing themselves in prices. There are three major types of inflation, as part of what Robert J. Gordon calls the "triangle model": Demand-pull inflation: inflation caused by increases in aggregate demand due to increased private and government spending, etc. Demand inflation is constructive to a faster rate of economic growth since the excess demand and favourable market conditions will stimulate investment and expansion. Cost-push inflation: also called "supply shock inflation," caused by drops in aggregate supply due to increased prices of inputs, for example. Take for instance a sudden decrease in the supply of oil, which would increase oil prices. Producers for whom oil is a part of their costs could then pass this on to consumers in the form of increased prices. Built-in inflation: induced by adaptive expectations, often linked to the "price/wage spiral" because it involves workers trying to keep their wages up (gross wages have to increase above the CPI rate to net to CPI after-tax) with prices and then employers passing higher costs on to consumers as higher prices as part of a "vicious circle." Built-in inflation reflects events in the past, and so might be seen as hangover inflation. A major demand-pull theory centers on the supply of money: inflation may be caused by an increase in the quantity of money in circulation relative to the ability of the economy to supply (its potential output). This is most obvious when governments finance spending in a crisis, such as a civil war, by printing money excessively, often leading to hyperinflation, a condition where prices can double in a month or less. Another cause can be a rapid decline in the demand for money, as happened in Europe during the Black Death. The money supply is also thought to play a major role in determining moderate levels of inflation, although there are differences of opinion on how important it is. For

example, Monetarist economists believe that the link is very strong; Keynesian economics, by contrast, typically emphasize the role of aggregate demand in the economy rather than the money supply in determining inflation. That is, for Keynesians the money supply is only one determinant of aggregate demand. Some economists consider this a 'hocus pocus' approach: They disagree with the notion that central banks control the money supply, arguing that central banks have little control because the money supply adapts to the demand for bank credit issued by commercial banks. This is the theory of endogenous money. Advocated strongly by postKeynesians as far back as the 1960s, it has today become a central focus of Taylor rule advocates. This position is not universally accepted: banks create money by making loans, but the aggregate volume of these loans diminishes as real interest rates increase. Thus, central banks influence the money supply by making money cheaper or more expensive, and thus increasing or decreasing its production. A fundamental concept in inflation analysis is the relationship between inflation and unemployment, called the Phillips curve. This model suggests that there is a trade-off between price stability and employment. Therefore, some level of inflation could be considered desirable in order to minimize unemployment. The Phillips curve model described the U.S. experience well in the 1960s but failed to describe the combination of rising inflation and economic stagnation (sometimes referred to as stagflation) experienced in the 1970s. Thus, modern macroeconomics describes inflation using a Phillips curve that shifts (so the trade-off between inflation and unemployment changes) because of such matters as supply shocks and inflation becoming built into the normal workings of the economy. The former refers to such events as the oil shocks of the 1970s, while the latter refers to the price/wage spiral and inflationary expectations implying that the economy "normally" suffers from inflation. Thus, the Phillips curve represents only the demand-pull component of the triangle model. Another concept of note is the potential output (sometimes called the "natural gross domestic product"), a level of GDP, where the economy is at its optimal level of production given institutional and natural constraints. (This level of output corresponds to the Non-Accelerating Inflation Rate of Unemployment, NAIRU, or the "natural" rate of unemployment or the full-employment unemployment rate.) If GDP exceeds its potential (and unemployment is below the NAIRU), the theory says that inflation will accelerate as suppliers increase their prices and built-in inflation worsens. If GDP falls below its potential level (and unemployment is above the NAIRU), inflation will decelerate as suppliers attempt to fill excess capacity, cutting prices and undermining built-in inflation. However, one problem with this theory for policy-making purposes is that the exact level of potential output (and of the NAIRU) is generally unknown and tends to change over time. Inflation also seems to act in an asymmetric way, rising more quickly than it falls. Worse, it can change because of policy: for example, high

unemployment under British Prime Minister Margaret Thatcher might have led to a rise in the NAIRU (and a fall in potential) because many of the unemployed found themselves as structurally unemployed (also see unemployment), unable to find jobs that fit their skills. A rise in structural unemployment implies that a smaller percentage of the labor force can find jobs at the NAIRU, where the economy avoids crossing the threshold into the realm of accelerating inflation.

Controlling inflation
A variety of methods have been used in attempts to control inflation.
Monetary policy

Today the primary tool for controlling inflation is monetary policy. Most central banks are tasked with keeping inflation at a low level, normally to a target rate around 2% to 3% per annum, and within a targeted low inflation range, somewhere from about 2% to 6% per annum. There are a number of methods that have been suggested to control inflation. Central banks such as the U.S. Federal Reserve can affect inflation to a significant extent through setting interest rates and through other operations. High interest rates and slow growth of the money supply are the traditional ways through which central banks fight or prevent inflation, though they have different approaches. For instance, some follow a symmetrical inflation target while others only control inflation when it rises above a target, whether express or implied. Monetarists emphasize increasing interest rates (slowing the rise in the money supply, monetary policy) to fight inflation. Keynesians emphasize reducing demand in general, often through fiscal policy, using increased taxation or reduced government spending to reduce demand as well as by using monetary policy. Supply-side economists advocate fighting inflation by fixing the exchange rate between the currency and some reference currency such as gold. This would be a return to the gold standard. All of these policies are achieved in practice through a process of open market operations.

Fixed exchange rates

Under a fixed exchange rate currency regime, a country's currency is tied in value to another single currency or to a basket of other currencies (or sometimes to another measure of value, such as gold). A fixed exchange rate is usually used to stabilize the value of a currency, vis-a-vis the currency it is pegged to. It can also used as a means to control inflation. However, as the reference value rises and falls, so does the currency pegged to it. This essentially means that the inflation rate in the country is determined by the inflation rate of the country the currency is pegged to. In addition, a fixed exchange rate prevents a government from using domestic monetary policy in order to achieve macroeconomic stability. Under the Bretton Woods agreement, most countries around the world had currencies that were fixed to the US dollar. This limited inflation in those countries, but also exposed them to the danger of speculative attacks. After the Bretton Woods agreement broke down in the early 1970s, countries gradually turned to floating exchange rates. However, in the later part of the 20th century, some countries reverted to a fixed exchange rate as part of an attempt to control inflation. This policy of using a fixed exchange rate to control inflation has been used in many countries in South America. For instance, Argentina (1991-2002), Bolivia, Brazil, Chile.
Wage and price controls

Another method attempted in the past has been wage and price controls ("incomes policies"). Wage and price controls have been successful in wartime environments in combination with rationing. However, their use in other contexts is far more mixed. Notable failures of their use include the 1972 imposition of wage and price controls by Richard Nixon. More successful examples include the Prices and Incomes Accord in Australia and the Wassenaar Agreement in the Netherlands. In general wage and price controls are regarded as a temporary and exceptional measure, only effective when coupled with policies designed to reduce the underlying causes of inflation during the wage and price control regime, for example, winning the war being fought. They often have perverse effects, due to the distorted signals they send to the market. Artificially low prices often cause rationing and shortages and discourage future investment, resulting in yet further shortages. The usual economic analysis is that any product or service that is under-priced is overconsumed. For example, if the official price of bread is too low, there will be too little bread at official prices, and too little investment in bread making by the market to satisfy future needs, thereby exacerbating the problem in the long term. Temporary controls may complement a recession as a way to fight inflation: the controls make the recession more efficient as a way to fight inflation (reducing the need to increase unemployment), while the recession prevents the kinds of distortions that controls cause when demand is high. However, in general the advice of economists is not to impose price controls but to liberalize prices by assuming that the economy will adjust and abandon unprofitable economic activity. The lower

activity will place fewer demands on whatever commodities were driving inflation, whether labor or resources, and inflation will fall with total economic output. This often produces a severe recession, as productive capacity is reallocated and is thus often very unpopular with the people whose livelihoods are destroyed.

Current situation of inflation in India

The India economy forecast issued by IMF in October 2009 predicts also that the inflation rate in 2009 will increase to 8.7% from 8.3% in 2008, contrary to decreasing inflation trends observed in many other countries. As the graph below shows, inflation is predicted to be still above 8% in 2010 but decrease down to 4.1% by 2012.

India Inflation Forecast October 2009

Inflation is no stranger to the Indian economy. In fact, till the early nineties Indians were used to double-digit inflation and its attendant consequences. But, since the mid-nineties controlling inflation has become a priority for policy framers. The natural fallout of this has been that we, as a nation, have become virtually intolerant to inflation. While inflation till the early nineties was primarily caused by domestic factors (supply usually was unable to meet demand, resulting in the classical definition of inflation of too much money chasing too few goods), today the situation has changed significantly.

Inflation today is caused more by global rather than by domestic factors. Naturally, as the Indian economy undergoes structural changes, the causes of domestic inflation too have undergone tectonic changes. Needless to emphasise, causes of today's inflation are complicated. However, it is indeed intriguing that the policy response even to this day unfortunately has been fixated on the traditional anti-inflation instruments of the pre-liberalisation era. Global imbalance the cause for global liquidity The developed western economies, particularly the United States, are consuming on a massive scale leading to gargantuan trade deficits. Crucially their extreme levels of consumption and imports are matched by the proclivity, nay fetish, of the developing countries in having an export-driven economic model. Thus while a set of developing countries produces, exports and also saves the proceeds by investing their forex reserves back in these countries, developed countries are consuming both the production and investment originating from the developing countries. In effect, developing countries are building their foreign exchange reserves while the developed countries are accumulating the corresponding debt. For instance, the US current account deficit is estimated to be 7 per cent of GDP in 2006 and stood at approximately $900 billion. Thus, the current account deficit of the US becomes the current account surplus of other exporting countries, viz. China, Japan and other oil producing and exporting countries. The reason for this imbalance in the global economy is the fact that after the Asian currency crisis; many countries found the virtues of a weak currency and engaged in 'competitive devaluation.' Under this scenario, many countries simply leveraged their weak currency vis-a-vis the US dollar to gain to the global (read US) markets. This mercantilist policy to maintain their competitiveness is achieved when their central banks intervenes in the currency markets leading to accumulation of foreign exchange, notably the US dollar, against their own currency. Implicitly it means that the developing world is subsidising the rich developed world. It would mean that the US has outsourced even defending the dollar to these countries, as a collapse of the US currency would hurt these countries holding more dollars in reserves than perhaps the US itself.

In this connection, commenting on the above phenomenon in the Power and Interest News Report, Jephraim.P.Gundzik wrote that the world growth "was hardly sufficient to be behind the further rise of commodity prices in the first five months of this year (i.e. in 2006). Rather than demand pushing the value of commodities higher in the past 18 months, it has been the (impending) dollar's devaluation against commodities that has pushed commodity prices to record highs." Naturally, as the players fear a fall in the value of the dollar and reach out to various assets and commodities, the prices of these commodities and assets too will rise. Higher international farm prices impact Indian farm prices What actually compounds the problem for India is the fact that lower harvest worldwide, specifically in Australia and Brazil, and the overall strength of demand vis-a-vis supply and low stock positions world over, global wheat prices have continued to rise. Wheat demand is expected to rise, while world production is expected to decline further in the coming months, as a result of which global stocks, already at historically low levels, may fall further by 20 per cent. These global trends have put upward pressure on domestic prices of wheat and are expected to continue to do so during the course of this year. No wonder, despite the government lowering the import tariffs on wheat to zero, there has been no significant quantity of wheat imports as the international prices of wheat are higher than the domestic prices.

Growth and forex flows

Another cause for the increase in the prices of these commodities has been due to the fact that both India and China have been recording excellent growth in recent years. It has to be noted that China and India have a combined population of 2.5 billion people. Given this size of population even a modest $100 increase in the per capita income of these two countries would translate into approximately $250 billion in additional demand for commodities. This has put an extraordinary highly demand on various commodities. The excessive global liquidity as explained above has facilitated buoyant growth of money and credit in 2005-06 and 2006-07. For instance, the net accretion to the foreign exchange reserves aggregates to in excess of $50 billion (about Rs 225,000 crore) in 2006-07. Crucially, this incremental flow of foreign exchange into the country has resulted in increased credit flow by our banks. Naturally this is another fuel for growth and crucially, inflation.

This Reserve Bank of India's strategy of dealing with excessive liquidity through the Market Stabilization Scheme (MSS) has its own limitations. Similarly, the increase in repo rates (ostensibly to make credit overextension costly) and increase in CRR rates (to restrict excessive money supply) are policy interventions with serious limitations in the Indian context with such huge forex inflows.

How about the revaluation of the Indian Rupee?

To conclude, all these are pointers to a need for a different strategy. The current bout of inflation is caused by a multiplicity of factors, mostly global and is structural. Monetary as well as trade policy responses, as has been attempted till date, would be inadequate to deal with the extant issue effectively. Crucially, a stock market boom, a real estate boom and a benign inflation in the food grains market is an economic impossibility. It has to be noted that the Indian market is structurally suited for leveraging shortages rather effectively. Added to this is the information asymmetry among various class of consumers as well as between consumers, on the one hand, and producers and consumers, on the other. Further, the sustained flow of foreign money, thanks to the excessive global liquidity in the world, has fuelled the rise of the stock markets and real estate prices in India to unprecedented levels. This boom has naturally led to corresponding booms in various related markets as much as the increased credit flow has in a way resulted in overall inflation. Economic policy rests in the triumvirate of fiscal, monetary and trade policies. Theoretical understanding of economics meant that these policies are interdependent. Also, one needs to understand that growth naturally comes with its attendant costs and consequences. While these policies are usually intertwined and typically compensatory, one has to understand that the issues with respect to inflation cannot be subjected to conventional wisdom in the era of globalisation. One policy route yet unexamined in the Indian context by the government is the exchange rate policy, especially revaluation of the Rupee as an instrument to control inflation. It is time that we think about a revaluation of the Indian Rupee as a policy response to the complex issue of managing inflation, while simultaneously address the constraints on the supply side on food grains through increase in domestic production.

A higher Rupee value vis-a-vis the dollar would mean lower purchase price of commodities in Rupee terms. The Indian economy has undergone significant changes in the past decade and a half. With increased linkages to the global economy, it cannot duck the negatives of globalisation. Quite the contrary, it needs to come with appropriate policy responses for the same, which cannot be of the 1960s vintage. Allowing Rupee to appreciate is surely one of them.

Current Inflation
Inflation rose by 0.95 percent to reach 8.43 per cent in December 2010. It was 7.48 per cent in the November. The rise in inflation is due to increase in prices of certain food and non-food items. After moderating somewhat in November, the overall inflation, measured on the basis of wholesale prices, rose in December as vegetable, like onion, and other proteinbased items became expensive. As per the Whole sale Price index data released today in New Delhi, prices of food,non-food articles and minerals shot up by 16.46 per cent on an annual basis. However, prices of certain food items declined on a year-on-year. While wheat became cheaper by 5.09 per cent, pulses fell by 10.89 per cent and potatoes went down by 26.57 per cent. During the month, fuel and power prices went up by 11.19 per cent, while manufactured goods became expensive by 4.46 per cent on an annual basis. Within manufactured products, sugar prices eased by 9.91 per cent and leather and leather goods by 1.23 per cent on an annual basis. Government yesterday announced several measures to contain price rise including de-hoarding operations and closely monitoring export and import of food items.

The inflation rate in India was last reported at 8.72 percent in May of 2011. From 1969 until 2010, the average inflation rate in India was 7.99 percent reaching an historical high of 34.68 percent in September of 1974 and a record low of -11.31 percent in May of 1976. Inflation rate refers to a general rise in prices measured against a standard level of purchasing power. The most well known measures of Inflation are the CPI which measures consumer prices, and the GDP deflator, which measures inflation in the whole of the domestic economy. This page includes: India Inflation Rate chart, historical data and news.

Recent Measures by the Government to Control Inflation in India

In order to contain inflationary pressures, the monetary measures undertaken by the Reserve Bank were supplemented by a number of fiscal and supply augmenting measures undertaken by the Government. These include: (I) Measures relating to Imports Pulses: Customs duty on import of pulses was reduced to zero on June 8, 2006 and the period of validity of import of pulses at zero duty, which was initially available up to March 2007, was first extended to August 2007 and further to March 2009. Wheat: Import of wheat at zero duty, which was available up to end-December 2006, was extended further to end-December 2007. Edible oils: Customs duty on palm oils was reduced by 10 percentage points across the board in April 2007 and import duty on various edible oils was reduced in a range of 5-10 percentage points in July 2007. The 4 per cent additional countervailing duty on all edible oils was also withdrawn. Customs duties on crude and refined edible oil were reduced from a range of 40-75 per cent to 20.0-27.5 per cent in March 2008. Import of crude form of edible oil at zero duty and refined form of edible oil at a duty of 7.5 per cent was allowed.

Rice: In March 2008, the customs duty on semi-milled or wholly-milled rice was reduced from 70 per cent to zero per cent up to March 2009. Maize: Customs duty on maize imported under a Tariff Rate Quota of five lakhs metric tonnes was also decreased from 15 per cent to Nil in April 2008. Milk: In order to ensure adequate availability of milk in lean summer months, basic customs duty on skimmed milk powder was proposed to be reduced from 15 per cent to 5 per cent for a Tariff Rate Quota of 10,000 metric tonnes per annum in April 2008. Similarly, on butter oil, which is used for reconstituting liquid milk, customs duty was reduced from 40 per cent to 30 per cent.

Cement: On April 3, 2007, import of Portland cement other than white cement was exempted from countervailing duty (CVD) and special additional customs duty; it was earlier exempted from basic customs duty in January 2007. Exports of cement were prohibited with effect from April 11, 2008. Iron & Steel: In order to augment the domestic availability of steel products as well as to soften prices, the following measures were announced: a) Reduction in the basic customs duty on pig iron and mild steel products viz., sponge iron, granules and powders; ingots, billets, semi-finished products, hot rolled coils, cold rolled coils, coated coils/sheets, bars and rods, angle shapes and sections and wires from 5 per cent to Nil; b) Full exemption of the import of TMT bars and structural from CVD, which is currently at 14 per cent; c) Reduction in the basic customs duty on three critical inputs for manufacture of steel, i.e. metallurgical coke, ferro alloys and zinc from 5 per cent to Nil.

Cotton: The 10 per cent customs duty on cotton imports along with 4 per cent special additional duty was abolished with effect from July 8, 2008. Crude Oil & Petroleum products: Customs duty on crude oil was reduced from 5 per cent to nil as well as on diesel and petrol from 7.5 per cent to 2.5 per cent each, and on other petroleum products from 10.0 per cent to 5.0 per cent. Excise duty on petrol and diesel was reduced by Re. 1 per litre. (II) Measures relating to Exports

Pulses: A ban was imposed on export of pulses with effect from June 22, 2006 and the period of validity of prohibition on exports of pulses, which was initially applied up to end-March 2007, was further extended first up to end-March 2008 and then for one more year beginning April 1, 2008. Onion: The minimum export price (MEP) was increased by the National Agricultural Cooperative Marketing Federation of India Ltd. (NAFED) by US $ 100 per tonne for all destinations from August 20, 2007 and by another US $ 50 per tonne with effect from October 2007 for restricting exports and augmenting availability in the domestic market. Edible Oils: The export of all edible oils was prohibited with immediate effect from April 1, 2008. Rice: On April 1, 2008, export of non-basmati rice was banned and the minimum export price (MEP) was raised to US $ 1,200 per tonne in respect of basmati rice. On April 29, 2008, an export duty of Rs.8,000 per tonne was imposed on basmati rice

along with a commensurate reduction in its minimum export price and thereby refixed the MEP at US$ 1,000 per tonne.

Iron & Steel: On April 29, 2008, export duty was imposed on steel items at the following three different rates:
I. 15 per cent on specified primary forms and semi-finished products, and hot rolled

coils/sheet,
II. 10 per cent on specified rolled products including cold-rolled coils/sheets and

pipes and tubes,

III. 5 per cent on galvanized steel in coil/sheet form.

For this purpose, a uniform statutory rate of 20 per cent has been incorporated in the Export Schedule. These measures are expected to disincentivise the export of steel and augment domestic supply.

Cotton: One per cent drawback benefits (refund of local taxes) on exports of raw cotton were withdrawn with effect from July 8, 2008. (iii) Other Measures a) The minimum support price (MSP) for paddy was raised by Rs. 125 per tonne for 2007-08 and for wheat by Rs. 150 for 2007-08 and further by Rs. 150 for 2008-09. b) Issuance of oil bonds to State-run oil marketing companies.

CONCLUSIONS
Various conclusions were drawn on the basis of objectives after going through the questionnaires filled by different people which are as follows:1. Among people who were interviewed in states like UP, Haryana and New Delhi, the largest concern with inflation appears to be that it lowers peoples standard of living. 2. This standard of living effect is not the only perceived cost of inflation among noneconomists: other perceived costs are tied up with issues of exploitation, political instability, loss of morale, and damage to national prestige. 3. Inflation perceptions appear to be driven by socio-demographic factors and economic conditions. 4. Low degree of literacy on inflation and inaccurate price recall are significant in explaining extreme perceptions. 5. It was found that preventing inflation is considered to be as the national priority by many people. 6. It can also be concluded that the most effective solution for combating inflation is to provide BPT people with some lump sum amount or to raise salaries of employees to keep them satisfied. 7. The estimated rate of inflation over the next 3-5 years is around 20%-25%.