INDIAN INSTITUTE OF PLANNING AND MANAGEMENT

(ERRAMANZIL, BESIDE TAJ KRISHNA, BANJARA HILLS,

HYDERABAD)

A REPORT ON
INFLATION IN INDIA

UNDER GUIDANCE OF PROF.PRABHAKAR REDDY

CHANDRA SEKHAR
AJAY KUMAR
MANIK REDDY
KRISHNA KEERTHANA
UDAY SHREE
BHARGAVI

FALL WINTER BATCH 2007-09

Trimester 3

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 ACKNOWLEDGEMENT

I would like to put forth my gratitude, indebtness, and thankfulness

to the authorities of Indian institute of planning and management Hyderabad
for giving us the opportunity to do a project report on GENERAL
INSURANCE(HEALTH INSURANCE). We would like to thank Prof.
Prabhakar Reddy sir for his constant guidance, advice, suggestions and for
his encouragement, to complete the project successfully.

Lastly we would thank our family members without whose blessings and
support we wouldn’t have made it so far.

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 DECLARATION

We hereby declare that all the information that has been collected, analyzed,
and provided for the purpose of this project is entirely true and factual. We
would also like to mention that the work here has neither purchased nor
acquired by any other unfair means .and it has not been submitted to other
universities or published any time before. The information presented in the
report is accurate and updated to the best of our capabilities and knowledge.

CHANDRA SEKHAR
AJAY KUMAR
MANIK REDDY
KRISHNA KEERTHANA
UDAY SHREE
BHARGAVI
Trimester-3 (fall winter batch 2007-09)

CONTENTS

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Overview of inflation 5
Definition 6
Types of Inflation 7
Measures of inflation 14
Issues in Measuring Inflation 16
Causes of Inflation 17
Effect of Inflation 20
Control of Inflation 23
Inflation in India 26
Calculation of Inflation in India 27
Rate of Inflation in Indian 31
Whom does inflation hit the most 35
How does Inflation Affect the Individual 37
“Rising Inflation Hit Business Confident” FICCI 38
Indian Stocks Plunge Due to Political Turmoil 41
And Inflation Fears
How does Inflation affect the Indian Market 43
Food prices drive Indian Inflation 44
Analysis Report 45
Conclusion and recommendation 48

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OVERVIEW OF INFLATION

Everyone is familiar with the term ‘Inflation’ as rising prices. This means
the same thing as fall in the value of money. For example, a person would
like to buy 5kgsof apple with Rs. 100, at the present rate of inflation, say,
zero. Now when the inflation rate is 5%, then the person would require Rs.
105 to buy the same quantity of apples. This is because there is more money
chasing the same produce. Thus, Inflation is a monetary aliment in an
economy and it has been defined in so many ways, which can be defined as
“the change in purchasing power in a currency from period to period relative
to some basket of goods and services.”

Inflation is a rise in general level of prices of goods and services over time.
Although "inflation" is sometimes used to refer to a rise in the prices of a
specific set of goods or services, a rise in prices of one set (such as food)
without a rise in others (such as wages) is not included in the original
meaning of the word. Inflation can be thought of as a decrease in the value
of the unit of currency. It is measured as the percentage rate of change of a
price index but it is not uniquely defined because there are various price
indices that can be used.

Many economists believe that high rates of inflation are caused by high rates
of growth 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

There are many measures of inflation. For example, different price indices
can be used to measure changes in prices that affect different people. Two
widely known indices for which inflation rates are reported in many
countries are the Consumer Price Index (CPI), which measures consumer
prices, and the GDP deflator, which measures price variations associated
with domestic production of goods and services.

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DEFINITION

Inflation is a general and progressive increase in prices; "in inflation

everything gets more valuable except money" .It can be either an increase in
money supply or a decrease in available goods and services.

A simple commonly used definition of the word inflation is simply "an

increase in the price you pay or a decline in the purchasing power of
money". In other words, Price Inflation is when prices get higher or it takes
more money to buy the same item.

Webster's 1983 Definition of Inflation

According to Webster's New Universal Unabridged Dictionary published in

1983 the second definition of "inflation" is:

"An increase in the amount of currency in circulation, resulting in a

relatively sharp and sudden fall in its value and rise in prices: it may be
caused by an increase in the volume of paper money issued or of gold
mined, or a relative increase in expenditures as when the supply of goods
fails to meet the demand.

This definition includes some of the basic economics of inflation and would
seem to indicate that inflation is not defined as the increase in prices but as
the increase in the supply of money that causes the increase in prices i.e.
inflation is a cause rather than an effect.

Webster's 2000 Definition of Inflation

However, The American Heritage® Dictionary of the English Language,

Fourth Edition, and Copyright © 2000 Published by Houghton Mifflin
Company says:

“Inflation is a persistent increase in the level of consumer prices or a

persistent decline in the purchasing power of money, caused by an increase
in available currency and credit beyond the proportion of available goods
and services.”

In this definition, inflation would appear to be the consequence or result

(rising prices) rather than the cause.

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TYPES OF INFLATION
The various types of inflation are classified as follows

(a) . RATE OF INFLATION

According to the rate of inflation, there are three types of inflation,

1. Moderate inflation
(a) Creeping
(b) Walking
2. Running inflation
3. Galloping Inflation
4. Hyper Inflation

1. Moderate, Gal1oping and Hyperinflation The severity of inflation is

often measured in terms of the rapidity of price rise. On the basis, a
quantitative distinction of inflation may be nude into three categories, viz:
Moderate inflation; Running and galloping inflation; and Hyperinflation.
a. Moderate Inflation
It is a mild and tolerable form of inflation. It occurs when prices are rising
slowly when the rate of inflation is less than 10 per cent annually, or it is a
single digit int1ation rate, it is considered to be a moderate inflation in the
present the economy.

The following are the major characteristics of moderate inflation:

i. There is a single digit inflation rate (less than 10 per cent) annually.
ii. It does not disrupt the economic balance.
iii. It is regarded as stable Inflation in which the relative prices do not get far
out of line.
iv. People’s expectations remain more or less stable under moderate
inflation.
v. Under a low inflation rate, the real interest rate is not too low or negative,
so money can serve its role as a store of value without difficulty.
vi. There are modest inefficiencies associated with moderate inflation.
Economists have arbitrarily laid down that a 3-4 per cent price rise per
annum is a tolerable rate of inflation in modern economies. Even the
Chakravarthi Report of the Reserve Bank of India has accepted 3-4 per cent
rate of inflation annually to be an efficient and tolerable norm for the Indian
economy. Incidentally, some economists have described up to 3 per cent

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annual rate of inflation as ‘creeping inflation’ and if it exceeds 10 per cent, it
is called ‘walking inflation.’ This means, Samuelson has clubbed ‘creeping’
and ‘walking’ inflation into
‘Moderate’ inflation. Samuelson’s opinion, moderate inflation is not a
serious
Problem. While some economists feel that even a walking inflation should
make us more cautious, as it represents a warning signal for the occurrence
of running or double digit and eventually a galloping inflation, if it is not
checked in time.
2. Running and Galloping Inflation
When the movement of price accelerates rapidly, running inflation emerges.
Running inflation may record more than 100 per cent rise in prices over a
decade. Thus, when prices rise by more than 10 per cent a year, running
inflation occurs. Economists have not described the range of running
inflation.
But, we may say that a double digit inflation of 10-20 percent per annum is
a running inflation. If it exceeds that figure, it may be called ‘galloping’
inflation.
According to Samuelson, when prices are rising at double or triple digit rates
of 20, 100 or 200 per cent a year, the situation is described as ‘galloping’
inflation.
Indian economy has witnessed a sort of ‘running’ and ‘galloping’ inflation to
some extent (not exceeding 25 per cent per annum) during the planning era,
since the Second Plan period. Argentina, Brazil and Israel, for instance, have
experienced inflation rates over 100 per cent in the eighties. Galloping
inflation is really a serious problem. It causes economic distortions and
disturbances.
3. Hyper Inflation
In the case of hyperinflation, prices rise every movement, and there is no
limit to the height to which prices might rise. Therefore, it is difficult to
measure its magnitude, as prices rise by fits and starts. .
In quantitative terms, when prices rise over 1000 per cent in a year, it is
called a hyperinflation. Austria, Hungary, Germany, Poland and Russia
witnessed
Hyperinflation in the wake of World War I. Hyperinflation notably took
place in Germany in 1920-1923. The German price index rose from 1 to 10,
00,000,000 during January 1922 to November 1923. Believe it or not, it is a
fact!

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The Main Features of Hyperinflation are
i. During hyperinflation, the price rise is severe. The price index moves up
by leaps and bounds. It is over 1000 per cent per year. There is at least a 50
per cent price rise in a month, so that in a year it rises to about 130 times.
ii. It represents the most pathetic deterioration in people
Purchasing power.
iii. It is apparently generated by a massive fiscal dislocation.
iv. It is amplified by wage-price spiral.
v. Hyperinflation is a monetary disease.
vi. The velocity of circulation of money increases very fast.
vii. The structure of the relative prices of goods becomes highly lU1stable.
viii. The real wages tend to decline fast.

(b.) TIME PERIOD

According to the nature of time period of occurrence, inflation is classified
into three types,

1. War-time Inflation
2. Post-war Inflation
3. Peace-time Inflation

War, Post-War and Peace-Time Inflation

On the basis of the nature of time-period of occurrence, we have:
• War-time inflation;
• Post-war inflation; and
• Peace-time inflation.
1. War-Time Inflation
It is the outcome of certain exigencies of war, on account of increased
government expenditure on defence which is of an unproductive nature. By
such public expenditure, the government apportions a substantial production
of goods and services out of total availability for war which causes a
downward shift in the supply; as a result, an inflationary gap may develop.
2. Post-war Inflation
It is a legacy of war. In the immediate post-war period, it is usually
experienced. This may happen when the disposable income of the
community increases, when war-time taxation is withdrawn or public debt is
repaid in the post-war period.

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3. Peace-time Inflation
By this is meant the rise in prices during the normal period of peace.
Peacetime inflation is often a result of increased government outlays on
capital projects having a long gestation period; so a gap between money
income and real wage goods develops. In a planning era, thus, when
government’s expenditure increases, prices may rise.

(c) GOVERNMENT REACTION

According to government there are two types of inflations

1. Open inflation
2. Repressed inflation

Open and Repressed Inflation

Inflation is open or repressed according to the government’s reaction to the
prevalence of inflationary forces in the economy.
a. Open Inflation
When the government does not attempt to prevent a price rise, inflation is
said to be open. Thus, inflation is open when prices rise without any
interruption. In open inflation, the free market mechanism is permitted to
fulfill its historic function of rationing the short supply of goods and
distribute them according to consumer’s ability to pay. Therefore, the
essential characteristics of an open inflation lie in the operation of the price
mechanism as the sole distributing agent. The post-war hyperinflation during
the twenties in Germany is a living example of open inflation.
b. Repressed Inflation
When the government interrupts a price there is a repressed or suppressed
inflation.. Thus, suppressed inflation refers to those conditions in which
price increases are prevented at the present time through an adoption of
certain measures like price controls and rationing by the government, but
they rise on the removal of such controls and rationing. The essential
characteristic of repressed inflation, in contrast to open inflation, is that the
former seeks to prevent distribution through price rise under free market
mechanism and substitutes instead a distribution system based on controls.
Thus, the administration of controls is an important feature of suppressed
inflation.

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Types of Inflation Based on the Causes Inducing Inflation
According to the cause of rising prices, one can consider several types of
inflation as follows:
1. Credit-inflation
2. Deficit inflation
3. Scarcity inflation
4. Profit-inflation
5. Foreign trade inflation
6. Tax-inflation
7. Cost or wage inflation
8. Demand inflation

1. Credit Inflation
Inflation which is caused by excessive expansion of bank credit or money
supply is referred to as credit or money inflation.

2. Deficit Inflation
It is the inflation caused by deficit financing. When the government budgets
contain heavy deficit financing, through creating new money, the purchasing
power in the community increases and prices rise. This may be referred as to
As deficit-induced inflation. During a planning era, when government
launches upon heavy investment, it usually resorts to deficit financing, when
adequate resources are not found. An inflationary spiral develops due to
deficit financing, when adequate resources are not found. An inflationary
spiral
Develops due to deficit financing, when the production of consumption
goods fails to keep. Pace with the increased money expenditure.

3. Scarcity Inflation
Whenever scarcity of real goods occurs or may be artificially created by the
hoarding activities of unscrupulous traders and speculators which may result
into black-marketing, thereby causing prices to go up, such type of inflation
may be described as scarcity inflation.

4. Profit Inflation
. The concept of profit inflation was originated by Keynes in his Treatise on
Money. According to Keynes, the price level of consumption goods is a
function of the investment exceeding savings. He considered the investment

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Boom as a reflection of profit boom. Inflation is unjust in its distribution
effect. It redistributes income in favor of profiteers and against the wage-
earning class. During inflation, thus, the entrepreneur class may tend to
expect an upward shifting of the marginal efficiency of capital (MEC);
hence entrepreneurs are induced to invest more even by borrowing at higher
interest rates. Eventually, investment exceeds savings and economy tends to
reach a higher level of money income equilibrium. If economy is operating
at full employment level or if there are bottlenecks of market imperfections,
real output will not rise proportionately, so the imbalance between money
Income and real income is corrected through rising prices.
5. Foreign-Trade Induced Inflation
For an international economy, we may categories the following
Two types of inflation as being caused by factors pertaining to
The balance of payments.
i. Export-Boom Inflation; and
ii. Import Price-hike Inflation.
a. Export-Boom Inflation
When a country having a sizeable export component in its foreign trade
experiences a sudden rise in the demand for it’s exportable against the
inelastic supply of exportable in the domestic market, it obviously implies an
excessive pressure of demand which is revealed in terms of persistent
inflation at Home. Again, trade gains and sudden influx of exchange
remittances may lead to an increase in monetary liabilities which is further
reflected in the rising pressure of demand for domestic output causing an
inflationary spiral to get further momentum. Such a permanent case for
export-boom inflation is, however, ruled out in the Indian economy, because
neither export trade is a significant portion of Domestic National Product nor
is there a continuous boom of export-demand, causing tenus of trade to
move up favorably all the time.
b. Import Price-hike Inflation
When prices of import components rise due to inflation abroad, the domestic
costs and prices of goods using these imported parts vill tend to rise. Such an
int1ation is referred to as imported intluion. For instance, hike in oil prices
by the Arab countries was responsible for accelerating. Inflationary price
rise in many oil-importing countries, including India to some extent.

6. Tax Inflation
Year to year increase in commodity taxation such as excise duties and sales
tax may lead to rise in prices of taxed goods. Such inflation is termed as tax
inflation or tax-induced inflation.

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7. Cost Inflation
When inflation emerges on account of a rise in cost factor, it is called cost
inflation. It occurs when money incomes (wage rate, particularly) expand
more than real productivity. Cost inflation has its course through the level of
money costs of the factors of production and in particular through the level
of wage rates. Due to a rising cost of living index, workers demand hitch’
wages, and higher wages in their turn increase the cost of production, which
a producer generally meets by raising prices. This process of spiraling may
each higher and higher level. In this case, however, cyclical anti-inflation
remedies of monetary
Controls are not relative effective. Wage inflation is an important variant of
cost inflation. Wage push inflation occurs when money wages are raised
without
Corresponding improvement in the productivity of the workers.
8. Demand Inflation
When there is an excess of aggregate, detrland against the available
aggregate supply of goods and services, prices tend to rise. It is called
demand-induced inflation. Population-growth, rising money income, etc.
forces playa significant role in generating demand inflation.

There are three major types of inflation,

• 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 favorable market conditions will
stimulate investment and expansion. The failing value of money,
however, may encourage spending rather than saving and so reduce
the funds available for investment.
• Cost-push inflation: presently termed "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

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 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
Plague.

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.

MEASURES OF INFLATION
Inflation is measured by calculating the percentage rate of change of a price
index, which is called the inflation rate. Inflation is measured by observing
the change in the price of a large number of goods and services in an
economy, usually based on data collected by government agencies. The
prices of goods and services are combined to give a price index or average
price level, the average price of the basket of products. The inflation rate is
the rate of increase in this index; while the price level might be seen as
Measuring the size of a balloon, inflation refers to the increase in its size.
There is no single true measure of inflation,

The rate can be calculated for many different price indices, including:

1.Consumer price indices

(CPIs) which measure the price of a selection of goods purchased by a

"typical consumer." In the UK, an alternative index called the Retail
Price Index (RPI) uses a slightly different market basket.

2.Cost-of-living indices (COLI) are indices similar to the CPI which are
often used to adjust fixed incomes and contractual incomes to maintain
the real value of those incomes.

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 3.Producer price indices

(PPIs) which measure the prices received by producers. This differs from
the CPI in that price subsidization, profits, and taxes may cause the
amount received by the producer to differ from what the consumer paid.
There is also typically a delay between an increase in the PPI and any
resulting increase in the CPI. Producer price inflation measures the
pressure being put on producers by the costs of their raw materials. This
could be "passed on" as consumer inflation, or it could be absorbed by
profits, or offset by increasing productivity. In India and the United
States, an earlier version of the PPI was called the Wholesale Price Index.

4.Commodity price indices,

Commodity price indices measure the price of a selection of

commodities. In the present commodity price indices are weighted by the
relative importance of the components to the "all in" cost of an employee.

• The GDP Deflator is a measure of the price of all the goods and
services included in Gross Domestic Product (GDP). The US
Commerce Department publishes a deflator series for US GDP,
defined as its nominal GDP measure divided by its real GDP measure.
• Capital goods price Index, although so far no attempt at building such
an index has been made, several economists have recently pointed out
the necessity of measuring capital goods inflation (inflation in the
price of stocks, real estate, and other assets) separately. Indeed a given
increase in the supply of money can lead to a rise in inflation
(consumption goods inflation) and or to a rise in capital goods price
inflation. The growth in money supply has remained fairly constant
through since the 1970s however consumption goods price inflation
has been reduced because most of the inflation has happened in the
capital goods prices.

ISSUES IN MEASURING INFLATION

Measuring inflation requires finding objective ways of separating out
changes in nominal prices from other influences related to real activity. In

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the simplest possible case, if the price of a 10 oz. can of corn changes from
$0.90 to $1.00 over the course of a year, with no change in quality, then this
price change represents inflation. But we are usually more interested in
knowing how the overall cost of living changes, and therefore instead of
looking at the change in price of one good, we want to know how the price
of a large 'basket' of goods and services changes. This is the purpose of
looking at a price index, which is a weighted average of many prices. The
weights in the Consumer Price Index, for example, represent the fraction of
spending that typical consumers spend on each type of goods (using data
collected by surveying households).

Inflation measures are often modified over time, either for the relative
weight of goods in the basket, or in the way in which goods from the present
are compared with goods from the past. This includes hedonic adjustments
and “reweighing” as well as using chained measures of inflation. As with
many economic numbers, inflation numbers are often seasonally adjusted in
order to differentiate expected cyclical cost increases, versus changes in the
economy. Inflation numbers are averaged or otherwise subjected to
statistical techniques in order to remove statistical noise and volatility of
individual prices. Finally, when looking at inflation, economic institutions
sometimes only look at subsets or special indices. One common set is
inflation excluding food and energy, which is often called “core inflation”.

CAUSES OF INFLATION

Some of the Causes of Inflation

Inflation is a complex phenomenon which cannot be attributed to a single
factor. We may summaries the major causes of inflation thus:
1. Over-expansion of Money Supply
Many a times, a remarkable degree of correlation between the increase in
money supply and the rise in the price level may be observed.
2. Expansion of Bank Credit Rapid expansion of bank credit is also
responsible for the inflationary trend in a country.
3. Deficit Financing
The high doses of deficit financing which may cause reckless spending, may
also contribute to the growth of the inflationary spiral in a country.
4. Ordinary Monetary Factors
Among other monetary factors influencing the price trend in an economy,
the major ones are listed here:

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a. High Non-development Expenditure
. The continuous increase in public expenditure, and especially the growth of
defence and non-development expenditure.
b. Huge Plan Investment.
The huge planned investment and its high rate of growth in every plan may
lead to an excess demand in the capital goods sector, so that industrial prices
may rise.
c. Black Money
. Some economists have condemned black money in the hands of tax
evaders and black marketers as an important source of inflation in a country.
Black money encourages lavish spending, which causes excess demand
And a rise in price
d. High Indirect Taxes.
Incidence of high commodity taxation. Prices tend to rise on account of
high excise duties imposed by the Government on raw materials and
essential goods.
Non-Monetary Factors
There are various non-monetary and structural factors that may
Cause a rising price trend in a country. These are:
a. A high Population Growth.
Undoubtedly, the rising pressure of demand resulting from of population
and money income, will cause a high price rise in an over populated country.
b. Natural Calamities and Bad Weather Conditions.
Vagaries of monsoon, bad weather conditions, droughts and failure of
agricultural crops have been responsible for price spurts, from time to time,
in many underdeveloped countries. Agricultural prices are most sensitive to
inflationary forces in India. Natural calamities also contribute occasionally
to the inflationary boost in a country. Events such as cyclones and floods,
which destroy village economies, also aggravate the inflationary pressure.
c. Speculation and Hoarding
. Hoarding and speculative activities, corruption at every level, in both
private and public sectors, etc., are also responsible to some extent for
aggravating inflation in a: country.
d. High Prices of Imports.
Inflation has also been inflicted on some countries through the import
content used by their industries. Prices of petroleum products have been
increased in many countries due to price hikes by the oil producing
countries.
e. Monopolies.

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 Monopoly profits and unfair trade practices by big industrial houses are also
responsible for the price rise in countries like India.
f. Underutilization of Resources.
Non-utilization of installed capacities in large industries is also a
contributory factor to inflation. Inflation in the country may be regarded as a
symptom of a
Deep-seated malady, born of structural deficiencies involved in the
functioning of its economic system, which is characterized by inherent
weaknesses, wastages, and imbalances.

GAPS AND BOTTLE NECK

To understand the true nature of inflation in an underdeveloped country, one
has to examine the bottlenecks and gaps of various types which obstruct the
normal growth process, causing prices to rise with the generation of money
income without an appropriate rise in real income. These gaps or bottlenecks
may be enlisted as to follows:
a. Market imperfections.
Market imperfections like factor immobility, price rigidity, ignorance of
market conditions, rigid social and institutional structures, and lack of
specialization and training in underdeveloped economies do not allow an
optimum allocation and utilization of resources. Hence, increase in
money supply and increased money income remains unaccompanied by
increased supply of real output, causing a net price rise of an inflationary
nature in these economies.
b. Capital Bottleneck.
On account of a very low rate of capital formation and consequent capital
deficiency, a poor country is caught in a vicious circle of poverty, and
any excessive money supply instead of breaking this vicious circle, tends
to create a chronic inflationary spiral. Thus, in a poor country, there is
inflation because by virtue of its internal backwardness, it is prone to
chronic inflation.
c. Entrepreneurial Bottleneck.
Entrepreneurs in underdeveloped countries lack skill, spirit of boldness
and adventure. They prefer trading or safer traditional investments rather
than attempt risky innovations. Absence of adequate industrial capital,
prevalence of merchant capital and a colossal amount of private
investments in such
Unproductive fields as land, jewellery, gold, etc., which is a gross socio
economic waste, starves the developing economy of its much needed capital
resources. Thus, increased money supply or savings in terms of money

18
makes little impact on real output and monetary equilibrium is just attained
through a galloping price rise in the various sectors of the economy.
d. Food Bottleneck.
Due to slow growth of agriculture, overpressure of growing population on
land, primitive methods of cultivation, defective land tenure system, lack
of adequate irrigation facilities and many other reasons, agriculture output,
especially food supply which constitutes a large part of wage-goods, has
failed to keep pace with the growing demand for it from the growing
population and.
Increased’ rural employment in the rural industrilsation process in these
countries. This food bottleneck has created the problem of price rise in food
grains, and it has become the cornerstone in the whole of price-structure in
the developing economies.
e. Infrastructural Bottleneck.
These refer to power shortages and inadequacies of transport facilities in
underdeveloped economies. Infrastructural bottlenecks obviously restrict the
Growth process in industrial, agricultural and commercial sectors and cause
under-utilization of capacity in the economy as a whole. Underutilization of
resources does not absorb the full increase in money supply and reflects
upon the rising prices.
f. Foreign Exchange Bottleneck.
Developing economies suffer from a fundamental structural disequilibrium
in the balance of payments due to high imports and low exports on
unfavorable terms of trade; hence, they usually suffer from foreign exchange
scarcity problem. In recent years, day to day, rising imports bills due to high
oil prices have aggravated the problem further.
This foreign exchange bottleneck comes in the way of necessary imports to
check domestic inflation. Again, the need to boost exports to meet the
growing deficits in the balance of payments puts an extra pressure on the
marketable surplus meant for domestic requirements. This eventually leads
to a heavy rise to exportable commodities in the domestic market.
g. Resources Gap.
When the public sector is widely expanded for industrial development in
these countries, the government aggravates the problem of resources gap.
Owing to the backward socio-economic political structure of the less
developed country, its government always fmds it difficult to raise sufficient
resources through taxation, public borrowings and profit of State enterprises,
to meet the ever-increasing public expenditure in intensive and extensive
dimensions. As such, under the pressure of the resources gap, the
government has to resort to a heavy does of deficit fmancing, despite

19
knowing its dangers. This makes the economy inflation prone. Similarly, the
resource gap in the private sector, caused by low voluntary savings and high-
cost economy, presses for over-expansion of money supply through bank
credit which, by and large,
Results in the acceleration of inflationary spiral in the economy.

EFFECTS OF INFLATION
A small amount of inflation can be viewed as having a beneficial effect on
the economy. One reason for this is that it can be difficult to renegotiate
prices and wages. With generally increasing prices it is easier for relative
prices to adjust.

Many prices are "sticky downward" and tend to creep upward, so that efforts
to attain a zero inflation rate (a constant price level) punish other sectors
with falling prices, profits, and employment. Efforts to attain complete price
stability can also lead to deflation, which is generally viewed as a negative
by Keynesians because of the downward adjustments in wages and output
that are associated with it.

With inflation, the price of any given good is likely to increase over time,
therefore both consumers and businesses may choose to make purchases
sooner rather than later. This effect tends to keep an economy active in the
short term by encouraging spending and borrowing and in the long term by
encouraging investments. But inflation can also reduce incentives to save, so
the effect on gross capital formation in the long run is ambiguous.

Inflation is also viewed as a hidden risk pressure that provides an incentive

for those with savings to invest them, rather than have the purchasing power
of those savings erode through inflation. In investing, inflation risks often
cause investors to take on more systematic risk, in order to gain returns that
will stay ahead of expected inflation.

Inflation also gives central banks room to maneuver, since their primary tool
for controlling the money supply and velocity of money is by setting the
lowest interest rate in an economy - the discount rate at which banks can
borrow from the central bank. Since borrowing at negative interest is
generally ineffective, a positive inflation rate gives central bankers
"ammunition", as it is sometimes called, to stimulate the economy. As

20
central banks are controlled by governments, there is also often political
pressure to increase the money supply to pay government services; this has
the added effect of creating inflation and decreasing the net money owed by
the government in previously negotiated contractual agreements and in debt.

For these reasons, many economists see moderate inflation as a benefit;

some business executives see mild inflation as "greasing the wheels of
commerce." But other economists have advocated reducing inflation to zero
as a monetary policy goal - particularly in the late 1990s at the end of a long
disinflation period, when the policy seemed within reach; and some have
even advocated deflation instead of inflation.

In general, high or unpredictable inflation rates are regarded as bad:

• Uncertainty about future inflation may discourage investment and

saving.
• Redistribution
o Rent Seeking - happens when resources are used to merely
transfer wealth rather than produce it. E.g. a company tries to
gauge and combat the costs of inflation.
o 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 profits which may keep
pace with inflation.
o Debtors may be helped by inflation due to reduction of the real
value of debt burden.
o Inflation redistributes wealth from those who lend a fixed
amount of money to those who borrow. For example, where the
government is a net debtor, as is usually the case, it will reduce
this debt redistributing money towards the government. Thus
inflation is sometimes viewed as similar to a hidden tax.
o 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.

21
 • 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.
• Shoe leather costs: Because the value of cash is eroded by inflation,
people will tend to hold less cash during times of inflation. This
imposes real costs, for example in more frequent trips to the bank.
(The term is a humorous reference to the cost of replacing shoe leather
worn out when walking to the bank.)
• Menu costs: Firms must change their prices more frequently, which
impose costs, for example with restaurants having to reprint menus.
• Relative Price Distortions: Firms do not generally synchronize
adjustment in prices. If there is higher inflation, firms that do not
adjust their prices will have much lower prices relative to firms that
do adjust them. This will distort economic decisions, since relative
prices will not be reflecting relative scarcity of different goods.
• Rising inflation can prompt trade unions to demand higher wages, to
keep up with consumer prices. Rising wages in turn can help fuel
inflation. In the case of collective bargaining, wages will be set as a
factor of price expectations, which will be higher when inflation has
an upward trend. This can cause a wage spiral. In a sense, inflation
begets further inflationary expectations.
• 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.

CRUBING INFLATION

Inflation is complex phenomenon. It should be attacked from various angles.

The following are the broad categories of instruments commonly used in
order to control inflation in modern economy:
(1) Monetary policy,
(2) Fiscal policy,

22
(3)Direct control, and
(4) Miscellaneous measures.

1. Monetary Policy
Inflation is primarily a monetary phenomenon. Hence, the most logical
solution to check inflation is to check the flow of money supply by devising
appropriate monetary policy and carefully implementing monetary
measures.
Broadly speaking, to control inflation, it is necessary to control total outlays
because under conditions of full employment, increase in total outlays will
be reflected in a general rise in prices, that is, inflation. Monetary policy
used to ‘control inflation is based on the assumption that a rise in prices
(inflation) is due to excess of monetary demand for goods and services by
the people because easy bank credit is available to them. Monetary policy,
thus, pertains to banking and credit availability of loans to firms and
households, interest rates, public debt and its management, and the monetary
standard.
Monetary management is aimed at the commercial banking system, and
through this action, its effects are primarily felt in the economy as a whole.
Monetary management, by directly affecting the volume of cash reserves of
the banks, can regulate the supply of money and credit in the economy,
thereby
Influencing the structure of interest rates and the availability of credit. Both
these, factors affect the components of aggregate demand (consumption plus
investment) and the flow of expenditure in the economy.
The central bank’s monetary management methods, the devices for
decreasing or increasing the supply of money and credit for monetary
stability is called monetary policy. Central banks generally use the three
quantitative weapons, namely: (i) bank rate policy,
(ii) Open market operations, and
(iii) Variable reserve ratio
to control the volume of credit in an economy.
To curb inflationary pressures, a dear money policy is usually followed by
using the quantitative methods; the total volume of credit is depleted. In this
regard, (i) bank rate may be raised;
(ii) Open market sales operation may be wldertaken; and
(iii) In severe cases, the reserve requirement ratio may be increased.

23
In a developing economy there is always an increasing need for credit.
Growth requires credit expansion but to check inflation, there is need to
contract credit. In such a conflict, the best course is to resort to credit
control, restricting the flow of credit into the unproductive, inflation-infected
sectors and speculative
Activities and diversifying the flow of credit towards the most desirable
needs of productive and growth-inducing sector.
Fiscal Policy
Fiscal policy is budgetary policy in relation to taxation, public borrowing,
and public expenditure. Changes in the total expenditure can be effected by
fiscal measures. To combat inflation, fiscal measures would involve increase
in taxation and decrease in government spending. During inflation the
government is supposed to counteract an increase in private spending.
Obviously, during a period of full employment inflation, the aggregate
demand in relation to the limited supply of i goods and services is reduced to
the extent that government expenditures is curtailed.
A curtain public expenditure along is not sufficient. Government must
simultaneously increase taxes to affect a cut in private expenditure also, - in
order to minimize inflationary pressures. As we know, when more taxes are
imposed, the size of the disposable income diminishes, as also the
magnitude of the inflationary gap, given the available supply of goods and
services. Inflationary pressure is significantly weakened by the simultaneous
curtailment of government expenditure and an increase in taxation because,
more resources are released for expanding the productive capacity in the
private sector; the
Supply curve of aggregate goods and services shifts upwards with a
contraction of monetary demand due to a decline in disposable income with
people.
It has been argued that a tax policy can be directed towards restricting
demand without restricting production. For instance, excise duties or sales
tax on various commodities take away the buying power from the consumer
goods market without discouraging the expansion of production capacity.
However,
Some economists point out that this is not a correct way of combating
inflation becomes of its regressive nature. On the other hand, this may lead
to a further rise in prices of such commodities, and inflation can spread from
one sector to
Another and from one commodity to another. But, during inflation, a
progressive direct tax is considered best; it is also justified in the interest of
social equity. .

24
Direct Controls
Direct controls refer to the regulatory measures undertaken to convert an
open inflation into a repressed one. Such regulatory measures involve the
use of direct control on prices and rationing of scarce goods. The function of
price control is a fix a legal ceiling, beyond which prices of particular goods
may not
Increase. When ceiling prices are fixed and enforced, it means prices are not
allowed to rise further and so, inflation is suppressed. Under price control,
producers cannot raise the price beyond a prevailing level, even though there
may be a pressure of excessive demand forcing it up. Wartime price control
is an example of such attempts to suppress inflation. In view of the severe
scarcity of certain goods, particularly, food grains, government may have to
enforce rationing, along with price control. The main function of rationing is
to divert consumption from those commodities whose supply needs to be
restricted for some special reasons, say, in order to make the commodity
available to a larger number of people as possible. Thus, rationing becomes
essential when necessities, such as food grains, are relatively scarce.
Rationing has the effect of limiting the variety of quantity of goods available
for the good Cause of price stability and distributive justice. However,
rationing is criticized on the ground that it restricts consumer’s sovereignty.
According to Keynes, “rationing involves a great deal of waste, both of
resources and of employment.” Prof.Kurihara, however, suggests that “a
sensible progress of rationing should aim at diverting consumption from
particular articles whose supply is below normal rather than at controlling
aggregate consumption. ”
In short, monetary fiscal controls may be used to repress excess demand, in
general, but direct controls can be more useful when they are applied to
specific scarcity areas.

25
INFLATION IN INDIA

Indian economy has been registering a mammoth GDP growth post-

liberalization. The opening up of the Indian economy after the 1990s
increased India's industrial output, which in turn raised the inflation
India rate significantly.

The stupendous growth rate of industrial output and employment created

an enormous pressure on the inflation rate and pushed it further. The
Reserve Bank of India (the central bank) and the Ministry of Finance,
Government of India is concerned about the present upswing of inflation
India. The present rise of inflation India rate could be detrimental to the
projected growth and aims of the Indian economy.

The main cause of rise in the rate of inflation India is the pricing
disparity of agricultural products between the producer and consumers in
the Indian market. Moreover, the sky-rocketing of prices of food
products, manufacturing products, and essential commodities have also
catapulted the inflation rate in India. Furthermore, the unstable
international crude oil prices have worsened the situation. As a result of
this, the Wholesale Prices Index (WPI) of India touched 6.1% as on
January 6, 2007 and the Cash Reserve Ratio (CRR) touched 5.5% on the
same day.

Reserve Bank of India - the central bank of India, has assured the Indian
business community and the general public about the harmless rise in the
CRR but apprehensions still exist amongst business circles in India. The
Reserve Bank of India is devising methods and financial models to arrest
the rise in the rate of inflation in India. This insurgency financial
modeling may arrest the immediate crisis but the long-term concerns are
yet to be allayed or addressed. To arrest the disturbing sentiments
amongst the Indian business circles, the Reserve Bank of India had given
top priority to price stability and economic growth sustenance in India, in
its recently drafted monetary policy. The Reserve Bank of India has
raised the Cash Reserve Ratio in a continuous manner to arrest the rise in
inflation.

Most developed nations across the world have devised several methods to
arrest inflation and bring in stability to its economy. In India, the solution
to this problem lies in rationalizing the pricing disparity between the

26
 producers and the end-consumers along with increasing India's
agricultural produce. This will not only ensure inflation stabilization but
also sustain the present economic growth rate of India.

CALCULATION OF INFLATION IN INDIA

Rising inflation was the most recent ticklish political issue that hit the
Manmohan Singh government. But was inflation rising because of price rise
in essential commodities? Or was it because of the 'erroneous method' of
calculating inflation?

Some economists assert that India's method of calculating inflation is wrong

as there are serious flaws in the methodologies used by the government.

Economists V Shunmugam and D G Prasad working with India's largest

commodity bourse -- the Multi Commodity Exchange -- have come out with
a research paper arguing that the government urgently needs to shift the
method of calculating inflation.

Saying that there are serious flaws in the present method of calculating
inflation, the paper India should adopt methodologies in developed
economies.

• 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.

Wholesale Price Index (WPI)

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

27
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.

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 Shunmugam and 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.

"CPI is the official barometer of inflation in many countries such as the

United States, the United Kingdom, Japan, France, Canada, Singapore and
China. The governments there review the commodity basket of CPI every 4-
5 years to factor in changes in consumption pattern," says their research
paper.

It pointed out that WPI does not properly measure the exact price rise an
end-consumer will experience because, as the same suggests, it is at the
wholesale level.

The paper says the main problem with WPI calculation is that more than 100
out of the 435 commodities included in the Index have ceased to be
important from the consumption point of view.

28
Take, for example, a commodity like coarse grains that go into making of
livestock feed. This commodity is insignificant, but continues to be
considered while measuring inflation.

India constituted the last WPI series of commodities in 1993-94; but has not
updated it till now that economists argue the Index has lost relevance and
can not be the barometer to calculate inflation.

Shunmugam says WPI is supposed to measure impact of prices on business.

"But we use it to measure the impact on consumers. Many commodities not
consumed by consumers get calculated in the index. And it does not factor in
services which have assumed so much importance in the economy," he
pointed out.

But why is India not switching over to the CPI method of calculating
inflation?

Finance ministry officials point out that there are many intricate problems
from shifting from WPI to CPI model.

First of all, they say, in India, there are four different types of CPI indices,
and that makes switching over to the Index from WPI fairly 'risky and
unwieldy.' The four CPI series are: CPI Industrial Workers; CPI Urban Non-
Manual Employees; CPI Agricultural laborers; and CPI Rural labour.

Secondly, officials say the CPI cannot be used in India because there is too
much of a lag in reporting CPI numbers. In fact, as of May 21, the latest CPI
number reported is for March 2006.

The WPI is published on a weekly basis and the CPI, on a monthly basis.

And in India, inflation is calculated on a weekly basis.

India Inflation Rate

The Indian economy has been registering stupendous growth after the
liberalization of Indian economy. The opening up of the Indian economy
in the early 1990s had increased India's industrial output and
consequently has raised the India Inflation Rate.

The stupendous growth rate of industrial output and employment has

29
created enormous pressure on the inflation rate. The Reserve Bank of
India (the central bank) and the Ministry of Finance, Government of
India are concerned about the prevalent and intermittent rise of the
inflation rate. The present rise of India Inflation Rate can be detrimental
to the projected growth of Indian economy. Thus, the Reserve Bank of
India is devising methods to arrest the rise of inflation by putting checks
and measures in place. Although the central bank has assured the Indian
business community and the general public about the harmless
inflationary rise, apprehensions still exist among the business circles of
India.

The main cause of rise of India Inflation Rate is the pricing disparity of
agricultural products between the producer and end-consumer. Moreover,
the meteoric rise of prices of food products, manufacturing products, and
essential commodities has also catapulted the India Inflation Rate. As a
result of this, the Wholesale Prices Index (WPI) of India touched 6.1% as
on 6th January, 2007. Moreover, the Cash Reserve Ratio touched 5.5%
on the same day.

To arrest the panic and discomfort amongst the Indian business circles,
the Reserve Bank of India, in its recently drafted monetary policy, had
given top priority to price stability. It also sought to sustain the
stupendous rate of economic growth of India. The Reserve Bank of India
has raised the Cash Reserve Ratio in a continuous manner to arrest the
rise of India Inflation Rate.

The solution to this problem lies in rationalizing the pricing disparity

between the producer and the consumer. Only this will ensure inflation
stabilization and thus sustainable economic growth of India.

30
RATE OF INFLATION IN INDIA SINCE (1995-2003)..,

India Inflation Rate 2006

India inflation rate 2006 had been lower towards the beginning of the
year. The inflation rate in India in 2006 grew towards the middle of the
year and rose again higher towards the end of the year.

In an economic context, the term 'inflation' pertains to the sustained

increase in the prices of goods and services. The increase needs to be
sustained and also significantly more than the mean prices, for the
economic condition to be defined as inflation. It is always the aim of the
Indian government to keep the rate of inflation in India below 4%
because the more higher the rate of inflation, the more expensive life
becomes for the people of the country.

The government of India, along with the Reserve bank of India monitors and
controls the inflation rate in India. In February 2006, the rate of inflation in
India stood at 4.02% but it has since then lowered due to the decrease in
prices of groundnut seed, cotton seed, and raw cotton. In April, 2006 the
inflation rate in India was pegged at 3.96%. However, in June, the rate of

31
inflation in India in 2006 grew to 5.24%, which is the highest inflation rate
in India in the last 13 months.

The rise in inflation has taken place due to the Indian government's
decision to increase petrol and diesel prices. The depreciation of the
rupee and the increase in global rates made the inflation rate in India
2006 rise. This rise in the India inflation rate 2006 led to the increase in
interest rates, which in turn increased the cost of living for the citizens of
the country.

In July, 2006 the India inflation rate stood at 5.21%. The rise in the
inflation rates has taken place due to the increase of wholesale prices in
food and energy. Due to the rise in the prices of manufactured and
mineral products, the inflation rate in India stood at 5.45% in November,
2006.

India inflation rate 2006 was a function of several factors and led to an
uncomfortable rise in the prices of commodities and services, which
inconvenienced people from all walks of life.

Indian Inflation 2007

Indian Inflation 2007 has been reflecting a 4.05 percent decline during the
month of August. Rate of inflation in India is decreasing due to lowering of
prices of vegetables, poultry chicken, fruits, lentils, and a few manufactured
items.

The Indian Inflation rate in July was 4.45 percent and it has been observed
that the month of August has experienced a decline in inflation. However,
the RBI is not keen on relaxing its policies. Only a few manufactured goods
have experienced reduction in prices in the process.

The rate of inflation for wholesale goods was 6.69 percent in the month of
January, which later came down to 4.28 percent by 1st June and further
reduced to 4.03 percent towards the end of the month, thus adding to the
lowering of Indian Inflation 2007.
RBI has been firm in its policy for data revision and firm manufactured
product prices. Economists consider the manufacturing inflation as the key
inflation in the Indian economy and are expecting relaxation in policies from

32
the RBI. Interestingly, the annual inflation up to 21st April was 5.77 percent
which went up to 6.07 percent thereafter.
According to RBI governor Venugopal Reddy, the RBI is keen on
containing inflation at 5 percent this FY begun in April, 2007. However, the
onset of the monsoons in July has resulted in better crops and other farm
items, leading to a reduction in their prices.

Few manufacturing products that have become cheaper now are imported
basic pig iron edible oil, methanol, bakery products, and foundry pig iron. A
rising trend has been seen in prices of milk, tea, at the rate of 4 percent.
The trends in Indian Inflation 2007 are given below:

• March 10 - (week ending 24 Feb) 6.10 percent

• March 16 - 6.46 percent
• April 6 - 6.39 percent
• April 14 - 5.74 percent
• April 20 - (week ended 7 April) 6.09 percent
• May 4 - 5.77 percent
• May 10 - 5.25 percent
• June 23 - (week ending 9 Jun) 4.38 percent
• July 13 - 4.27 percent
• August 11 - (week ending 28 July) 4.45 percent

Indian Inflation 2007 is definitely on the wane and has been observed to
have been influenced by global factors. The domestic inflation is expected to
undergo tectonic changes and is possibly becoming a victim of outdated
anti-inflationary measures.

INDIA INFLATION 2008

India's inflation remained below the RBI's year-end target for the eighth
month in a row as the government continued to maintain a cap on retail fuel
prices, making it more likely the central bank will maintain interest rates at a
5 1/2 year high. Wholesale prices rose 3.83 percent in the week ended Jan.
12 from a year earlier, faster than the previous week's 3.79 percent, the
Ministry of Commerce and Industry said today in New Delhi

33
The Reserve Bank of India - which aims to keep inflation below 5 percent -
is due to meet on Jan. 29 to review rates. It has raised its benchmark interest
rate nine times since October 2004 in order to keep a tight rein on prices and
as a result has succeeded in dragging down inflation from a two-year high of
13.1%reached in January 2007.
The Reserve Bank is expected to come under pressure after the U.S. Federal
Reserve cut the target overnight lending rate on Jan. 22 by three quarters of a
percentage point to 3.5 percent. The Fed rate cut widened the spread
between two-year Indian government bonds and similar maturity U.S.
Treasury notes to 5.40 percentage points from 5.01 percentage points a week
earlier. Finance Minister Palaniappan Chidambaram noted in Davos that the
unexpected cut in the U.S. interest rates may increase capital flows to India
and the central bank would have to respond appropriately to tackle inflows.

Pressure may also mount on the Rupee, which rose 12.3 percent in 2007,
leading it to appreciate further on higher overseas inflows as investors try to
take advantage of high-yielding emerging market assets. The rupee has
gained 0.2 percent after the Federal Reserve cut its key interest rate to the
lowest since 2005

34
WHOM DOES INFLATION HURT THE MOST

When we first think of inflation we assume that it will affect all people
equally. After all if everyone is using the same dollars wouldn't everyone be
affected equally? The fact of course is that everyone isn't affected equally.

Our second assumption might be that the poor would be hurt the worst
because they earn minimum wage and everything they buy is getting more
expensive. However, if the minimum wage is indexed to inflation they
would about break even. So interestingly if the minimum wage earners are
also deep in debt inflation actually helps them.

The reason for this is that debtors borrow valuable money and the number of
dollars they must repay is fixed. So over time the value of the dollars they
must repay is less and less (so they are easier to obtain than if the value of
the dollar wasn't inflated away.) This is called repaying with "cheaper
dollars".

However, bigger beneficiaries would be the average middle class person

with a large mortgage because the debt is for a longer term so inflation has
longer to work its "magic".

On the other hand, the biggest losers due to inflation are those willing to
loan money. An extreme example would be during the hyper-inflation of
1923 in Germany. If you had loaned a friend enough money to buy a car in

35
early 1923 and he had repaid it at the end of 1923 you might have been able
to buy a box of matches with it. So it is easy to see that the borrower got a
car and he was able to repay it with pocket change. The lender of course was
the big loser.

At first this looks like the ultimate Robin Hood scheme, robbing from the
rich bankers and giving to the poor borrowers. However, the other big losers
those on fixed incomes like the elderly and anyone whose income isn't
indexed to inflation.

Inflation affects them especially hard because the prices of things they buy
go up while their income stays the same. In addition, the poor are generally
renters so they don't even benefit from a "cheaper" mortgage while they are
paying higher prices for their groceries.

Also even though their wages may be indexed to inflation there is a time
lag since it is usually only re-indexed once a year. During this time they are
on the old wages while prices for things they buy have already gone up.

Interestingly the biggest debtor in the world is the US government and thus
it is also the biggest beneficiary of inflation.

And not coincidentally the Government is also the one who controls the
money supply and thus inflation.

In a way, inflation works as a hidden tax because the government borrows

money from investors. It spends this valuable money and then gets to pay
back its debt with cheaper dollars.

The poor unsuspecting investor who is convinced that Government notes,

bonds and T-Bills are "Low-Risk investments" accepts these dollars at face
value but before long realizes that they won't buy as much as the dollars they
loaned to the government in the first place.

Generally, the Government walks a tightrope though; it can't inflate all its
debt away too quickly, without destroying the economy, so it faces a
constant balancing act.

One big disadvantage of inflation is the fact that it discourages lending

(smart banks need more interest to make up for the lost value). This prices
some borrowers out of the market making loans too expensive.

36
Inflation also makes planning for the future more difficult, so businesses are
less likely to take risks. No risk means no advancement which stifles the
entire economy.

On a small scale lenders are the losers from inflation and borrowers are the
winners but on a bigger scale the biggest beneficiary is the Government and
the overall economy is the biggest loser.

Other losers are those on fixed incomes and those who are priced out of the
loan market.

HOW DOES INFLATION AFFECT THE INDIVIDUAL

When people go the grocery store and see ever higher prices they know how
inflation affects them. But when they are feeling more philosophical they
might reason that if all wages and prices increased at the same rate it would
all balance out in the end right?

Well theoretically yes but in reality it never works that way. Prices of
various items all increase at different rates so some people are benefiting
while others suffer. Those on fixed incomes suffer the most because the cost
of things they are buying increases but their income stays the same.

This is where COLA or "Cost Of Living Allowance" comes in it is an

adjustment that is made to compensate for the increase in prices due to
inflation.

But even if costs are adjusted they are adjusted after the fact so that you have
already been paying the higher prices for a year before your income is
adjusted.

One side of inflation that most consumers appreciate is the fact that they can
pay off their debts with "cheaper dollars". So as you borrow the value of the
money you borrowed goes down so it takes fewer hours of work to pay back
the lender.

37
This is one reason why debt is so prevalent today. Unfortunately, this is a
subtle but insidious poison because it trains us to feel good about cheating
others. In the past a man's honor was tied to his ability to repay his debts but
today inflation has taught us that it is good to try to cheat lenders out of their
due. This has led to a higher rate of bankruptcies and if the trend continues it
could lead to the breakdown of commerce.

Once lenders can't be assured of getting repaid they will stop lending (or
have to charge exorbitant interest rates) and as interest rates increase the
economy grinds to a halt. So even the "good" side of inflation is really "bad"
for the economy in the long run.

“RISING INFLATION HITS BUSINESS CONFIDENCE”, says

FICCI SUVERY

Runaway inflation, combined with high interest rates, has further dented the
business confidence of Indian industry, a survey by the Federation of Indian
Chambers of Commerce and Industry (Ficci) for the fourth quarter of 2007-
08 has revealed.

As many as 64 per cent of the 413 companies surveyed said that the
economic conditions had worsened, compared with the past six months. In
the previous survey, for the third quarter (October-December) of 2007-08,
50 per cent of the respondents had expressed a similar view.

In the survey for the fourth quarter of 2006-07, only 14 per cent of the
respondents said that the economic conditions had worsened.

The latest survey also reveals that the outlook on parameters like sales,
investments and employment took a dip, while that on profits remained flat,
compared with the third quarter survey.

A larger number of companies expect weak demand. As many as 37 per cent

of the respondents mentioned weak market demand as a factor adversely
affecting their business performance, as against 20 per cent in the same
quarter of 2006-07.

As many as 95 per cent of the respondents pointed towards the rising cost of
raw materials and inputs as the key constraint to their performance, as
against 70 per cent in the fourth quarter of 2006-07.

38
Moreover, 61 per cent of the companies surveyed cited rising wages as a
cause for concern, while a higher number of respondents reported high cost
of credit as a cause for worry.

The only silver lining in the survey was in the form of expectations of better
economic conditions later during the year. "In their assessment of the
economic situation, members of corporate India have reported that the
economic trends may have reached their worst levels and from now on one
can expect some improvement," a FICCI release said.

The survey found that 44 per cent of the companies covered by it expected
their performance would improve in Q1 (April-June) and Q2 (July-
September) in 2008-09.

"Manufacturing inflation will go up in the months ahead and it would be a

persistent trend throughout 2008," the Federation of Indian Chamber of
Commerce and Industry (FICCI) said after conducting a survey of business
confidence which has deteriorated in the last six months.

Manufacturing has a weight age of 63.75 per cent in the whole price index.
Inflation touched a 13-year high of 11.42 per cent for the week ended June
14.

The results of the survey conducted between May and June showed that
performance of the economy, industry and at the firm level has further
weakened.

"The Current Conditions Index is at its lowest level because of moderation

in growth, rise in inflation and input costs," the chamber said. The pressure
on industry on account of rising interest and input costs has breached the
absorptive capacity for many companies that are being forced to revise
prices upward.
"India Inc has struck a note of nervous optimism and expressed deep
concern at the current state of the economy," it said. Assessment of current
industry performance shows that nearly 38 per cent of the companies
witnessed deterioration in performance over the last six months. This figure
stood at 29 per cent in the last survey.

The industry is however keeping its fingers crossed for recovery in the

39
medium term. About 37 per cent of the companies have expressed optimism
that economic conditions would improve in the near term as "economic
trends may have reached their worst levels and one can now expect some
improvement".
About 32 per cent feel the situation would further deteriorate over the next
six months.

Apart from heavy and light industry, where performance has declined, the
services sector too is showing signs of moderation.

"While the situation may improve somewhat in the near future, we will still
fall short of the strong performance that was witnessed till about a year ago,"
the chamber said.

The relentless increase in prices since early 2008 has clouded the economic
environment. With RBI further tightening the monetary policy, interest rates
have started hardening and this would impact the country's economic
growth.

In addition, global factors such as rising crude oil and commodity prices
continue to remain a cause of concern.

With the Current Conditions Index and Expectations Index moving in the
opposite direction, the Overall Business Confidence Index value has not
seen any lateral movement and maintained its level at 55.3 as seen in the
previous survey.

While outlook for investments, sales and employment in the next six months
has moderated, there is marginal improvement in outlook for exports.

While depreciation of the rupee against the dollar has eased the situation for
exporters, companies maintain that the effect of the rupee rise still continues.

Indian Stocks Plunge Due to Political Turmoil and Inflation

Fears:
India's key stock market index has fallen more than 3.5 percent because of
concerns about rising inflation and political instability.

40
Mumbai's Sensex index lost 500 points Tuesday to close at 12,962, its
lowest in more than a year.

Indian banks were among the hardest hit in the sell-off, including State Bank
of India, which lost 7.8 percent, and ICICI Bank, which declined 6.5
percent.
The surging price of crude oil worldwide has added to concerns about India's
inflation rate, which is at a 13-year high. In June, the Indian government
raised the price of gasoline and diesel fuel to help state oil companies stay
profitable.

Analysts say tensions between India's ruling coalition and the communist
parties over a proposed nuclear pact with the United States also contributed
to Tuesday's stock sell-off. The communist parties have threatened to
withdraw support for the ruling coalition and force early elections if the pact
is passed.

INFLATION AT 11.63%; FM SEES 13% IN NEAR TERMS

Inflation for the week ended June 21 is at 11.63% versus 11.42%. A CNBC-
TV18 poll had seen inflation for the week ended June 21 at 11.44%.

Finance Minister P Chidambaram said the main drivers will continue to be

petroleum, iron and steel products, reports CNBC-TV18. He also said that
fuel and power prices have stabilised after a sharp rise.

“There is a rise in prices of manufactured products, despite a year-on-year

(YoY) drop in commodities. The pace in price rise of essential commodities
is slower than last week.”

The Finance Minister sees inflation touching 13% in near-term reports

CNBC-TV18 quoting Newswire18.

41
Indranil Pan of Kotak Mahindra Bank sees a 25bps repo arte hike by the RBI
on July 29 and an overall 50 bps hike in this financial year. He also sees a
CRR hike in the days ahead given the liquidity in the economy. He expects
inflation to touch 13% going forward. He sees GDP at 7.5 to 7.8% this year.

Gaurav Kapur of ABN Amro Bank feels that over the next couple of
months, things can only worsen from hereon. So by the time we reach the
monetary policy, we could still pretty much have the number in the vicinity
of 12.5-13%.

Shubha Rao, Chief Economist,Yes Bank has said that the inflation numbers
are not a comforting number looking at the index week-on-week. She said
that since early May, the average number that has been going up is by 0.8
ticks. "Going forward, we are not really optimistic about any lowering of
this kind of a trend."

According the Rao, in couple of weeks from now inflation could possibly be
seen cross well over 12%, given this trend and the news flows in terms of
aviation turbine fuel (ATF), steel prices or even the second order impact in
terms of primary articles fruits, vegetables, transportation cost being built in
and the cement prices being marginally hiked in the south all these news
flows do not add to comfort.

Speaking to CNBC-TV18, Rao said that the Reserve Bank of India (RBI)
will walk into the monetary policy on July 29 with inflation ruling well over
12%. She believes that means RBI will review its fixed rate once again,
perhaps 50 bps was taking the cue that inflation will be between 11.5% to
12.5% but between these weeks if there are a few more nasty surprises like
this then in just a couple of weeks it would have crossed well over 12.5%.
"We cannot really rule out a repo rate hike but at this point in time RBI may
look at inflation crossing well over 13% or so."

INDIAN OFFICIAL INFLATION IS AT 12% BUT IN REALITY

COMMON PEOPLE ARE FACING HYPER INFLATION OF 30%

42
 Indian inflation rose to a new 13-year high of 11.42 per cent for the week
ended June 14, vastly higher than the 4.13 per cent in the corresponding
week a year ago. That is what the Indian Government is telling the media.
But Indian main streets are upset with the onslaught of inflation and
Indian fiscal mismanagement.

According to sources, the commodities and services that affect common

people in India is rising at a whopping rate of 30%. The Government keeps
quiet. But the common people are suffering badly. Many Indian middle class
household is deep in debt as they bought two or three cars, new apartment,
furniture and so on loan. They never realized what it will mean when food
prices go up at a rate higher than 30% per year.

Even the data released by the Central Statistical Organization (CSO) was
accompanied by a steep revision of the provisional inflation figure of 7.57
per cent reported earlier for the week ended April 19. The final figure now
stands at 8.23 per cent, once again underscoring the fact that inflation has
been under reported throughout the recent months.

The biggest problem for India is subsidized petroleum products. When that
subsidy is gone, the real inflation for the common people will be above 50%
per year. That will crumble the financial infrastructure in the country.

Most middle class Indians depend on life insurance, bank deposits and so on.
Rising inflation will make these household worth much less they can
imagine create massive negative sentiment.

HOW DOES INFLATION AFFECT THE INDIAN MARKET:

Amit Dalal of Amit Nalin Securities feels that there is definitely going to be
more of a negative impact on interest rate sensitive stocks. “Companies that
have gone into a mode of high capital employed capex programmers will
have high cost of productions. Those sectors are real estate, auto, where we
have to be very concerned,” he said.

According to Dalal, if one looks at the volatility that has been seeing during
the last ten days, it is obviously impossible for one to forecast how the
market trend can be, in terms of looking at price of oil. “The fall in the
market that has come in the last two weeks which is down to 3,000 points
from where we were. It has taken into account the fact that earnings are

43
going to be impacted by this high inflationary period ahead of us. Therefore,
we are now discounting earnings at a much lower level for FY09 and even
FY10. The positive lining in the cloud is that we have now completely
differentiated our investment opportunities from investment laggards. There
are certain sectors, which are dependent on borrowings like infrastructure,
auto companies are dependent on consumer borrowings and these are going
to be laggards for a long time to come,” Dalal added

FOOD PRICES DRIVE INDIA INFLATION

Inflation in India has hit a three-year high as a result of spiraling food and
energy costs, official figures show.

India's wholesale price index, released weekly, hit 7% for the year up to 22
March, the highest since December 2004.

The government has been taking steps to control prices, banning exports of
non-basmati rice and scrapping import duties on cooking oils and maize.
Economists said the data could trigger a rise in interest rates this month,
earlier than many had expected.

India's Economic Times says the government is considering a price ceiling

on commodities if all other measures fail to bring down inflation - a law last
used in the 1970s. In India, the wholesale price index, which measures
inflation at the "factory gate", is more closely watched than the consumer
price index because it tracks a wider range of goods. The consumer price
index reflects shop and market prices.

"Inflation is beyond anybody's expectations and I expect further firefighting

measures from the government," said D K Joshi, principal economist at
Crisis. "One can forget lowering of interest rates for some time to come."
Record prices of rice, wheat and other foodstuff, along with the sky-high oil
price, have fanned inflation worldwide.

This has prompted many governments to impose price controls and curb
exports of essential goods. India has raised the cost of borrowing nine times
since October 2004.

44
Growth is expected to slow this coming financial year to about 8%, its
weakest rate of expansion since 2005, but still a robust rate of growth. In the
year ending 31 March 2008, the economy grew 8.7%.

ANALYSIS REPORT

1. Expenditure pattern amongst people?

price
awareness 60
food 2500
rent 5000
health 500
education 10000
transport 2000
clothes 5000
entertainment 800
phone bill 1500
vehicle (inc
fuel) 2000
electricity 600
servant 500

45
2.people’s view on government handling inflation?

as told by
measures taken by GOVT people
increase in bank interest rates 25
measures are taken by GOVT 23
govt control over steel and
cement price 12

46
 3. suggestions from survey ?

suggestions to control
prices
do not buy luxury during
inflation 18
govt should control all
sectors 20
import duty should be
increased 12
taxes should be increased
on liquor 10

47
 CONCLUSION AND RECOMMENDATION

1.HOW TO TACKLE INFLATION IN INDIA

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.

48
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 emphasize, 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-liberalization era.

Global imbalance the cause for global liquidity

To understand the text of the present bout of inflation, let us at the outset
understand the context: the functioning of the global economy, which is in a
state of extreme imbalance. This is simply because 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.
After all, it takes two to a tango.

For instance, the US current account deficit is estimated to be 7 per cent of

GDP in 2006 and stood at approximately $900 billion. Obviously, 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
wise versa the US dollar to gain to the global (read US) markets. This
mercantilist policy to maintain their competitiveness is achieved when their

49
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 subsidizing the rich

developed world. Put more bluntly, 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!

. 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.

But as the imbalance shows no sign of correcting, players seek to shift to

commodities and assets across continents to hedge against the impending
fall in the US dollar. Thus, it is a fight between central banks and the
psychology of market players across continents.

As a corrective measure, economists are coming to the conclusion that most

of the currencies across the globe are highly undervalued wise versa the
dollar, which, in turn, requires a significant dose of devaluation. For
instance, a consensus exists amongst economists and currency traders that
the Yen is one of the most highly undervalued currencies (estimated at
around 60%) along with the Chinese Yuan (estimated at 50%) followed by
other countries in Asia.

This artificial undervaluation of currencies is another fundamental cause for

increasing global liquidity.

To get an idea of the enormity of the aggregation of these two factors on the
world's supply of dollars, Jephraim P. Gundzik calculates the dollar value of
rising prices of just one commodity -- crude oil.

In 2004, global demand for crude oil grew by a mere four per cent.
Nevertheless higher oil prices advanced by as much as 34 per cent.
Consequently, it is this factor that significantly contributed to increase the
world's dollar supply by about $330 billion.

50
In 2005, international crude oil prices gained another 35 per cent and global
demand for oil grew by only 1.6 per cent. Nonetheless, the world's supply of
dollars increased by a further $460 billion.

Naturally, with all currencies refusing to be revalued, this leads to increased

global liquidity. While one is not sure as to whether the increase in the
prices of crude led to the increase of other commodities or vice versa, the
fact of the matter is that, in the aggregate, increased liquidity has led to the
increase in commodity prices as a whole.

Although some of this increase in the world's supply of dollars has been
reabsorbed into US economy by the twin American deficits -- current as well
as budgetary -- it is estimated that as much as $600 billion remains outside
the US.

What has further compounded the problem is the near-zero interest rate
regime in Japan. With almost $905 billion forex reserves, it makes sense to
borrow in Japan at such low rates and invest elsewhere for higher returns.
Obviously, some of this money -- estimated by experts to be approximately
$200 billion -- has undoubtedly found its way into the asset markets of other
countries.

Most of it has been parked in alternative investments such as commodities,

stocks, real estates and other markets across continents, leveraged many
times over. Needless to reiterate, the excessive dollar supply too has fuelled
the property and commodity boom across markets and continents.

The twin causes -- excessive liquidity due to undervaluation of various

currencies (technical) and fear of the US dollar collapse leading to increased
purchase of various commodities to hedge against a fall in US dollar
(psychological) -- needs to be tackled upfront if inflation has to be
confronted globally.

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 wise versa 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

51
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. Surely growth will come at a cost.

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.

52
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
globalization.

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 vice-versa 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 globalization.

53
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. The time for a rethink on our exchange rate
policy to tackle inflation is now. Are we ready?

2.SridharKrishnaswami
Washington, July 2 (PTI) The impact of surging food and fuel prices being
felt globally is "not so big" in India but it needs to tighten its monetary
policy, the IMF has said as it warned that some countries will not be able to
feed their people and maintain economic stability if the hike continues.

"Some countries are at a tipping point," said International Monetary Fund

Managing Director Dominique Strauss-Kahn at the release of a new IMF
study which says the effect of price hike is most acute for import-dependent
poor and middle-income countries confronted by balance of payments
problems, higher inflation and worsening poverty.

"If food prices rise further and oil prices stay the same, some governments
will no longer be able to feed their people and at the same time maintain
stability in their economies," he said.

Kahn said such countries needed help from the international community for
good policy options. "Their challenge is ours. It is to ensure adequate food
supplies while preserving the poverty-reducing benefits derived in recent
years from faster growth, low inflation, and better budget and balance of
payments positions," he added.

But a senior official of the IMF told PTI that although India has not been
flagged in the latest report because of many "mitigating factors", the broad
general policy implications apply.

"India is a large country and it has USD 312 billions in reserves. The fact
that you had a near doubling of oil prices over a period of year is going to
impact the current account and you are seeing it," said Kalpana Kochhar,
Senior Advisor in the Asia Pacific Department of the Fund.

"You would not have seen Indian highlighted.... The impacts are big but not
so big. There are positive inflows and the results are still large," she said.
P.Chidambaram.

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 REFERENCES:

1. Inflationdata.com

2. Inflation wikipedia

3. www.investopdedia.com

4. Geoffrey T Mills (1996), “The impact of inflation on Capital

Budgeting and Working capital”, Journal of financial and Strategic
Decisions, vol.9, No.1, Spring, pp 79-87.

55