Economic Effects Of Inflation In India

Improved Essays
Inflation and its impact in India

What is Inflation

Imagine we had Rs.7 in 2003. One could have purchased a 300 ml Pepsi and gone home happy (excluding the Rs. 2 that shopkeepers charge for refrigerating it).

Fast forward 12 years and on would have to shell out Rs.15 to purchase the same 300ml Pepsi bottle. What happened?

One would think Indra Nooyi has fleeced us, but in reality, the value of money has reduced. This is attributable to inflation.

Inflation is defined as a sustained increase in the general level of prices for goods and services.

Quite literally, the beast of inflation reduces the purchasing power of money.

In recent years, consumer price inflation in India has slowly crept up and reached double digits. The year-on-year change of the CPI-IW has exceeded 5 per cent in every month from early 2006 onwards. This is in contrasts with other emerging economics who have, in general, witnessed low or single digit inflation, especially after the global financial crisis of 2008. Inflation is measured by a variety of indices, like the Consumer Price Index (CPI) and the Wholesale Price Index (WPI). 1. CPI: The Consumer Price Index expresses the current price of a basket of goods and services at present or in any specific year in terms of prices during the same period in the previous year. Most countries, including India, use the CPI as their measure of inflation, which is measured from the consumer 's perspective. 2. WPI: The Wholesale Price Index shows the rise (or fall) of prices of manufactured goods as they leave the factory. Until recently, the Reserve Bank of India (RBI) used the WPI as their measure of inflation. Inflation can mean either an increase in the money supply (i.e. the government printing more money) or an increase in price levels. Increase in money supply will increase prices of products and services because an ample supply of “easy money” will encourage people to spend it fast and increase the demand for all kinds of “goodies”, causing their prices to increase. On the surface, inflation is good, since high demand will encourage companies to increase production and this will improve the GDP. Improved GDP will strengthen the stock market, because investors are always excited about companies’ profitability which has a strong link to higher production throughput and enhanced GDP. Gross Domestic Product – GDP The monetary value of all the finished goods and services produced within a country’s borders in a specific financial year. It includes all of private and public consumption, government outlays, investment and exports less imports that occur within a defined territory on an annual basis. [GDP = C + G + I + NX] Where: - “C” states for private consumption, or consumer spending, in a nation’s economy. “G” is the sum of Government spending. “I” is the sum of all the country’s business spending on capital. “NX” is the Nation’s total net exports, calculated as total exports minus total imports. GDP is commonly used as an indicator of the economic health of a country, as well as to gauge a country’s standard of living. Fiscal and Monetary Policy Over time,
…show more content…
Inflation of this type is called demand-pull inflation. Various fiscal and monetary measures are adopted to check this inflation.

There is a two-pronged approach towards controlling the economy, namely, the Fiscal Policy and the Monetary Policy.

Fiscal Policy: Fiscal policy is the means by which a government adjusts its spending levels and tax rates to monitor and influence a nation 's economy. The tax and expenditure programs levied and undertaken by the government are the drivers of the fiscal policy. Monetary Policy: The Monetary Policy is governed by the nation 's central bank (in this instance, the RBI) to control the money supply in the economy to maintain price stability and attain high economic growth. The central bank achieves this by controlling the interest rates.

Monetary policy refers to the adoption of suitable policy regarding interest rate and the availability of credit. Monetary policy is another important measure for reducing aggregate demand to control inflation. As an instrument of demand management, monetary policy can work in two ways:
a. It can affect the cost of credit
b. It can influence the credit

Related Documents

  • Improved Essays

    If this situation continues over the long term, it can result in hyperinflation (Dinner Party, Page 62). Hyperinflation is a condition where the price of goods dramatically increases over a short period of time. In Dinner Party (Page 42), it is discussed that an important issue in the economy is how we handle inflation over time. This is caused by the population spending to avoid pending expected price increases and creates a cycle that is hard to control. Hyper Inflation occurred in Germany in the 1920s as a result of a government program that issued debt (bonds) to raise money to pay for the results of World War I.…

    • 1248 Words
    • 5 Pages
    Improved Essays
  • Improved Essays

    Monetary policy involves managing interest rates and credit conditions, which influences the level of economic activity. Monetary Policy influences inflation and employment. By implementing effective monetary policy the FED can maintain stable prices, which results in more employment and long term economic growth. The FED’s has 3 traditional tools which are the open market operations which influences the supply of bank reserves. Reserve requirements is the second tool which are the portions of deposits that banks must maintain, and lastly discount rates which is the interest rate charged by the FED to depository institution on short term…

    • 1264 Words
    • 6 Pages
    Improved Essays
  • Improved Essays

    • Discretionary vs. Nondiscretionary Fiscal Policy 685 A discretionary is the changes made by the government. It could be taxes or spending. Changes can be made every year by the president or congress. When changes are made, it’s done to expand the economy.…

    • 770 Words
    • 4 Pages
    Improved Essays
  • Decent Essays

    The Federal Open Market Committee (FOMC) meets eight times each year to review economic and financial conditions and decides on monetary policy. Monetary policy refers to the actions taken that affect the availability and cost of money and credit. At these meetings, short-term interest rate targets are determined. Using economic indicators such as the Consumer Price Index (CPI) and the Producer Price Indexes (PPI), the Fed will establish interest rate targets intended to keep the economy in balance. By moving interest rate targets up or down, the Fed attempts to achieve maximum employment, stable prices and stable economic growth.…

    • 178 Words
    • 1 Pages
    Decent Essays
  • Improved Essays

    Chapter 17 Summary

    • 496 Words
    • 2 Pages

    Chapter 17 started by articulating the privileges enjoyed by the Federal Reserve under the leadership of Greenspan the Great (1987–2006) and Bernanke the Bald (2006–2014) which from its inception of more than a century eluded its operations. Wright and Quadrini, (2009) called the rare privilege “the halo of success and widespread approbation” (p. 193). We furthermore understood that the central banks, rather than the Federal Reserve were the stronghold of central planning in the free market economy that was why the criticism of the Austrian and the communists’ economists did not prevail after all. Although the fed owes its genesis to the desires of the Americans to be protected from financial panics and economic crisis, it was the central banks responsibility for stabilizing the macroeconomy.…

    • 496 Words
    • 2 Pages
    Improved Essays
  • Superior Essays

    Contracting Monetary Policy: congress and the president create these policies to increase government income while the economy is doing well and to prevent an economic bubble. It is also a policy used by authorities contract the supply of money a deduce economic activities by increasing the interest rate. This is done by a reduction in the money supply in the economy. A higher interest rate would reduce the production and demand of Aveeno eczema therapy as there would be little money in…

    • 1251 Words
    • 5 Pages
    Superior Essays
  • Improved Essays

    Improvement in the UK economy is usually dependant on the improvement of four major factors, economic growth, balance of payments, unemployment and inflation. This should lead to steady economic growth that would lead to a steady increase in the productive capacity in the economy. Income tax is the percentage of income that people are taxed upon that is given to the government. There are many policies that can be used to tackle these certain goals, for example fiscal and monetary policy. Fiscal is a change in government spending or taxation, an example of fiscal policy is to reduce taxation and thus give consumers more spending power, hopefully increasing economic activity.…

    • 1259 Words
    • 6 Pages
    Improved Essays
  • Improved Essays

    Fiscal Policy In Canada

    • 668 Words
    • 3 Pages

    This type of bank controls how much money is in the economy and the interest rates that individuals and institutions pay. The government in charge usually appoints the central bank head to achieve their goals. On the other hand, fiscal policy is controlled by the government more specifically the minister of finance in Canada. A government uses fiscal policy to manage the economy by deciding when to tax and spend revenue or borrowing more money to cover the shortfall. - Describe how the government uses each policy if the economy is too hot and inflation is rising rapidly.…

    • 668 Words
    • 3 Pages
    Improved Essays
  • Great Essays

    The Federal Reserve System assumes an imperative part in the economy. The legislature made the Federal Reserve System to foresee and avert or tackle issues that emerge from money related emergencies'. Budgetary emergencies' can bring about a frenzy and frenzy can prompt a retreat. For the most part, when individuals think there is a frenzy, they hurry to their bank and pull back all their cash in the long run, the bank runs out cash this is the point at which the Federal Reserve mediates. The Federal Reserve measures and ascertains diverse parts of the economy and considers the results to settle on essential monetary choices and arrangements.…

    • 1533 Words
    • 7 Pages
    Great Essays
  • Improved Essays

    Federal Monetary System

    • 763 Words
    • 4 Pages

    The monetary policy, and the whole monetary system in the United States is controlled by the Federal Reserve, which is the central bank of this country. In other words the "Fed" is able to oversees the banking system and regulate the quantity of money in the economy. It was created in the 1914, after bank failures of 1907. It is run by the Board of Governors, which has seven members, including the chairman. Currently this position is held by Janet Yellen.…

    • 763 Words
    • 4 Pages
    Improved Essays
  • Superior Essays

    The fiscal policy controls taxes and spending, while the monetary policy buys and sells…

    • 1451 Words
    • 6 Pages
    Superior Essays
  • Great Essays

    One being expansionary, which consists of the actions of a central bank, currency board or other regulatory committee that determine the size and rate of growth of the money supply. This in turn affects interest rates. So basically, a bank or government could cut interest rates. When there are lower interest rates there will be B more people buying instead of saving. This will also increase demand.…

    • 1604 Words
    • 7 Pages
    Great Essays
  • Improved Essays

    If money grows to fast, inflation will increase, but if the money supply is slowed, the economy will slow also. Thats where the Monetary Policy helps control the growth so the economy will not slow down. Without it, interest rates and the amount of money might get out of control. So the government has had a positive impact on the Monetary Policy with helping the American economy…

    • 647 Words
    • 3 Pages
    Improved Essays
  • Improved Essays

    In The American Economic Review (1948), The Role of the Monetary Policy by Milton Friedman debates about how monetary policy can affect an economy. In the earlier days the responsibles of the monetary authorites were to stifle any rise in the interest rate, price and output stability and to maintain the gold standard. The monetary authories did not pay much attention to the monetary policies which lead to the The Great Contraction which destroyed the economy. This prove to show that Keynesian was impotent to suggested that the depression was caused by collapsing of investment, shortage of investment opportunities and stubborn thriftiness. The author ridicules other economists about their point of view of The Great Contraction and the solution…

    • 1049 Words
    • 5 Pages
    Improved Essays
  • Great Essays

    Inflation Force Customers Prefer Low Cost Product Customers prefer products with low cost than better quality with higher cost that happens frequently during the inflation period. Normally customers purchase at places whereby the price can be negotiated and with eye to eye contact, so the prices sold would not be higher than the average market prices. Thus, the human interaction is more important than machine interaction when come to price or cost concerned as the prices set can be negotiated with physical retail shop. T4.…

    • 1544 Words
    • 7 Pages
    Great Essays

Related Topics