* Among the major developing nations, Only Russia has higher inflation than us. * India has the second highest inflation with an average inflation of close to 7 per cent estimated during the seven years from 2005-12. What is inflation?
* Inflation rate refers to a general rise in prices measured against a standard level of purchasing power. Why do we have inflation?
* High inflation generally signifies that too much money is chasing too few goods, essentially implying that the demand for goods and services is much higher than the supply, resulting in an increase in the prices of goods and services. (More on supply-side inflation, explained in older articles. See the archive on www.mrunal.org/economy What is the solution?
* massive investments to ease the supply side problem [such as lack of 24/7 electricity and water supply to factories, cold storage for agro-products, smooth road-connectivity between villages and cities and so on] * Government should cut down the subsidies (because they’re mostly misused for example cheap diesel for running generators that power unnecessary Airconditioners in shopping malls) * Government should try to divert the public savings into infrastructure, agriculture, human resource development and so on. [at present public savings go mostly in gold, real estate, share market speculation] * Private investments from India and abroad will have to be poured in large amounts. What are the problems faced by Indian Businessmen?
* High inflation = raw material is expensive : steel, cement, petrol everything. * Sluggish policy making environment,
* High interest rates and
Uncertainty in global economy, particularly Europe.
Theory #2: cost push inflation
* Also known as supply side inflation.
* it means the cost of production has increased hence the price of products have increased. What are the factors responsible?
* Maruti is producing 1000 cars per month, but the union workers of Maruti go on a strike and demand higher salary. * Ultimately, Maruti agrees to the union demand, every worker will now get more salary. But of course the company never pays out of its own pocket and wants to keep the profit margin same so, the increased cost of car-production is always transferred to the customers. So the car that used to sell for two lakh rupees, will now sell for 2.17. Increase in the tax
* Finance Minister reads the newspaper headline – Indians have more mobile phones than toilets. So he thinks, why not increase the excise duty on the mobile phones and use that Revenue to give more funds under “total sanitation campaign “ (TSC). That’ll help in building more toilets on the villages. * But of course, the CEOs of Nokia, Samsung or Motorola are not going to pay the money out of their pockets to finance the toilet building in Indian villages, they'll pass the increased cost to the customers. MRP of Nokia Lumia is increased. * The cash in your hands is same as earlier, but the MRP has been increased by the supplier’s side. Reduced availability of raw material
Consider the case of onion
* Bad weather= less production of onion or
* the blackmarketeers are intentionally stocking up or hoarding onions for better prices in future. * Government declared attractive MSP (minimum support price) for Pulses (daal, Moong) so, farmers have shifted to producing those pulses instead of onions. * UAE businessman is paying higher prices for Indian onions, because of bad weather conditions there. So our middlemen, find it lucrative to export onions to UAE rather than to local vegetable market in city. In all four cases, because the supply of onions is reduced, the restaurant owner will * A. Increase the per plate price of pau-bhaaji or
* B. Keep the per plate price same as usual but reduce the quantity of onion given, so that you’ve to pay extra for the...