Inflationary Measures in India

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  • Topic: Inflation, Consumer price index, Money
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  • Published : February 10, 2013
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--------------------------------------------------------------------------------------------------------------------- INFLATIONARY MEAURES IN INDIA
Inflation is a determinant in functioning of any economy. In our country India has mixed economy model that comprises both capitalism and socialism. In our country, India uses the Wholesale Price Index (WPI) to calculate inflation rate. Inflation is calculated on a weekly basis. The present day process being used in India has been Wholesale price index (WPI) while several other developed countries adopt the Consumer Price Index (CPI) to calculate inflation.

The demographics and structures of India don’t permit it to adopt the consumer price index system of measuring inflation. Moreover Consumer Price Index is calculated on a monthly basis while the wholesale price index is calculated on a weekly basis. INTRODUCTION:

Inflation is a determinant in functioning of any economy. In our country India has mixed economy model that comprises both capitalism and socialism. Inflation’s effects on an economy are various and can be simultaneously, positive and negative. Negative effects of inflation include an increase in the opportunity cost of holding money, uncertainty over future inflation which may discourage investment and savings, and if inflation is rapid enough, shortage of foods as consumers begin hoarding out of concern that prices will increase in the future. Positive effects include ensuring that central banks can adjust real interest rates and encouraging investment in non-monetary capital projects. Meaning of inflation:

Inflation is a rise in the general level of prices of goods and services is an economy over a period of time. When the general price level rises, each unit of currency buys fewer goods and services, that is, a decrease in the purchasing power of the currency. Definition of inflation:

* According to Crowther,
“Inflation is a state in which the value of money is falling i.e. the prices are rising.”… * According to Coulbourn,
“Inflation is too much of money chasing too few goods”.
Features of inflation:
* Inflation involves a process of the persistent rise in prices. It involves rising trend in price level.
* It is a state of disequilibrium
* It is scarcity oriented
* It is dynamic in nature
* Inflationary price rise is persistent and irreversible
* Inflation is caused by excess demand in relation to supply of alltypes of goods and services * It is a purely monetary phenomenon
* It is a post full employment phenomenon
* It is a long-term process
Causes of Inflation:
There are several reasons as to why an economy can experience inflation.
One explanation is the demand-pull theory, which states that all sectors in the economy try to buy more than the economy can produce. Shortages are then created and merchants lose business. To compensate, some merchants raise their prices. Others don’t offer discounts or sales. In the end, the price level rises.

A second , the deficit of the Federal government. If the Federal Reserve System expands the money supply to keep the interest rate down, the federal deficit can contribute to inflation. If the debt is not monetized, some borrowers will be crowded out if interest rates rise. This results in the federal deficit having more of an impact on output and employment than on the price level.

A third reason , the cost-push theory which states that labor groups cause inflation. If a strong union wins a large wage contract, it forces producers to raise their prices in order to compensate for the increase in salaries they have to pay.

The fourth reason, the wage – price spiral which states that no group is to blame for inflation. Higher prices force workers to ask for higher wages. If they get their way, then producers try to recover with...
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