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Inflation Rate in India

IndianMoney.com Research Team | Posted On Wednesday, January 30,2019, 06:29 PM

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Inflation Rate in India

 

 

What is inflation rate?

 Inflation is defined as the measure of rate of increase in the prices of goods and services with time. Inflation rate is the rate at which prices of goods and services increase with time, which results in the fall in purchasing value of the rupee.

The inflation rate in India

The table below shows the inflation rate in India since the year 2006.

Year

CPI

2018

3.69

2017

3.6

2016

4.5

2015

4.9

2014

5.8

2013

9.4

2012

10

2011

9.5

2010

9.5

2009

12.3

2008

9.1

2007

6.2

2006

6.7

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Inflation Rate in India

Types of Inflation Indexes:

There are two types of inflation indexes:

1. CPI index:

Consumer Price index, also called CPI, measures the change in price levels of goods and services purchased by consumers. CPI is a statistical calculation arrived on the basis of prices of specific items, whose prices are compared regularly. Sub-indices and sub-sub-indices are calculated for various categories and sub-categories of goods and services, combining to calculate the overall index with weights showing their shares in the total consumer expenditures covered by the index. Change in annual percentage of CPI is used as a measure of inflation.

2. WPI index:

WPI, or Wholesale Price Index, is the price of a certain class of goods and services at the wholesale level. Some countries use WPI to represent inflation rate. India is using CPI to represent its inflation rate.

The wholesale price index is calculated on the basis of the wholesale price of a certain number of commodities out of the available 240 commodities. Commodities chosen for WPI calculation are those that are important in that region at that particular time.

The indicator individually tracks the price movement of a commodity. Based on this movement, WPI is calculated by the averaging principle.

Formula for Measuring Inflation

WPI was first published in 1902, and was one of the important economic indicators available to policy makers. It was replaced by CPI in most of the developed nations in the 1970s.

The rate of inflation formula measures the percentage of change in purchasing power of the rupee. As the cost of goods and services increase, the purchasing power of the rupee decreases.

The rate of inflation formula shown below uses the Consumer Price Index. If some other index is used, then "CPI" in the rate of inflation formula is replaced by that alternative index.

Formula

The subscript "x" represents the initial consumer price index for the period being calculated, or time x. Subscript "x+1" refers to the end consumer price index for that period calculated, or time x+1.

Effects of Inflation:

(a) On Creditors and Debtors:

During inflation, creditors suffer loss because of time value of money. Debtors, on the other hand, gain during inflation.

(b) Producers and workers:

Producers make more money as they get higher prices for their goods and thereby make more profits. Producers earn more during inflation. But, workers suffer a loss as find wages falling because wages do not match the increase in prices. Workers as a class, gain as they get more employment opportunities during inflation.

(c) Fixed income-earners:

Fixed income earners like salaried individuals, landlords earning rent, pensioners and so on, suffer losses because inflation reduces the value of their earnings as it doesn’t match with the rise in costs.

(d) Investors:

The investors in equity shares gain as returns could beat inflation. Do remember that equity investments carry risk.

(e) Traders, speculators, business people and black-marketers:

They earn more profits due to persistent rise in prices.

(f) Farmers:

Farmers gain as the rise in prices of agricultural products would be generally higher than the increase in prices of other goods.

Conclusion:

Inflation makes businesses feel uneasy and uncertain. Society gets affected as there’s growing discontentment among the salaried individuals, which make them demand an increase in wages and salaries. The middle-class suffers the most as the real value of their income becomes low and insufficient. Inflation is not good because it makes the rich, richer and the poor, poorer.

SEE ALSO: Bharat Bill Payment System (BBPS) of India

How to reduce inflation rate?

Following are the ways to curb inflation:

1. Monetary Measures:

 (a) Credit Control:

The most important monetary measure is credit control. The central bank adopts a number of methods to control credit. For this reason, it raises the repo rate, sells securities in the open market called open market operations, raises the cash reserve ratio CRR, and adopts a number of selective credit control measures, like raising margin requirements and regulating consumer credit.

(b) Demonetization of Currencies:

One of the extreme monetary measures is to demonetize currency of higher denominations. Such measures are usually adopted when there is black money in abundance in the country.

2. Fiscal Measures:

Monetary policies are alone not enough to control inflation. Therefore, this must be supplemented by fiscal measures. Fiscal measures are quite effective in controlling government expenditure, personal consumption expenditure, and private and public investments.

Major fiscal measures:

(a) Reduction in Unnecessary Expenditure:

The government should cut down on the unnecessary expenditure on non-developmental activities in order to curb inflation. This will keep a check on private expenditures which are dependent on the government demand for goods and services. But it is not smooth to cut down on government expenditures. Though this measure is always welcome, it’s difficult to distinguish between essential and non-essential expenditures. Therefore, this measure should be followed up by taxation.

(b) Increase in Taxes:

To cut personal consumption expenditure, the rates of personal, corporate and commodity taxes must be increased and new taxes levied, and the rate of taxes should not be very high so as to discourage saving, investment and production. The tax system should provide higher incentives to those who want to save, invest and increase productivity.

 (c) Increase in Savings:

Another critical measure is to increase savings on the part of citizens. This tends to cut down on disposable income, and personal consumption expenditure automatically comes down. But, due to the rising cost of living, people are not in a position to save too much.

(d) Surplus Budgets:

An important measure is to adopt anti-inflationary money saving economical policies. For this, the government should give up on deficit financing and instead have surplus budgets. It means collecting more in revenues and taxes by spending less.

(e) Public Debt:

The government should stop repayment of public debt and postpone it to some future date till inflationary pressures are under control. Instead, the government should borrow more in order to reduce money supply with the public.

As with monetary policies, fiscal policies alone are not sufficient to control inflation. Fiscal policies must be supplemented with monetary, non-monetary and non-fiscal measures as well.

SEE ALSO: What Is Wealth Management?

3. Other Measures:

Other measures are those that directly aim at increasing aggregate supply and reducing aggregate demand.

(a) To Increase Production:

SEE ALSO: Personal Loan Without CIBIL Verification

The following measures must be adopted to increase production:

(i) One of the foremost measures to control inflation is to enhance the production of essential consumer goods like food, clothing, kerosene, sugar, vegetable oils and so on.

(ii) If there is a need, raw materials can be imported on preferential basis to enhance the production of essential commodities.

(iii) Efforts must be made to increase productivity. For this, industrial peace must be maintained through agreements amongst trade unions, so that there are no strikes and protests.

(iv)The policy of rationalization of industries must be adopted as a long-term measure.

(v) All possible help in the form of latest technology, raw materials, financial help, subsidies and so on must be given to different consumer goods to increase production.

(b) Rational Wage Policy:

Another critical measure is to adopt a rational wage and income policy. Under inflation, there is a wage-price spiral. To keep this under control, the government must freeze wages, incomes, profits, dividends, bonuses and so on.

(c) Price Control:

Price control and rationing is another direct measure to curb inflation. Price control refers to fixing an upper limit for the prices of essential consumer commodities. They are the maximum prices fixed by law and anybody charging more than these prices is subject to punishment. It is extremely hard to monitor price control.

(d) Rationing:

Rationing involves distribution of consumption of scarce goods so as to make them available to a large number of consumers. It is applicable on essential consumer goods like wheat, rice, sugar, kerosene oil and so on. It is meant to stabilize the prices of necessary goods and assure distributive justice. It is inconvenient for consumers as it leads to queues, artificial shortages, corruption and black marketing. 

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