Case study: Inflation

What is causing Inflation? Inflation is the rise in prices which occurs when the demand for goods and services exceeds their available supply. In simpler terms, inflation is a situation where too much money chases too few goods. In India, the wholesale price index (WPI), which was the main measure of the inflation rate consisted of three main components - primary articles, which included food articles, constituting22% of the index; fuel, constituting 14% of the index; and manufactured goods, which accounted for the remaining 64% of the index. For purposes of analysis and to measure more accurately the price levels for different sections of society and as well for different regions, the RBI also kept track of consumer price indices. The average annual GDP growth in the 2000s was about 6% and during the second quarter (July-September) of fiscal 2006-2007, the growth rate was as high as 9.2%. All this growth was bound to lead to higher demand for goods. However, the growth in the supply of goods, especially food articles such as wheat and pulses, did not keep pace with the growth in demand. As a result, the prices of food articles increased. According to Subir Gokarn, Executive Director and Chief Economist, CRISIL, "The inflationary pressures have been particularly acute this time due to supply side constraints [of food articles] which are a combination of temporary and structural factors."Measures Taken In late 2006 and early 2007, the RBI announced some measures to control inflation. These measures included increasing repo rates, the Cash Reserve Ratio (CRR) and reducing the rate of interest on cash deposited by banks with the RBI. With the increase in the repo rates and bank rates, banks had to pay a higher interest rate for the money they borrowed from the RBI. Consequently, the banks increased the rate at which they lent to their customers. The increase in the CRR reduced the money supply in the system because banks now had to keep more money as reserves. On December 08, 2006, the RBI again increased the CRR by 50 basis points to 5.5%. On January 31, 2007, the RBI increased the repo rate by 25 basis points to 7.5%...Some Perspectives

The RBI's and the government's response to the inflation witnessed in 2006-07 was said to be based on 'traditional' anti-inflation measures. However, some economists argued that the steps taken by the government to control inflation were not enough...Outlook Several analysts were of

the view that the RBI could have handled the 2006-07 inflation with outtinkering with the interest rates, which according to them could slow down economic growth. Others believed that high inflation was often seen by investors as a sign of economic mismanagement and sustained high inflation would affect investor confidence in the economy. However, the inflation rate in emerging economies was usually higher than developed economies Questions: Q1. Explain the concept of Inflation in Indian context. Q2. Give out the ways of curbing inflation.

RBI has decided to reduce the Cash Reserve Ratio (CRR) for Scheduled Commercial Banks by 50basis points from 5.50 per cent to 5.00 per cent and Repo Rate is 4.75% of their net demand with effect from January 17, 2009.

Solution
Knowing Inflation By inflation one generally means rise in prices. To be more correct inflation is persistent rise in thegeneral price level rather than a once-for-all rise in it, while deflation is persistent falling price. Asituation is described as inflationary when either the prices or the supply of money are rising, but in practice both will rise together. These days economies of all countries whether underdeveloped,developing as well developed suffers from inflation. Inflation or persistent rising prices are major problem today in world. Because of many reasons, first, the rate of inflation these years are muchhigh than experienced earlier periods. Second, Inflation in these years coexists with high rate of unemployment, which is a new phenomenon and made it difficult to control

inflation.A n i n f l a t i o n a r y s i t u a t i o n i s w h e r e t h e r e i s ' t o o m u c h m o n e y c h a s i n g t o o f e w g o o d s ' . A s products/services are scarce in relation to the money available in the hands of buyers, prices of the products/services rise to adjust for the larger quantum of money chasing them. As someone oncesaid, "Inflation is when you pay Rs.15 for a Rs.10 haircut you used to get for Rs.5 when you had hair." Inflation in Indian Context Inflation is no stranger to the Indian economy. The Indian economy has been registering stupendousgrowth after the liberalization of Indian economy. In fact, till the early nineties Indians were used toignore inflation. But, since the mid-nineties controlling inflation has become a priority. The naturalf a l l o u t o f t h i s h a s b e e n t h a t w e , a s a n a t i o n , h a v e b e c o m e v i r t u a l l y i n t o l e r a n t t o i n f l a t i o n . T h e opening up of the Indian economy in the early 1990s had increased India's industrial output and consequently has raised the India Inflation Rate . While inflation was primarily caused by domesticfactors (supply usually was unable to meet demand, resulting in the classical definition of inflationof too much money chasing too few goods), today the situation has changed significantly.Inflation today is caused more by global rather than by domestic factors. Naturally, as the Indianeconomy undergoes structural changes, the causes of domestic inflation too have undergone tectonicc h a n g e s . T h e main cause of rise in the rate of inflation rate in India is the pricing

d i s p a r i t y o f 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 alsocatapulted the inflation rate in India. Furthermore, the unstable international crude oil prices haveworsened the situation.

Defining causes of Inflation What exactly is the nature of this inflation which has the nation in its grip? The different causes of inflation which are experienced in Indian economy in a large proportion would be:Demand-pull inflation: This is basically when the aggregate demand in an economy exceeds theaggregate supply. It is also defined as `too much money chasing too few goods'. Bare -boned, itmeans that a country is capable of producing only 100 items but the demand is for 105 items. It's avery simple demand-supply issue. The more demand there is, the costlier it becomes. Much the sameas the way real estate in the country is rising. Cost-push inflation: This is caused when there is a supply shock. This represents the condition w h e r e , even though there is no increase in Aggregate Demand, prices may still rise. I.e. nonavailability of a commodity would lead to increase in prices. T h i s m a y h a p p e n i f t h e c o s t s o f especially wage cost rise. Imported Inflation: This is inflation due to increases in the prices of imports. Increases in the pricesof imported final products directly affect any expenditure-based measure of inflation. They play animportant role in driving the rise in domestic prices. The rise in the global prices of crude oil andagricultural commodities, including food grains, and industrial products, and setbacks to globaleconomy resulting from sub-prime mortgage disaster and US recession have contributed to Indiasinflation. Other Causes: When the government of a country print money in excess, prices increase to keep up with theincrease in currency, leading to inflation.

Increase in production and labor costs, have a direct impact on the price of the final product,resulting in inflation. When countries borrow money, they have to cope with the interest burden. This interest burden results in inflation. High taxes on consumer products, can also lead to inflation. An increase in indirect taxes canalso lead to increased production costs. Inflation can artificially be created through a circular increase in wage earners demands andthen the subsequent increase in producer costs which will drive up the prices of their goodsa n d s e r v i c e s . T h i s w i l l t h e n t r a n s l a t e b a c k i n t o h i g h e r p r i c e s f o r t h e w a g e e a r n e r s o r consumers. As demands go higher from each side, inflation will continue to rise.

Study on Consumer Buying Behaviour in Toothpaste Industry a Case Study of Colgate

Toothpaste industry has grown immensely in the Indian scenario. There is a lot of competition in the industry mainly between two major players Colgate and HLL .The companies are coming up with new schemes as well as products to lure the customers. The usage of toothpaste has grown because of the lifestyle and the way the individuals are living i.e. more awareness about health. Colgate is going ahead with almost 60% of the market share in the industry. The title of the project was study on consumer buying behavior in the toothpaste industry. The objectives of the study were to Study the consumer buying habit and to study the toothpaste brands to identify important parameters for customer. The questionnaire methodology was adopted and the consumers and the sales officer in companies were contacted in order to have their view on toothpaste. The area of the study was restricted to Gurgaon 100 respondents were contacted .The sales managers in two companies were contacted and their views were known in terms of how they were going in the toothpaste segment. It was found that many firms are in the toothpaste segment. So it is a highly competitive segment. It was found that focus as well as cost leadership was being followed by the firms when they were going in the toothpaste segment. The firms are more and more focusing on the promotion and they are spending a lot of money on this front. Customers are also becoming demanding now-a-days and it is seen that many attributes are important for the success of a particular brand. The firms are going in for new launches. It is found that the discounts are important factor. Another important factor is brand image or brand name. The project provided an opportunity to know about a competitive segment and how consumers behave in that segment. It also provided an insight into the toothpaste industry and the attitude and perception of the consumer in that segment.

solution
Objective of the Study:

To study the Consumer Buying habits in Toothpastes. To study the various factor and identify important parameters for customer acceptance. To plot popular Toothpastes Brands on the perceptual maps. of Identification of gaps in the positioning Study: stances.

Scope (1)

(2) Identification of consumer perceptions and attitudes regarding Oral hygiene. Conclusions: The toothpaste industry is going to be more competitive in the near future. The profit margin is going down over the year and going to be continuing for the future also. So the main mantra for the companies to be successful is to satisfy the consumers and develop brand image and brand loyalty amongst them.

So it has become very necessary for the consumers to understand the Indian consumers very well. So in the future the companies who come up with new products at competitive prices and with good quality are going to the successful one. Promotional activities are also going to play an important role that should to be for both retailers and consumers.

So we are going to see a market which is going to heat up in the near future where mainly two major players Colgate and HLL will fight the war. Suggestions:

The companies should give more emphasis on advertising and sales promotion as the competition is becoming tougher and tougher. So they need to make some brand image amongst the consumers.

The customers are becoming king as they have a whole lot of choices. So the companies should try to be cost effective and pass on the saved amount to the customer.

Retailers are still the place to buy toothpaste. So the companies should focus on retailers also who is also a customer for their products.

The companies should try to launch new products after through research of the consumers as they are becoming more dynamic day by day.

Limitations:

The responses can be biased, as some of the respondents may not have revealed the true pictures.

The company officials also too tend to give biased answers, as they always want to give a rosy picture of their company.

The managers were reluctant to give information about the product. The sample was restricted to the Gurgaon region only.