a.

What, in your opinion, were the factors, both domestic and global, that led to the inflation
trend in India in early 2007?
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,
constituting 22% of the index; fuel, constituting 14% of the index; and manufactured goods,
which accounted for the remaining 64% of the index. Food inflation was a serious issue for any
economy and some possible causes were discussed below.
The main reason was that with the high growth rate of the economy and rising incomes, demand
for food had been gone up over time. This resulted in a mismatch between the supply and
demand for food grains and increase in the prices of food grains. 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.
Though the agriculture growth rate increased in India since independence, but in the last few
years it has decreased in India due to reduced soil quality and inaccessibility of new technology
and investment. Inadequate distribution links, poor storage and processing capacity have led to a
huge amount of food grains getting wasted. Agriculture contributed to 21-22% of GDP but
accounted for just 5.7% of the total investment as of 2004. Also the supply side constraints and
inadequate support systems caused less growth in agriculture. So, after the Green Revolution, the
agriculture sector was totally ignored.
Along with the above reason there are several factors responsible for this. The lower supply from
the rest of the world had led to a sharp increase in agricultural prices and prices of manufactured
products, due to severe shortfall in world output. The surge in international prices of farm
products coincided with an adverse domestic supply situation in markets for wheat, pulses,
oilseeds and other agricultural goods, and much more importantly, with the emergence of
aggregate demand pressure in the economy.
The adding of money to the domestic monetary base reflected an abrupt change in policy by the
RBI. The large amounts of dollars, RBI were forced to buy, were fuelling excessive growth in the
money supply and hence also contributed to the inflation.
Conclusion
Considering the above factors, this was obvious that, agricultural sector in India suffers from
structural problems which must be addressed by the government and policy makers.