UNIVERSITY INSTITUTE OF LEGAL STUDIES

ECONOMICS

A PROJECT REPORT ON
INFLATION IN POST-REFORM
PERIOD

Submitted By:-
Submitted to: - Dishant Mittal
Mr. Harvinder B.comLLb

Roll no.:- 130/15

3rd Sems.

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 Table of Contents
INFLATION ............................................................................................................... 4
CAUSES OF INFLATON.............................................................................................. 4
EFFECT OF INFLATION ............................................................................................. 5
Inflation in the Post-reform Period ( 1991 onwards) ............................................... 6
Average trends in inflation (2000-01 to 2011-12) .................................................... 7
Annual Average Inflation Rate based on WPI ....................................................... 9
CONTROLLING MEASURES ..................................................................................... 10
Fiscal & Administrative measures ....................................................................... 11
BIBLIOGRAPHY....................................................................................................... 12

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 ACKNOWLEDGEMENT
Success is a blend of multiple efforts. The final import of this project is also a result
of the sheer hard work and constant support of many people. I would like to take
this opportunity to thank all of them.

To begin with, I would like to express my humble gratitude to my teacher, Mr.

Harvinder, for her able guidance and mentoring. The meticulous manner in which
she teaches has paid significantly in the completion of this project.

Secondly, I would like to thank my department, University Institute of Legal

Studies, Panjab University, Chandigarh, for providing such an expansive library
which provided me all the relevant material required for this project.

Last but not the least, I would like to express my profound gratitude to my parents
and my friends who have constantly supported and motivated me throughout this
project.

Dishant Mittal

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 INFLATION
In economics, inflation is a sustained increase in the general price level of goods
and services in an economy over a period of time. When the price level rises, each
unit of currency buys fewer goods and services. Consequently, inflation reflects a
reduction in the purchasing power per unit of money – a loss of real value in the
medium of exchange and unit of account within the economy. A chief measure of
price inflation is the inflation rate, the annualized percentage change in a
general price index, usually the consumer price index, over time. Inflation affects
economies in various positive and negative ways. The 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 were
rapid enough, shortages of goods as consumers begin hoarding out of concern that
prices will increase in the future. Positive effects include reducing the real burden
of public and private debt, keeping nominal interest rates above zero so that central
banks can adjust interest rates to stabilize the economy, and reducing
unemployment due to nominal wage rigidity.

Inflation is a persistent rise in the general price level rather than a once-for-all rise
in it. Inflation is one of the most closely monitored economic variable in India since
it has considerable impact on the average consumers. Inflation refers to a general
rise in prices.

Price stability is an essential condition for economic growth and well-being of the
people. Inflation is estimated as the percentage rate of change in a price index over
the reference time period. The variations in prices and hence inflation are usually
measured in terms of the wholesale price index (WPI) or consumer price index
(CPl). In India inflation is measured in terms of WPI.

CAUSES OF INFLATON
Inflation refers to a rise in prices that causes the purchasing power of a nation to
fall. Inflation is a normal economic development as long as the annual percentage
remains low; once the percentage rises over a pre-determined level, it is considered
an inflation crisis. There are many causes for inflation, depending on a number of
factors.

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Excess printing of money:-
Inflation can happen when governments print an excess of money to deal with a
crisis. As a result, prices end up rising at an extremely high speed to keep up with
the currency surplus. This is called the demand-pull, in which prices are forced
upwards because of a high demand.

Rise in production costs:-

Another common cause of inflation is a rise in production costs, which leads to an
increase in the price of the final product. For example, if raw materials increase in
price, this leads to the cost of production increasing, this in turn leads to the
company increasing prices to maintain steady profits. Rising labor costs can also
lead to inflation. As workers demand wage increases, companies usually chose to
pass on those costs to their customers.

International lending and national debts:-

Inflation can also be caused by international lending and national debts. As nations
borrow money, they have to deal with interests, which in the end cause prices to rise
as a way of keeping up with their debts. A deep drop of the exchange rate can also
result in inflation, as governments will have to deal with differences in
import/export level.

Rise in tax and duties:-

Finally, inflation can be caused by federal taxes put on consumer products such as
cigarettes or fuel. As the taxes rise, suppliers often pass on the burden to the
consumer; the catch, however, is that once prices have increased, they rarely go
back, even if the taxes are later reduced. Wars are often cause for inflation, as
governments must both recoup the money spent and repay the funds borrowed from
the central bank. War often affects everything from international trading to labor
costs to product demand, so in the end it always produces a rise in prices.

EFFECT OF INFLATION
As we know Inflation is the increase in the price of general goods and service.
Thus, food, commodities and other services become expensive for consumption.
Inflation can cause both short-term and long-term damages to the economy; most
importantly it causes slow down in the economy.
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1. People start consuming or buying less of these goods and services as their income
is limited. This leads to slowdown not only in consumption but also production.
This is because manufactures will produce fewer goods due to high costs and
anticipated lower demand.

2. Banks will increase interest rates as inflation increases otherwise real interest rate
will be negative. (Real interest = Nominal interest rate – inflation). This makes
borrowing costly for both consumers and corporate. Thus people will buy fewer
automobiles, houses and other goods. Industries will not borrow money from banks
to invest in capacity expansion because borrowing rates are high.

3. Higher interest rates lead to slowdown in the economy. This leads to increase in
unemployment because companies start focusing on cost cutting and reduces hiring.
Remember Jet Airways lay off over 1000 employees to save cost.

4. Rising inflation can prompt trade unions to demand higher wages, to keep up
with consumer prices. Rising wages in turn can help fuel inflation.

5. Inflation affects the productivity of companies. They add inefficiencies in the

market, and make it difficult for companies to budget or plan long-term. Inflation
can act as a drag on productivity as companies are forced to shift resources away
from products and services in order to focus on profit and losses from currency
inflation.

Inflation in the Post-reform Period ( 1991 onwards)

Between end-March 1991 and end-March 1992, the Indian rupee depreciated by
nearly 37 per cent with respect to the US dollar. Notwithstanding the limited
openness of the Indian economy, this order of depreciation added to inflationary
pressures during the first half of the 1990s [RBI 2004]. Hikes in procurement prices
as well as supply demand imbalances in essential commodities like pulses, oilseeds
and edibles oils further added to inflation. Lower foreign exchange reserves in the
early 1990s constrained the import option for meeting the demand gaps. The
sustained rise in fuel prices at a double-digit rate (of about 13 per cent) in the first
half of the 1990s had its impact on inflation, not only directly but also through the
second round effects. Furthermore, a phased opening up of the Indian economy also
added to inflationary pressures. Due to the combined effect of all these factors, a
sharp increase in inflation was witnessed during the period 1992-96. Four out of
first five years of the 1990s registered double digit inflation. From 1995-96
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onwards, there has been a continuous deceleration and the average inflation for the
period 1996-97 to 2000-01 was the lowest since the mid 1950s in terms of the 52
week average.

Wholesale Price Inflation (Average) - 1991-92 to 2011-12

(upto March 2012)
Year All Commodity
PPPrimary Articles of which Fuel, Manuf
Power, acture
Light and d
Lubricants Produ
cts
Food Articles Non food articles

1991-92 13.7 18.1 20.2 18.0 13.2 11.3

1992-93 10.1 7.5 12.4 -0.2 14.1 10.9
1993-94 8.4 6.9 4.9 8.9 15.5 7.8
(Base : 1993-94 = 100)
1994-95 12.6 15.8 12.8 24.2 8.9 12.3
1995-96 8.0 8.2 8.3 9.0 5.1 8.5
1996-97 4.6 8.4 12.4 -0.9 10.4 2.1
1997-98 4.4 2.7 3.0 2.5 13.8 2.9
1998-99 5.9 12.1 12.7 10.4 3.3 4.4
1999-00 3.3 1.2 3.8 -5.8 9.1 2.7
2000-01 7.2 2.8 3.0 2.4 28.5 3.3
2001-02 3.6 3.6 3.3 4.4 8.9 1.8
2002-03 3.4 3.3 1.8 8.2 5.5 2.6
2003-04 5.5 4.3 1.3 12.6 6.4 5.7
2004-05 6.5 3.6 2.6 0.7 10.1 6.3
(Base : 2004-05 = 100)
2005-06 4.4 4.3 5.4 -3.3 13.5 2.4
2006-07 6.6 9.6 9.6 5.8 6.5 5.7
2007-08 4.7 8.3 7.0 11.9 0.0 4.8
2008-09 8.1 11.0 9.1 12.9 11.6 6.2
2009-10 3.8 12.7 15.3 5.5 -2.1 2.2
2010-11 9.6 17.7 15.6 22.3 12.3 5.7
2011-12 8.9 9.8 7.3 9.6 14.0 7.3

Average trends in inflation (2000-01 to 2011-12)

The range of inflation varied from a low of 3.3 per cent in 1999-2000 to a high of
7.2 per cent in 2000-01. During this period, inflation has had a distinct decelerating
trend. In fact, even in 2002-03 when the country faced a severe drought, inflation
remained moderate at 3.4 per cent. Moreover, 2002-03 was also marked by the
simultaneous impact of several others adverse developments such as border
tensions and high international crude oil prices.

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A hardening of international oil prices as well as domestic food prices responding to
a deficient monsoon in the previous year fuelled a spurt in inflation in India during
the first half of 2004-05. Inflation began to ease in the second half of 2004-05 under
the impact of a combination of fiscal and monetary measures and weakening of
south-west monsoon. In 2005-06, WPI inflation eased to 4.3 per cent as compared
to 6.5 per cent a year earlier.
The ten-year average of headline WPI inflation was around 5.4 per cent from 2000-
01 to 2009-10.In this decade 2000-01, 2003-04, 2004-05, 2006- 07, and 2008-09
had higher inflation relative to the decadal average. The ten-year average inflation
in fuel was around 8.9 per cent. The major portion of that was contributed by the
high inflation of 2000-01. The years 2003-04, 2004-05, 2006-07, and 2008-09 also
witnessed high inflation in manufactured products mainly on account of high prices
of raw materials such as basic metal alloys and metal products, nonmetallic mineral
products, and machinery and machine tools. The year 2008-09 was different from
the previous three years as inflation in all the three sectors remained high on
account of high international fuel and commodity prices. The year 2009-10 was an
abnormal one due to global slowdown and unfavourable monsoon.
Notwithstanding, the average inflation was 3.6 per cent backed by negative inflation
in fuel.
The year 2010-11 was marked by strong inflation exhibiting persistence on the back
of elevated inflation expectations, hike in vegetable prices with unseasonal rains
post-monsoon and rising global commodity prices that resulted in significant cost-
push and demand-pull pressures since December 2010. Drivers of inflation changed
during 2010-11.Food products were the main drivers of price rise during April-July
2010, accounting for about two-fifths of increase in WPI. Their share declined
during August- November, when non-food primary products turned out to be the
main drivers. However, these price pressures spilled over to manufactured non-food
products during December 2010-March 2011, which accounted for 61 per cent of
the price rise in this period. The whole of 2010-11 was marked by inflation
persisting with headline inflation averaging 9.6 per cent.

During 2011-12, the WPI exhibited a sustained increase, even though the pace of
increase somewhat slowed down during the latter half of the year. The financial
year stared with a headline inflation of 9.7 per cent which briefly touched double
digit in September 2011 before coming down to 6.6 per cent in January 2012. The
increase in the WPI during the initial months of the year was driven by a host of
factors that included an increase in food prices, a revision in the administered prices
of fuel as well as an increase in manufactured product prices in the wake of
significant pressure from high input costs as well as strong demand and pricing
power. The decline in growth during 2011-12 was expected to ease the pressure on

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core inflation. However, the extent of moderation was constrained by further
pressure from rupee depreciation and high global commodity prices.

The phase of softening of inflation was marked by a decline in the contribution of

food, which again increased from February 2012 as prices increased sharply after
the seasonal decline. The contribution of non-food manufactured products remained
strong despite the deceleration in growth momentum. The contribution of fuel
group to overall inflation remained high and significant throughout the year despite
suppressed inflation from the administered prices of some petro-products, coal and
electricity.
Primary food articles inflation declined sharply during November 2011–January
2012, from above 10 per cent to negative territory, largely reflecting a seasonal
decline in the prices of vegetables and a favourable base effect. However, prices
rebounded significantly subsequently, resulting in food inflation reverting to
double-digit levels by April 2012. The prices of protein-based food articles have
remained persistently high since October 2011. As per mid-year analysis 2012-13,
inflation as measured by WPI averaged 8.9 per cent for 2011-12.

Annual Average Inflation Rate based on WPI

(Percentage)

Year Primary Fuel and Manufactured All

Articles Power Products Commodities

Weights (%) 20.12 14.91 64.97 100

2000-01 2.8 28.5 3.3 7.2
2001-02 3.6 8.9 1.8 3.6
2002-03 3.3 5.5 2.6 3.4
2003-04 4.3 6.4 5.7 5.5
2004-05 3.7 10.1 6.3 6.5
1st 5 Years 3.5 11.9 3.9 5.2
Average
2005-06 4.3 13.5 2.3 4.3
2006-07 9.6 6.5 5.6 6.5
2007-08 8.3 0.0 4.9 4.8
2008-09 11.0 11.6 6.2 8.0
2009-10 12.7 -2.1 1.8 3.6
2nd 5 Years 9.2 5.9 4.1 5.5
Average
Average 2000- 6.4 8.9 4.1 5.4
2001 to 2009-10
(10 years)
2010-11 17.7 12.3 5.7 9.6
2011-12 9.8 14.0 7.3 8.9

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 CONTROLLING MEASURES

There are broadly two ways of controlling inflation in an economy:

1. Monetary measures and

2. Fiscal measures

Monetary Measures
The most important and commonly used method to control inflation is monetary
policy of the Central Bank. Most central banks use high interest rates as the
traditional way to fight or prevent inflation.

Monetary measures used to control inflation include:

(i) Bank rate policy

(ii) Cash reserve ratio and

(iii) Open market operations.

Bank Rate Policy: This policy is used as the main instrument of monetary
control during the period of inflation. When the central bank raises the bank
rate, it is said to have adopted a dear money policy. The increase in bank rate
increases the cost of borrowing which reduces commercial banks borrowing
from the central bank. Consequently, the flow of money from the commercial
banks to the public gets reduced. Therefore, inflation is controlled to the extent
it is caused by the bank credit.

Cash Reserve Ratio (CRR): To control inflation, the central bank raises the
CRR which reduces the lending capacity of the commercial banks.
Consequently, flow of money from commercial banks to public decreases. In
the process, it halts the rise in prices to the extent it is caused by banks credits to
the public.

Open Market Operations: Open market operations refer to sale and purchase
of government securities and bonds by the central bank. To control inflation,
central bank sells the government securities to the public through the banks.
This result in transfer of a part of bank deposits to central bank account and
reduces credit creation capacity of the commercial banks.

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Fiscal Measures: Fiscal measures to control inflation include taxation,
government expenditure and public borrowings. The government can also take
some protectionist measures such as banning the export of essential items like
pulses, cereals and oils to support the domestic consumption encourage imports
by lowering duties on import items etc.

Fiscal & Administrative measures

Reduced import duties to zero - for wheat, onion, pulses, crude palmolein and
to 7.5 per cent for refined & hydrogenated oils & vegetable oils.

Duty-free import of white and raw sugar was extended up to 30.6.2012;

however, import duty of 10 per cent was instituted in June 2012.

Banned export of edible oils (except coconut oil and forest based oil) and
edible oils in blended consumer packs upto 5 kg with a capacity of 20,000 tons
per annum and pulses (except Kabuli chana and organic pulses and lentils up to
a maximum of 10000 tonnes per annum).

Imposed stock limits from time to time in the case of select essential
commodities such as pulses, edible oil, and edible oilseeds and in the case of
paddy and rice for specific seven states upto 30.11.2012.

Ban on export of onion was imposed for short period of time whenever
required. Exports of Onion were calibrated through the mechanism of Minimum
Export Prices (MEP).

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 BIBLIOGRAPHY

 Indian economy by S.K.Misra and V.K.Puri

 Inflation and its impact on Indian Economy by DR.S.JAMUNA
 Inflation and Economic Growth in India –An Empirical Analysis by
Prasanna V Salian and Gopakumar K.

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