Introduction

Inflation means that the general level of prices is going up, the opposite of deflation.
More money will need to be paid for goods (like a loaf of bread) and services (like getting a haircut at the hairdresser's).
Economists measure inflation regularly to know an economy's state.
Inflation changes the ratio of money towards goods or services;
more money is needed to get the same amount of a good or service, or the same amount of money will get a lower amount of a good or service.
Economists defined certain customer baskets to be able to measure inflation
can also be defined as, Inflation is the rate at which the general level of prices for goods and services is rising and, consequently, the purchasing power of currency is falling.

Causes of inflation

When the total money in an economy (the money supply) increases too rapidly, the quality of the money (the currency value) often decreases. Economists generally think that this money supply increase (monetary inflation) causes the goods/services price increase (price inflation) over a longer period. They disagree on causes over a shorter period.

Demand-Pull inflation

The Demand-Pull inflation theory can be said simply as "too much money chasing too few goods." In other words, if the will of buying goods is growing faster than amount of goods that have been made, then prices will go up. This most likely happens in economies that are growing fast. Whenever a product is bought or sold beyond its real price for its worth, then Inflation of money occurs.

Cost-Push inflation

The Cost-Push inflation theory says that when the cost of making goods (which are paid by the company) go up, they have to make prices higher to make profit out of selling that product. The higher costs of making goods can include things like workers' wages, taxes to be paid to the government or bigger costs of getting raw materials from other countries.

Costs of inflation

Almost everyone thinks excessive inflation is bad. Inflation affects different people in different ways. It also depends on whether inflation is expected or not. If the inflation rate is equal to what most people are expecting (anticipated inflation), then we can adjust and the cost is not as high. For example, banks can change their interest rates and workers can negotiate contracts that include automatic wage hikes as the price level goes up.

Problems arise when there is unanticipated inflation:
Creditors lose and debtors gain if the lender does not guess inflation correctly. For those who borrow, this is similar to getting an interest-free loan.
Uncertainty about what will happen next makes corporations and consumers less likely to spend. This hurts economic output in the long run.
People with a fixed income, such as retirees, see a decline in their purchasing power and, consequently, their standard of living.
The entire economy must absorb repricing costs ("menu costs") as price lists, labels, menus and so forth have to be updated.
If the inflation rate is greater than in other countries, domestic products become less competitive.
Nominal interest rate rise because inflation is anticipated.

Measures to Control Inflation

Inflation is caused by the failure of aggregate supply to equal the increase in aggregate demand. Inflation can, therefore, be controlled by increasing the supplies of goods and services and reducing money incomes in order to control aggregate demand.

1. Monetary Measures
2. Fiscal Measures
3. Other Measures.

1. Monetary Measures:

Monetary measures aim at reducing money incomes.

(a) Credit Control:

One of the important monetary measures is monetary policy. The central bank of the country adopts a number of methods to control the quantity and quality of credit. For this purpose, it raises the bank rates, sells securities in the open market, raises the reserve ratio, and adopts a number of selective credit control measures, such as raising margin requirements and regulating consumer credit. Monetary policy may not be effective in controlling inflation, if inflation is due to cost-push factors. Monetary policy can only be helpful in controlling inflation due to demand-pull factors.

(b) Demonetisation of Currency:

However, one of the monetary measures is to demonetise currency of higher denominations. Such a measures is usually adopted when there is abundance of black money in the country.

(c) Issue of New Currency:

The most extreme monetary measure is the issue of new currency in place of the old currency. Under this system, one new note is exchanged for a number of notes of the old currency. The value of bank deposits is also fixed accordingly. Such a measure is adopted when there is an excessive issue of notes and there is hyperinflation in the country. It is a very effective measure. But is inequitable for its hurts the small depositors the most.

2. Fiscal Measures:

Monetary policy alone is incapable of controlling inflation. It should, therefore, be supplemented by fiscal measures. Fiscal measures are highly effective for controlling government expenditure, personal consumption expenditure, and private and public investment.



The principal fiscal measures are the following:

(a) Reduction in Unnecessary Expenditure:

The government should reduce unnecessary expenditure on non-development activities in order to curb inflation. This will also put a check on private expenditure which is dependent upon government demand for goods and services. But it is not easy to cut government expenditure. Though this measure is always welcome but it becomes difficult to distinguish between essential and non-essential expenditure. Therefore, this measure should be supplemented by taxation.

(b) Increase in Taxes:

To cut personal consumption expenditure, the rates of personal, corporate and commodity taxes should be raised and even new taxes should be levied, but the rates of taxes should not be so high as to discourage saving, investment and production. Rather, the tax system should provide larger incentives to those who save, invest and produce more.

Further, to bring more revenue into the tax-net, the government should penalise the tax evaders by imposing heavy fines. Such measures are bound to be effective in controlling inflation. To increase the supply of goods within the country, the government should reduce import duties and increase export duties.

(c) Increase in Savings:

Another measure is to increase savings on the part of the people. This will tend to reduce disposable income with the people, and hence personal consumption expenditure. But due to the rising cost of living, people are not in a position to save much voluntarily.

Keynes, therefore, advocated compulsory savings or what he called ‘deferred payment’ where the saver gets his money back after some years. For this purpose, the government should float public loans carrying high rates of interest, start saving schemes with prize money, or lottery for long periods, etc. It should also introduce compulsory provident fund, provident fund-cum-pension schemes, etc. All such measures increase savings and are likely to be effective in controlling inflation.

(d) Surplus Budgets:

An important measure is to adopt anti-inflationary budgetary policy. For this purpose, the government should give up deficit financing and instead have surplus budgets. It means collecting more in revenues and spending less.

(e) Public Debt:

At the same time, it should stop repayment of public debt and postpone it to some future date till inflationary pressures are controlled within the economy. Instead, the government should borrow more to reduce money supply with the public.

Like monetary measures, fiscal measures alone cannot help in controlling inflation. They should be supplemented by monetary, non-monetary and non-fiscal measures.

3. Other Measures:

The other types of measures are those which aim at increasing aggregate supply and reducing aggregate demand directly.

(a) To Increase Production:

The following measures should be adopted to increase production:

(i) One of the foremost measures to control inflation is to increase the production of essential consumer goods like food, clothing, kerosene oil, sugar, vegetable oils, etc.

(ii) If there is need, raw materials for such products may be imported on preferential basis to increase the production of essential commodities,

(iii) Efforts should also be made to increase productivity. For this purpose, industrial peace should be maintained through agreements with trade unions, binding them not to resort to strikes for some time,

(iv) The policy of rationalisation of industries should be adopted as a long-term measure. Rationalisation increases productivity and production of industries through the use of brain, brawn and bullion,

(v) All possible help in the form of latest technology, raw materials, financial help, subsidies, etc. should be provided to different consumer goods sectors to increase production.

(b) Rational Wage Policy:

Another important measure is to adopt a rational wage and income policy. Under hyperinflation, there is a wage-price spiral. To control this, the government should freeze wages, incomes, profits, dividends, bonus, etc.

But such a drastic measure can only be adopted for a short period as it is likely to antagonise both workers and industrialists. Therefore, the best course is to link increase in wages to increase in productivity. This will have a dual effect. It will control wages and at the same time increase productivity, and hence raise production of goods in the economy.

(c) Price Control:

Price control and rationing is another measure of direct control to check inflation. Price control means fixing an upper limit for the prices of essential consumer goods. They are the maximum prices fixed by law and anybody charging more than these prices is punished by law. But it is difficult to administer price control.

(d) Rationing:

Rationing aims at distributing consumption of scarce goods so as to make them available to a large number of consumers. It is applied to essential consumer goods such as wheat, rice, sugar, kerosene oil, etc. It is meant to stabilise the prices of necessaries and assure distributive justice. But it is very inconvenient for consumers because it leads to queues, artificial shortages, corruption and black marketing. Keynes did not favour rationing for it “involves a great deal of waste, both of resources and of employment.

Types of Inflation

There are different types inflation which are explained below

Creeping Inflation

This is also known as mild inflation or moderate inflation. This type of inflation occurs when the price level persistently rises over a period of time at a mild rate. When the rate of inflation is less than 10 per cent annually, or it is a single digit inflation rate, it is considered to be a moderate inflation.

Galloping Inflation

If mild inflation is not checked and if it is uncontrollable, it may assume the character of galloping inflation. Inflation in the double or triple digit range of 20, 100 or 200 percent a year is called galloping inflation . Many Latin American countries such as Argentina, Brazil had inflation rates of 50 to 700 percent per year in the 1970s and 1980s.

Hyperinflation

It is a stage of very high rate of inflation. While economies seem to survive under galloping inflation, a third and deadly strain takes hold when the cancer of hyperinflation strikes. Nothing good can be said about a market economy in which prices are rising a million or even a trillion percent per year . Hyperinflation occurs when the prices go out of control and the monetary authorities are unable to impose any check on it. Germany had witnessed hyperinflation in 1920’s

Stagflation

It is an economic situation in which inflation and economic stagnation or recession occur simultaneously and remain unchecked for a period of time. Stagflation was witnessed by developed countries in 1970s, when world oil prices rose dramatically

Deflation

Deflation is the reverse of inflation. It refers to a sustained decline in the price level of goods and services. It occurs when the annual inflation rate falls below zero percent (a negative inflation rate), resulting in an increase in the real value of money. Japan suffered from deflation for almost a decade in 1990s.

Over variants of inflation

(i) Bottleneck inflation
(ii) Core inflation

This inflation takes place when supply falls drastically & the demand remains at the same level. Such situation arises due to supply ride accidents, hazards or Mismanagement.It is also known as ‘structural Inflation’It can be put Under ‘demand-pull inflation

(ii) Core inflation

This nomenclature is based on the inclusion or Exclusion of the good & services while calculating inflation. In India, it was 1st time used in the financial year 2001-02. In India, it means inflation of Manufactured goods.

Other Important Terms

Full employment or equilibrium is not sufficient in the economy, or there may not always be a balance in the economy. Sometimes there may be more than full employment, and this would lead to waste of resources. But sometimes it will be less than full employment. So these both situations are called inflationary and deflationary gaps.

Inflationary Gap

An inflationary gap occurs when consumption and investment spending is more than the full employment level GNP of a country or in other words the aggregate demand is greater than the aggregate supply. So the employment level cannot be increased further. So the prices of goods and services increase, when an inflationary situation occurs. Thus the inflation in the economy increases.

Deflationary Gap

The deflationary gap is an economic situation where the consumption and investment spending is less than the full employment level. So in this situation the deflationary Gap occurs. Or you can say the aggregate demand for goods and services decreases then the aggregate supply

Inflation Tax

 Inflation tax is not an actual legal tax paid to a government; instead “inflation tax” refers to the penalty for holding cash at a time of high inflation. When the government prints more money or reduces interest rates, it floods the market with cash, which raises inflation in the long run. If an investor is holding securities, real estate or other assets, the effect of inflation may be negligible. If a person is holding cash, though, this cash is worth less after inflation has risen. The degree of decrease in the value of cash is termed the inflation tax for the way it punishes people who hold assets in cash, which tend to be lower- and middle-class wage earners. 

Inflation Spiral

A situation when wages push prices up and prices pull wages up is known as the inflationary spiral. It is also known as wage-price spiral

Inflation Accounting

Profits of companies get overstated due to increase in inflation. When a firm calculates its profits after adjusting the effects of current level of inflation, this process is known as inflation accounting.

Reflation

It is an act of stimulating the economy (economic growth) by higher government expenditure, tax and interest rate cuts, reducing tax rates etc. Major world economies like USA, UK went for reflationary measures to emerge from the economic recession that had set in since 2008 following the sub-prime crisis in USA

Phillips Curve

It is a graphic curve depicting an inverse relationship between inflation and unemployment in an economy. The curve suggests that lower the inflation higher the unemployment and vice-versa

Inflation Targeting

Every government aims for a stable level or comfort zone of inflation aims to target inflation rate within this range. The Reserve Bank of India (RBI) has set a inflation target of 4-5% for the Indian economy. Of course, this target is not fixed for all times but is revised as per needs of the economy

Skewflation

Skewflation refers to skewed or lopsided inflation where there is sustained price rise in a small group of commodities even though prices of other commodities remains relatively stable. For instance, in India, food prices rose steadily during 2009 and 2010 even though prices of non-food items continued to be stable

GDP Deflator

This is the ratio between GDP at Current Prices and GDP at Constant Prices. If GDP at Current Prices is equal to the GDP at Constant Prices, GDP deflator will be 1, implying no change in price level. If GDP deflator is found to be 2, it implies rise in price level by a factor of 2, and if GDP deflator is found to be 4 , it implies a rise in price level by a factor of 4. GDP deflator is acclaimed as a better measure of price behaviour because it covers all goods and services produced in the country (because the weight of services has not been equitably accounted in the Indian 'headline inflation', i.e., inflation at the WPI)

Effects of Inflation

There are multi-dimensional effects of inflation on an economy both at the micro and macro levels. It redistributes income: distorts relative prices: destabilises employment, tax, saving and investment policies, and finally it may bring in recession and depression in an economy

On Creditors and Debtors

Inflation redistributes wealth from creditors to debtors, i.e., lenders suffer and borrowers benefit out of inflation. The opposite effect takes place when inflation falls (i.e., deflation).

On Lending

With the rise in inflation, lending institutions feel the pressure of higher lending. Institutions don't revise the nominal rate of interest as the 'real cost of borrowing' (i.e., nominal rate of interest minus inflation) falls by the same percentage with which inflation rises.

On Aggregate Demand

Rising inflation indicates rising aggregate demand and indicates comparatively lower supply and higher purchasing capacity among the consumers. Usually, higher inflation suggests the producers to increase their production level as it is generally considered as an indication of higher demand in the economy.

On Investment

Investment in the economy is boosted by the inflation (in the short-run) because of two reasons:
(i) Higher inflation indicates higher demand and suggests enterpreneurs to expand their production level, and
(ii) Higher the inflation, lower the cost of loan

On Income

Inflation affects the income of individual and firms alike. An increase in inflation makes the 'nominal' value of income increase while the 'real' value of income remains the same. Increased price levels erode the puchasing power of the money in the short-run but in the long-run the income levels also increase (making the nominal value of income going upward). It means, in a given period of time income may go up due to two reasons, viz., inflationary siituation and increased earning. The concept 'GDP Deflator' (GDP at current prices divided by GDP at constant prices) gives the idea of 'inflation effect' on income over a period.

On Saving

Holding money does not remain an intelligent economic decision (because money loses value with every increase in inflation) that is why people visit banks more frequently and try to hold least money with themselves and put maximum with the banks in their saving accounts. This is also known as the shoe leather cost of inflation

On Expenditure

Inflation affects both the forms of expenditures
-consumption as well as investment. Increased prices make our consumption levels fall as goods and services we buy get costlier. We see a tendency among the people to cut their consumption levels aimed at neutralising the impact of price rise- making consumption expenditure fall. Exact opposite happens once prices head downward.

OnTax

On tax structure of the economy, inflation creates two distortions:
(i) Tax-payers suffer while paying their direct and indirect taxes. As indirect taxes are imposed ad valorem (on value), increased prices of goods make tax-payers to pay increased indirect taxes (like cenvat, vat, etc., in India).
Similarly, due to inflation, direct tax (income tax, interest tax, etc.) burden of the tax-payers also increases as tax-payer's gross income moves to the upward slabs of official tax brackets (but the real value of money does not increase due to inflation; in fact, it falls). This problem is also known as bracket creep i.e., inflation-induced tax increases
(ii) The extent to which tax collections of the government are concerned, inflation increases the nominal value of the gross tax revenue while real value of the tax collection does not compare with the current pace of inflation as there is a lag (delay) in the tax collection in all economies.

On Exchange Rate

With every inflation the currency of the economy depreciates (loses its exchange value in front of a foreign currency ) provided it follows the flexible currency regime. Though it is a comparative matter, there might be inflationary pressure on the foreign currency against which the exchange rate is compared.

On Export

With inflation, exportable items of an economy gain competitive prices in the world market. Due to this, the volume of export increases (keep in mind that the value of export decreases here) and thus export income increases in the economy. It means export segment of the economy benefits due to inflation. Importing partners of the economy exert pressure for a stable exchange rate as their imports start increasing and exports start decreasing

On Import

Inflation gives an economy the advantage of lower imports and import-substitution as foreign goods become costlier. But in the case of compulsory imports (i.e., oil, technology, drugs, etc.) the economy does not get this benefit and loses more foreign currenc y instead of saving it.

On Trade Balance

In the case of a developed economy, inflation makes trade balance favourable while for the developing economies inflation is unfavourable for their trade balance. This is because of composition of their foreign trade. The benefit to export which inflation brings in to a developing economy is usually lower than the loss they incur due to their compulsory imports which become costlier due to inflation.

On Employment

Inflation increases employment in the short-run but becomes neutral or even negative in the long run

On Wages

lnflation increases the nominal (face) value of the wages while their real value falls. That is why there is a negative impact of inflation on the purchasing power and living standard of the wage employees. To neutralise this negative impact the Indian government provides dearness allowance to its employees twice a year

On Self-employed

Inflation has a neutralising impact on the self- employed people in the short-run. But in the long run they also get affected as the economy as a whole gets affected

On Economy

All the segments discussed above belong to an economy, but we must know the overall short- term and long-term impacts of inflation on an economy.
Experiences of the world economies in the late 1980s that a particular level of inflation is healthy for an economy. This specific level of inflation was called as the 'range' of inflation and every economy needs to calculate its own range. Inflation beyond both the limits of the range is never healthy for any economy. In the case of India it is considered 4 to 5 per cent which is also known as the 'comfort zone' of inflation in India. Similarly for Australia, New Zealand, the USA, Canada and the European Union healthy range today is 1 to 3 per cent. This is why every economy today utilises inflation targeting as part of its monetary policy
Inflation beyond the limits of the decided/ prescribed range brings in recession to depressions

Inflation in India

Every economy calculates its inflation for efficient financial administration as the multi-dimensional effects of inflation make it necessary. India calculates its inflation on two price indices i.e., the wholesale price index (:WPI) and the consumer price index (CPI). While the WPl-inflation is used at the macro level policy making, the CPI-inflation is used for micro level analyses. The inflation at the WPI is the inflation of the economy. Both the indices follow the 'point-to-point' method and may be shown in points (i.e .,digit) as well as in percentage relative to a particular base year

The Wholesale Price Index (WPI)

The Wholesale Price Index (WPI) is the price of a representative basket of wholesale goods.
Some countries (like the Philippines) use WPI changes as a central measure of inflation.But now India has adopted new CPI to measure inflation. However, United States now report a producer price index instead.

The Wholesale Price Index or WPI is "the price of a representative basket of wholesale goods". Some countries use the changes in this index to measure inflation in their economies, in particular India – The Indian WPI figure was released weekly on every Thursday .

But since 2009 it has been made monthly. It also influences stock and fixed price markets. The WPI is published by the Economic Adviser in the Ministry of Commerce and Industry.The Wholesale Price Index focuses on the price of goods traded between corporations, rather than goods bought by consumers, which is measured by the Consumer Price Index. The purpose of the WPI is to monitor price movements that reflect supply and demand in industry, manufacturing and construction. This helps in analyzing both macroeconomic and microeconomic conditions.

(i) 1952-53 Base Year (112 Commodities) issued from June 1952.
(ii) 1961-62 Base Year (139 Commodities) issued from July 1969.
(iii) 1970-71 Base Year (360 Commodities) issued from January 1977.
(iv) 1981-82 Base Year (447 Commodities) issued from January 1989.
(v) 1993-94 Base Year (435 Commodities) issuedfromJuly, 1999.
(vi) 2004-05 Base Year (676 Commodities) released in September 2011.
(vii) 2011-12 Base Year (676 Commodities), revised in January 2015.

New Series of WPI

With the purpose of making inflation data in India more transparent, updated and similar to the practices among most of the economies, a Working Group for Revision of WP/ Number was set up under the Chairmanship of the Planning Commission member, Prof. Abhijit Sen. In light of the recommendations the government recently announced the New Series of Wholesale Price Index.
Considering the importance of WPI as a tool for various polic y decisions, it is necessary to disseminate the most comprehensive, credible and accurate information, reflecting the realities of the present economic situation of the country. In order to capture the structural changes happening in the economy, the base year of WPI needs to be updated.

Features of the Revised Series of WPI

A representative commodity basket comprising 676 items has been selected in the new series (base 2004-05=100) as against 435 in the old series (base 1993-94=100) and weighting diagram has been derived for the new series consistent with the structure of the economy. There has been a substantial increase in the number of quotations selected for collecting price data for the above items. The number of price quotations for the new series is 5482 whereas in the old series, it was 1918.
The selection of the base year and the commodity basket was made on the basis of the recommendations of the Working Group set up specifically for this purpose. The Working Group was headed by Professor Abhijit Sen, Member, Planning Commission and included as its Members all stake-holders covering the users of the price data and the providers of the prices. The working group in its Technical Reports gave detailed recommendations with regard to the choice of the base year, the method of selection of items, preparation of weighting diagram and the collection of prices. The new index along with the base year and the commodity basket was also examined by Technical Advisory Committee (TAC) on Prices and Cost of Living based in Central Statistical Organisation. Before the launch of the new index, inter-departmental consultations were held and opinions obtained from Economic Advisory Council of the Prime Minister.

Revised Series: New Initiatives

There has been a substantial increase, both in terms of the number of commodities and its geographical coverage, in the revised series of WPI (base 2004-05=100), as compared to the earlier revisions undertaken so far. This would, undoubtedly, disseminate the more realistic and reliable data, facilitating better decision making and policy intervention.

The revised series of WPI (base 2004-05=100) has also addressed the issue of flow of regular data. The NIC unit of the Office of the Economic Adviser has developed an online data transmission mechanism, whereby, the manufacturing units can supply price data through internet. Also, an arrangement has been made with National Sample Survey Office (Field Operations Division) to get price data on regular basis. These measures have improved the flow of price data.
The launch of the new series of WPI with base year 2004-05 on September 14, 2010 has been one of the major initiatives of the Ministry of Commerce & Industry, Department of Industrial Policy & Promotion. (PIB Features)

consumer price index (CPI)

A consumer price index (CPI) measures changes in the price level of market basket of consumer goods and services purchased by households.
The CPI is a statistical estimate constructed using the prices of a sample of representative items whose prices are collected periodically. Sub-indices and sub-sub-indices are computed for different categories and sub-categories of goods and services, being combined to produce the overall index with weights reflecting their shares in the total of the consumer expenditures covered by the index. It is one of several price indices calculated by most national statistical agencies. The annual percentage change in a CPI is used as a measure of inflation. A CPI can be used to index (i.e., adjust for the effect of inflation) the real value of wages, salaries, pensions, for regulating prices and for deflating monetary magnitudes to show changes in real values. In most countries, the CPI, along with the population census, is one of the most closely watched national economic statistics

The Consumer Price Index for the industrial workers (CPI-IW)

The Consumer Price Index for the industrial workers (CPI-IW) has 260 items (plus the services) in its basket with 2001 as the base year43 (the first base year was 1958-59). The data is collected at 76 centres with one month's frequency and the index has a time lag of one month.
Basically, this index specifies the government employees (other than banks' and embassies' personnel ). The wages/salaries of the central government employees are revised on the basis of the changes occurring in this index, the dearness allowance (DA) is announced twice a year. When the Pay Commission recommends pay revisions, the base is the CPI (IW)

The Consumer Price Index for the Urban Non- Manual Employees (CPI-UNME)

The Consumer Price Index for the Urban Non- Manual Employees (CPI-UNME) has 1984-85 (first base year was 1958-59) as the base year and 146-365 commodities in the basket for which data is collected at 59 centres in the country- data collection frequency is monthly with two weeks time lag. 44
This price index has limited use and is basically used for determining dearness allowances (DAs) of employees of some foreign companies operating in India (i.e., airlines, communications, banking, insurance, embassies, and other financial services). It is also used under the Income Tax Act to determine capital gains and by the CSO (Central Statistical Organisation) for deflating selected service sector's contribution to the GDP at factor cost and current prices to calculate the corresponding figure at constant prices.
On the advice of its governing council the NSSO (National Sample Survey Organisation) is at present conducting a Family Living Survey (FLS) to obtain the profile of the present consumption pattern of urban non-manual employees so that the CPI (UNME) could be shifted to the present base year.
Presently, the CSO is also examining the possibility of constructing a consumer price index for the urban employees (a new index which might be like CPI-UE).

The Consumer Price Index for Agricultural Labourers (CPI-AL)

The Consumer Price Index for Agricultural Labourers (CPI-AL) has 1986-87 as its base year with 260 commodities in its basket. The data is collected in 600 villages with a monthly frequency and has three weeks time lag This index is used for revising minimum wages for agricultural labourers in different states. As the consumption pattern of agricultural labourers has changed since 1986-87 (its base year), the Labour Bureau proposes to revise the existing base year of this index. For the revision, the consumer expenditure data collected by the NSSO during its 61st NSS Round (2004-05) is proposed to be used.
The governments at the Centre and states remain vigilant regarding the changes in this index as it shows the price impact on the most vulnerable segment of the society, this segment spends almost 75 per cent of its total income on the purchase of food articles. Governments' failure to stabilise the index in the long range can make them politically volatile and be translated into political debacles. That is why the FCI is always kept ready to supply cheaper food grains in the situations of any price rise.

Consumer Price Index for the Rural Labourers (CPI-RL)

Consumer Price Index for the Rural Labourers (CPI-RL) with 1983 as the base year, data is collected at 600 villages on monthly frequency with three weeks time lag, its basket contains 260 commodities.
The agricultural and rural labourers in India create an overlap, i.e., the same labourers work as the rural labourers once the farm sector has either low or no employment scope. Probably, due to this reason this index was dropped by the government in 2001-02. But after the government change at the Centre the index was revived again

Trends in Inflation

Inflation has been a highly sensitive issue in India right since Independence and it has been so during the ongoing reforms process period, too. It has an incessant tendency of resulting into 'double digits', taking politically explosive proportions like governments falling at the Centre and state levels due to price rise of the commodities such as edible oil, onion, potato, etc. In such situations the government in general has been taking recourse to tighter money supply to contain the state level disturbances due to price rise of the commodities such as edible oil, onion, potato, etc., although it has contained inflation but at the cost of higher growth. Price rise got rooted in India's political psyche in such a way that the government did check frequent famines quickly at the cost of long-term endemic hunger and sustained malnutrition
Decadal inflation in India looks comparatively normal with reference to many developing economies. But it has sporadic incidences of double-digit tendencies mainly due to supply-side shortfalls caused by droughts (monsoon failures), price rise of crude oil in the international market or fund diversions due to wars (the Chinese war of 1962 and the Pakistan wars of 1965-66 and 1971). The decadal inflation in India has been as given below

(i) During 1950s: remained at 1.7 per cent.
(ii) During 1960s: remained at 6.4 per cent.
(iii) During 1970s: remained at 9.0 per cent.
(iv) During 1980s: remained at 8.0 per cent.
(v) During 1990s: remained at 9.5 per cent (though it reached 0.5 per cent by the fourth quarter of the fiscal 1998-99)
(vi) During2000s: Inflation was at lower levels between 2000-08 (from 3 to 5 per cent). But from 2009 onwards it started moving upward with 'sttuborn' tendencies. 50 Between 2009-13, the headline inflation
remained stuck at uncomfortable levels, primarily due to 'food articles' {food inflation) led by protein-rich items (protein inflation) in the consequence of shift in dietary habit, income effect (via MGNREGA kind of schemes), increased wages, increase in prices of commodities
in the global market (specially, food articles), costlier fodder, costlier energy and fuel, etc. By late 2010, India had the phenomenon of 'skewflation' with inflation being in the range of 9-10 per cent.
(vii) During 2010s: Headline inflation remained persistently high at 6-9 per cent during 2011-13 (Economic Survey 2014-15). It started moderating by mid- 2014. By March 2015 it was in negative (-2.06 per cent)-remaing in negative for the fourth straight month. The softening in inflation was primarily led by fall in the prices of oil, food articles (vegetables,
fruits). 51 It gave the RBI a space for 'rate
cut' aimed at promoting investment in the economy.
An analysis of inflationary trends in India does not pin-point any one reason behind it

Structural Inflation

With few exceptional years, India has been facing the typical problem of bottleneck inflation (i.e., structural inflation) which arises out of shortfalls in the supply of goods, a general crisis of a developing economy, rising demand but lack of investible capital to produce the required level
of goods. Whenever the government managed to go for higher growths by managing higher investible capital it had inflationary pressures on the economy.Thus, the supply-side mismatch remained a long-drawn problem in India for higher inflation. After some time even if the government managed higher expenditure, most of it went to the non-developmental areas which did show low growth with higher inflation-signs of a stagnating economy.

Cost-Push Inflation

Due to 'inflation tax' the price of goods and services in India have been rising as the government took alternative recourse to increase its revenue receipts. We see it taking place due to higher
import duties on the raw materials also.The non-value-added tax (non-VAT) structure of India in the past was also having cascading effect on the prices of commodities in the country.

Fiscal Policy

To finance the developmental requirements of the economy, the governments became trapped in the cyclical process ofover-money supply. At first it was done by external borrowings, but by the late 1960s onwards (once deficit financing got acceptance around the world) the governments started taking recourse to heavy internal borrowings as well as printing of fresh currency too. A major part of the government's internal borrowing is contributed by the Reserve Bank of India (RBI) which leads to price rise. For any government deficit if the Central Bank (RBI) is purchasing primary issues of the Government securities or creating fresh advances to the government the combined effect has to be higher inflation, lower savings rates and lower economic growth the vices of unsound fiscal policy . The higher fiscal deficit tends to bring about higher interest rates as demand for funds rise, excess demand raises expected inflation and expected depreciation of the currency once the foreign exchange (Forex) reserves started increasing with a faster pace by the early 2000-01 fiscal, its cost of maintenance has been translated into higher prices, as the RBI purchases the foreign currencies it supplies into equivalent rupees into the economy which creates extra demand and the prices go up.
The higher revenue deficits (driven by high interest payments, subsidies, salaries and pensions, basically) and fiscal deficits make the government supply more money which push the inflation in the upward direction. Once the Fiscal and Budget Management Act came into force in 2003, the scenario improved in the coming times. Though the period from 1999 to 2003 did show high growth with low inflation and the lowest interest rates in India.

Healthy Range of Inflation

Higher inflation and higher growth as a trade-off was questioned in the late-1980s by the developed economies as the economic and social costs of higher inflation also needed policy attention-a costly 'trade-off'.

(i) The Chakravarty Committee (1985) treated 4 per cent inflation acceptable for the economy in its report on the monetary system
(ii) The Government of India accepted a range of 4 to 6 per cent inflation as acceptable for the economy citing the world average of O to 3 per cent at the time (1997-98)
(iii) The RBI Governor C. Rangarajan advocated that inflation rate must come down initially to 6 to 7 per cent and eventually to 5 to 6 per cent on an average over the years
(iv) The Tarapore Committee on Capital Account Convertibility recommended an acceptable range of 3 to 5 per cent inflation for the three year period (1997- 98 to 1999-2000).
In the recent times (June 2003 onwards) the government/the RBI has maintained a general policy of keeping inflation below 5 per cent mark-at any cost-as if fixing 4 to 5 per cent as the healthy range of inflation for the economy

Producer Price Index (PPI)

a price index that measures the average changes in prices received by domestic producers for their output. Its importance is being undermined by the steady decline in manufactured goods as a share of spending.
The proposal of switching over to the PPI (from the WPI) came up from the government by mid-2003 and the working group has been getting inputs from the IMF regarding it

Housing Price Index

India's official Housing Price Index (HPI) was launched by the Finance Minister on 9 July 2007 in Mumbai. Basically developed by the Indian home loans regulator, the National Housing Bank (NHB) the index is named NHB Residex. Presently, the index has been introduced as a pilot project for five cities-Bangalore, Bhopal, Delhi, Kolkata and Mumbai, which covers different localities in each of these cities for the five-year period (2001-05).

There are various concepts of housing price indices, and many sources and ways for compilling price data-both private and public
overall objective of bringing transparency in the Indian real estate market, the index is expected to serve some highly important and timely purposes:
(i) Whether a broker is quoting too high a price for houses in the cities.
(ii) Banks/housing finance bodies will be able to estimate only if the loan applications are realistic for the properties.
(iii) This will also show the level of non- performing assets in the housing sector.
(iv) And most importantly it will serve as a realistic price index for the buyers. (At present a buyer has no means, to judge whether a rise in property price was in the offing with the general level of inflation (i.e., at WPI) in the country, or has been scaled up disproportionately. Other than quotes from brokers, there are no means at present to evaluate the changes in price in this sector. At present the only index that gave some idea of housing price changes was the CPI (IW) which being a national index did not show the regional variations.)

Household Inflation Expectations

Since September 2005, the RBI has been conducting quarterly inflation expectation surveys of households. The results of the latest survey covering 5,000 urban households across 16 cities were released in December 2014
Inflation in 2015-16 is closely linked to the following factors, as per the survey:
(a) Crude oil prices may correct and start moving upward;
(b) Supply pressures due to lower oilseeds and pulses acerage;
(c) Capacity constraints in warehousing and cold-storage; and
(d) Seasonal commodities.

Steps by Government to Control Inflation

The stubborn inflation of the last three years (particularly, the 'food inflation') cooled down by late 2014. The decline in inflation was substantial in commodities-the government took a series of measures to improve availability of foodgrains and de-clog the distribution channel. The major steps (Economic Survey 2014-15) taken by the government in recent times are as follows:
(a) Allocation of additional 5 million tonnes of rice to BPL and APL families pending implementation of the National Food Security Act (NFSA), and allocation of
10 million tonnes of wheat under open market sales for domestic market in 2014-15;
(b) Moderation in increases in the MSPs during the last and current season;
(c) Advisory to the states to allow free movement of fruits and vegetables by delisting them from the Agricultural Produce Marketing Committee (APMC) Act;
(d) Bringing onions and potatoes under the purview of the Essential Commodities Act 1955, thereby allowing state governments to impose stock limits to deal with cartelization and hoarding, and making violation of stock limits a non- bailable offence;
(e) Imposing a minimum export price (MEP) of US$ 450 per MT for potatoes with effect from June 2014 and US$ 300 per MT for onions with effect from August 2014.
As per the Survey, for keeping food inflation low in a sustainable manner, more radical measures will have to be taken to revamp agriculture and food sector production, storage, marketing, and distribution - including the public distribution system (PDS) and NFSA.

BUSINESS CYCLE

BUSINESS CYCLE is the fluctuations in economic activity that an economy experiences over a period of time. A business cycle is basically defined in terms of periods of expansion or recession. During expansions, the economy is growing in real terms (i.e. excluding inflation), as evidenced by increases in indicators like employment, industrial production, sales and personal incomes. During recessions, the economy is contracting, as measured by decreases in the above indicators. Expansion is measured from the trough (or bottom) of the previous business cycle to the peak of the current cycle, while recession is measured from the peak to the trough.
Business cycles are usually measured by considering the growth rate of real gross domestic product. Despite being termed cycles, these fluctuations in economic activity can prove unpredictable.

FOUR PHASES OF BUSINESS CYCLE

Business Cycle (or Trade Cycle) is divided into the following four phases :-
1. Prosperity Phase : Expansion or Boom or Upswing of economy.
2. Recession Phase : from prosperity to recession (upper turning point).
3. Depression Phase : Contraction or Downswing of economy.
4. Recovery Phase : from depression to prosperity (lower turning Point).
The business cycle starts from a trough (lower point) and passes through a recovery phase followed by a period of expansion (upper turning point) and prosperity. After the peak point is reached there is a declining phase of recession followed by a depression. Again the business cycle continues similarly with ups and downs.

(1) PROSPERITY PHASE

When there is an expansion of output, income, employment, prices and profits, there is also a rise in the standard of living. This period is termed as Prosperity phase.
The features of prosperity are :-
1. High level of output and trade.
2. High level of effective demand.
3. High level of income and employment.
4. Rising interest rates.
5. Inflation.
6. Large expansion of bank credit.
7. Overall business optimism.
8. A high level of MEC (Marginal efficiency of capital) and investment.
Due to full employment of resources, the level of production is Maximum and there is a rise in GNP (Gross National Product). Due to a high level of economic activity, it causes a rise in prices and profits. There is an upswing in the economic activity and economy reaches its Peak. This is also called as a Boom Period.

(2) RECESSION PHASE

The turning point from prosperity to depression is termed as Recession Phase.
During a recession period, the economic activities slow down. When demand starts falling, the overproduction and future investment plans are also given up. There is a steady decline in the output, income, employment, prices and profits. The businessmen lose confidence and become pessimistic (Negative). It reduces investment. The banks and the people try to get greater liquidity, so credit also contracts. Expansion of business stops, stock market falls. Orders are cancelled and people start losing their jobs. The increase in unemployment causes a sharp decline in income and aggregate demand. Generally, recession lasts for a short period.

(3) DEPRESSION PHASE

When there is a continuous decrease of output, income, employment, prices and profits, there is a fall in the standard of living and depression sets in.
The features of depression are :-
1. Fall in volume of output and trade.
2. Fall in income and rise in unemployment.
3. Decline in consumption and demand.
4. Fall in interest rate.
5. Deflation.
6. Contraction of bank credit.
7. Overall business pessimism.
8. Fall in MEC (Marginal efficiency of capital) and investment.
In depression, there is under-utilization of resources and fall in GNP (Gross National Product). The aggregate economic activity is at the lowest, causing a decline in prices and profits until the economy reaches its Trough (low point).

(4) RECOVERY PHASE

The turning point from depression to expansion is termed as Recovery or Revival Phase.
During the period of revival or recovery, there are expansions and rise in economic activities. When demand starts rising, production increases and this causes an increase in investment. There is a steady rise in output, income, employment, prices and profits. The businessmen gain confidence and become optimistic (Positive). This increases investments. The stimulation of investment brings about the revival or recovery of the economy. The banks expand credit, business expansion takes place and stock markets are activated. There is an increase in employment, production, income and aggregate demand, prices and profits start rising, and business expands. Revival slowly emerges into prosperity, and the business cycle is repeated.
Thus we see that, during the expansionary or prosperity phase, there is inflation and during the contraction or depression phase, there is a deflation.

Growth Recession

An expression coined by economists to describe an economy that is growing at such a slow pace that more jobs are being lost than are being added. The lack ofjob creation makes it "feel" as if the economy is in a recession, even though the economy is still advancing. Many economists believe that between 2002 and 2003, the United States' economy was in a growth recession. In fact, at several points over the past 25 years the U.S. economy is said to have experienced a growth recession. That is, in spite of gains in real GDP, job growth was either non-existent or was being destroyed at a faster rate than new jobs were being added.Experts have revived this term in the wake of the ongoing financial crises in the Euro-American economies since 2010. The situation is better described by the term 'double-dip recession'

double-dip recession

The concept of 'recession' in the USA and Euro Zone is quite precise and technical-'two comecutive quarters of falling GDP'-is how it is defined in these economies. And the idea of the 'double-dip recession' is an extension of it. A double-dip recession refers to a recession followed by a short-lived recovery, followed by another recession-the GDP growth sliding back to negative after a quarter or two of positive growth. The causes for such a recession vary but often include a slowdown in the demand for goods and services because oflayoffs and spending cutbacks done in the previous downturn. A double-dip (which may be even 'triple-dip') is a worst-case scenario-fear/speculation of it moves the economy into a deeper and longer recession and recovery becomes too difficult. As the world saw in the case of the Euro Zone crisis-there was a fear of such a recession by first quarter of 2013

Abenomics

This new term has been in news for some time now. The term originates from the name of the Japanese Prime Minister Shinzo Abe and indicates the 'set of economic measures' he took to rejuvenate the sluggish Japanese economy from the spells of recession-like situation-after his December 2012 re-election to the post he last held in 2007. This is also known as the 'Three Arrows of Abenomics' - the three economic measures under it are:
(i) Fiscal Stimulus: The government has initiated a massive fiscal stimulus to encourage public and private investments in the desired areas of the economy- investment in public works/infrastructure (which are by now 50 years old and need heavy investments), fiscal, concessions to private sector companies which invest in research & development, create jobs, increase salary, etc.
(ii) Quantitative Easing: The Bank of Japan (its Central bank) has been maintaining the official interest rate (like India's Repo Rate) near sub-zero to encourage lending by the banks. The aim is to double the amount of money in circulation by 2014 and reach the annual inflation target of 2 per cent. This makes the Japanese currency (Yen) to depreciate, too. Thus, this measure is intended to boost both domestic and external demands to propel the growth prospects of the economy. This measure, while at one hand increase the government expenditures, at the other it cuts the government's tax revenue, too
- leading to higher fiscal deficit. This measure revolves around the current strength of the economy to 'absorb'higher levels of inflation (which plays a major role in the growth process).
(iii) Structural Reforms: Under this measure the government has promised a variety of deregulations in the economy, mainly aimed at increasing 'competitiveness' of the economy and attaining a sustained growth path. This arrow still remains least concrete. By now, the government has set up a Group o fExperts (mainly formed of CEOs of large, medium and small companies) that is supposed to propose suitable measures to the government in the next three years regarding required set of 'structural' reforms needed by the economy. This measure also includes Japanese plan to 'join' TPP (Trans Pacific Partnership) and to go for a new FTA (Free Trade Agreement) between the countries in the Asis-Pacific region aimed at increasing its export potential.
The Three Arrows of Abenomics are a suite of economic measures which any economy may try in situations of any of the bad stages in the 'Economic Cycle'. Such economic measures were suggested by J. M. Keynes for the first time (in wake of the Great Depression of 1929). Today, its most famous exponent is the Nobel Economist Paul Krugman. Meanwhile, experts have mixed opinions on the success possibilities of the Abenomics.