CHAPTER-1

INTRODUCTION

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INTRODUCTION TO INFLATION

  In economics, inflation is a persistent increase in the general price level of goods and

services in an economy over a period of time. When the general 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 (normally the consumer price index) over time.

Inflation's effects on an economy are various and can be

simultaneously positive and negative. 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 is rapid enough, shortages

of goods as consumers begin hoarding out of concern that prices will increase in the

future. Positive effects include ensuring that central banks can adjust real interest

rates (to mitigate recessions) and encouraging investment in non-monetary capital

projects.

Economists generally believe that high rates of inflation and hyperinflation are caused

by an excessive growth of the money supply. However, money supply growth does

not necessarily cause inflation. Some economists maintain that under the conditions of

a liquidity trap, large monetary injections are like "pushing on a string". Views on

which factors determine low to moderate rates of inflation are more varied. Low or

moderate inflation may be attributed to fluctuations in real demand for goods and

services, or changes in available supplies such as during scarcities, as well as to

changes in the velocity of money supply measures; in particular the MZM ("Money

Zero Maturity") supply velocity. However, the consensus view is that a long sustained

period of inflation is caused by money supply growing faster than the rate of

economic growth.

. Today, most economists favor a low and steady rate of inflation. Low (as opposed to

zero or negative) inflation reduces the severity of economic recessions by enabling the

labour market to adjust more quickly in a downturn, and reduces the risk that

a liquidity trap prevents monetary policy from stabilizing the economy. The task of

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keeping the rate of inflation low and stable is usually given to monetary authorities.

Generally, these monetary authorities are the central banks that control monetary

policy through the setting of interest rates, through open market operations, and

through the setting of banking reserve requirements.

Definitions

According to Webster dictionary : “inflationary gap is an excess of

total disposable income over the value of the available supply of goods at a

specific price level sufficient to cause an inflation of prices”

According to kurihara ,” an excess of anticipated expenditure over

available output at base prices is called inflationary gap “.

In the words of Klein , ‘’ inflationary gap is then the difference between

what the population dr. will try to consume out of their income and the

amount available for consumption pre- inflation prices.

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Types of inflation

(1)On the basis of the degree of government control

(a) Open inflation : It refers to situation in which no steps are taken to

control rising prices. According to Milton friedman, open inflation is a process

in which prices rises without any attempt on the part of government to control

them. In this situation prices continue to rise according to demand and supply

conditions. Under open inflation, goods are distributed through price

mechanism. It means, those people who have large amount to spend buy more

goods. Inflation that took place in germany in post –world war 1 era was a

characterstics example of open inflation.

(b)Suppressed inflation: It refers to a situation in which rising prices are

checked by administrative measures like rationing, price control etc. By the

government. Thus prices are checked from rising in the present by the

government but as the control are lifted in future, prices began to rise rapidly.

In this situation when people expenditure is brought down by controls then

inflation manifests itself in the form of cash with the people, change in bank

deposit and cash and large hoarding of private wealth. under the suppressed

inflation of inexperienced and corrupt officials responsible for administering price

control and rationing, black market raises its ugly head. According to

PROF.FRIEDMAN,suppressed inflation prices mechanism becomes in operative..

economists like MILTON FREIDMAN and HALM are of the opinion that open

inflation is more appropriate than suppressed. It is so becoz, under suppressed

inflation due to rationing and price controls evils like black market, corruption

and bribery crop up and resources are equitably distributed.

(2)Classification on the basis of time

(a)War time inflation: In order to meet war expenses government increases

the supply of money. Large proportion is brought by the government itself.

Relatively small proportion of the production is available to the people. As a

result prices begin to shoot up . this, inflation that takes place during the course

of war is called war time inflation.

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(b)Post - war inflation: Tendency of inflation persists even after the war

mainly due to two reasons. Firstly, the government has to spend large amount

on the repairs and the constructions of damaged property like bridges and the

railways lines, ships, machines etc.. secondly, taxes levied during war are

abolished and loans taken from the public are repaid. Consequently, money

supply with the public increases but production of goods and services does not

increase in the same proportion. Thus, prices continue to rise even after the

war.

(c)Peace time inflation : Under developed countries need large resources for

economic planning and development programmes. In order to mobilise

resources , the government has to resort to deficit financing. It leads to rise in

prices which is popularly known as peace time inflation.

(3)On the basis of rate of inflation

(a)Creeping inflation: It refers to that inflation where in prices rise very

slowly. Such an inflation is not detrimental to the economy. It is not only

beneficial to the economy but is also considered essential to some extent.

Some economists are of the view that 3% rise in prices can be called creeping

inflation. They regard it appropriate and desirable in the interst of the national

development . some other economists apprehend danger from creeping inflation

as it may assume alarming propotions.

(b)Walking inflation: When price rises becomes intensive and quantum of

inflation gains momentum it is called inflation. When over a decade prices rise

between thirty and forty percent, it is called walking inflation.

(c) Running or galloping :When there is rapid increase in prices in very short

period it is called running inflation. In this case rate of inflation is between

eighty and hundred percent over a decade. Such a inflation has adverse effect

on middle and poor classes. It discourges saving. Such a situation warrants

stringent measures to curb inflation.

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(d)Hyper inflation: it refers to situation when prices rise at unexpected

rate. There is an escalation of price rise. It is called hydra- headed monster of

inflation. It puts the entire economy out of gear. It was this kind of inflation

that was witnessed in germany after 1932 and which made the people lose all

confidence in german currency. At one time prices roses one million times over

a period of one year in the germany. This resulted into utter confusion in the

economy. It completely wiped away fixed income groups and poor classes of

the society.

(3)Classification on the basis of scope

(a)Sectoral or sporadic inflation: when inflation affects only a particular

part of the country or a covers only one or two goods, like pulses, petrol etc.

It is called sporadic inflation.

(b)Comprehensive inflation : when inflation is not confined to a given part

part of the country or a few goods, but engulfs the entire country and all

goods, it is called comprehensive inflation.

(4)Classification according to process

(a)Wage induced inflation: Powerful labour organisation have a strong

bargaining power via the employers. They succeed in getting their wages

increased. This results into higher cost of production and increased prices. Such

a rise in prices is called wage induced inflation.

(b)Profit induced or mark up inflation: In developed countries like

America etc. Big companies while fixing the price of their commodities add a

given percentage of profit to the costs. This act is called mark- up . these

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companies rise very high and inflation takes place. Such an inflation is called

mark up inflation.

(c)Deficit induced inflation: Such an inflation is the outcome of deficit

financing by the government. It takes place due to increase in money supply

in the wake of deficit financing without any corresponding increase in the

supply of goods and services.

Calculation of inflation

(a)Consumer Price Index (CPI): CPI is a statistical time-series measure of a

weighted average of prices of a specified set of goods and services purchased by

consumers. It is a price index that tracks the prices of a specified basket of consumer

goods and services, providing a measure of inflation.CPI is a fixed quantity price

index and considered by some a cost of living index.

Many developing countries use changes in the Consumer Price Index (CPI) as their

central measure of inflation. However, this method is unsuitable for use in India, for

structural and demographic reasons. CPI numbers are typically measured monthly,

and with a significant lag, making them unsuitable for policy use. Instead, India uses

changes in the Wholesale Price Index (WPI) to measure its rate of inflation.

Provisional annual inflation rate based on all India general CPi (Combined) for

November 2013 on point to point basis (November 2013 over November 2012) is

11.24% as compared to 10.17% (final) for the previous month of October 2013. The

corresponding provisional inflation rates for rural and urban areas for November 2013

are 11.74% and 10.53% respectively. Inflation rates (final) for rural and urban areas

for October 2013 are 10.19% and 10.20% respectively

The Wholesale Price Index (WPI) is the price of a representative

basket of wholesale goods. Some countries (like India and The Philippines) use WPI

changes as a central measure of 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

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in their economies, in particular India – The Indian WPI figure was released weekly

on every Thursday . 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 macro economic and microeconomic conditions.

The rate at which the prices of everything go up is called “rate of inflation”.

For example- if the prices of something is RS. 100 this year, then next year the

price becomes approximately RS.104 then the rate of inflation is 4%.

If the price of something is RS. 80 then after a year with a rate of inflation of 4%

the price go up to (80*1.04) =83.2

So when u make an investment, make sure that your rate of return on the

investment is higher than the rate of inflation in your country. In our country

india, for the year 2005-06 the rate of inflation was 4%.

The annualized inflation rate in India is 8.9% as of June 2012 and till December 2013

the rate of inflation is 9.13%, per the Indian Ministry of Statistics and Programme

Implementation..

Theories of inflation8

Economists distinguish between two types of inflation: Demand pull Inflation and

Cost-Push Inflation. Both types of inflation cause an increase in the overall price level

within an economy.

Demand pull-inflation occurs when aggregate demand for goods and services in an

economy rises more rapidly than an economy’s productive capacity. One potential

shock to aggregate demand might come from a central bank that rapidly increases the

supply of money. See Chart 1 for an illustration of what will likely happen as a result

of this shock. The increase in money in the economy will increase demand for goods

and services from D0 to D1. In the short run, businesses cannot significantly increased

production and supply (S) remains constant. The economy’s equilibrium moves from

point A to point B and prices will tend to rise, resulting in inflation.

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Cost-push inflation-, On the other hand, occurs when prices of production process

inputs provides a typical example of cost-push inflation (illustrated in Chart 2). Rising

energy prices caused the cost of producing and transporting goods to rise. Higher

production costs led to a decrease in aggregate supply (from S0 to S1) and an increase

in the overall price level because the increase. Rapid wage increases or rising raw

material prices are common causes of this type of inflation. The sharp rise in the price

of imported oil during the 1970s equilibrium point moved from point Z to point Y.

While the differences in inflation noted above may seem simple, the cause of price

level changes observed in the real economy are often much more complex. In a

dynamic economy it can be especially difficult to isolate a single cause of a change in

the price level. However, knowing what inflation is and what conditions might cause

it is a great start!

EFFECTS OF RISE IN PRICES

MAIN EFFECTS OF RISE IN PRICES IN INDIA ARE FOLLOWS;

(1)Effect on economic development: Rapid rise in prices is not congenial to

economic development of india.it has an adverse affect on saving and investment.

(2)Effect on foreign investment: Price rise has an adverse affect on the foreign

investment in the country. Foreign investors do not invest in those countries where the

value of money is falling.On account of raise in prices, value of money falls and the

investors suffers loss.

(3)Wage spiral: When prices rise, workers demand more wages. As a result of

its prices rise still more,wages are rised to compensate the workers,.thus,a vicious

wage and prices spiral inflicts the economy.

(4)Adverse affect on the people with fixed income ; Prices rise has an

adverse affect on the people with fixed income .on the account of rise in the price

level the real value of their monetary income goes down. They buy less goods than

before.Their standard of living false.

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(5)Increase in cost ; Cost of project of both private and public go up due to rise in

the prices .as a result of it the total outlay of each plan exceeds the one provided for

originally , yet physical targets are not fully achieved .

(6)Unequal distribution of wealth ; Producers and traders are the gainers

during inflation .consequently rich becomes richer and poor becomes poorer .it leads

to concentration of wealth in the hands of few rich . Inequality of wealth and income

accentuates.

(7)Adverse balance of payments ; Exports of the country afflicted with

inflation become more costly and so cannot compete with exports of other

countries .Exports are therefore adversely affected .Since exports failed to increase

desired extent ,balance of payment continues to be unfavourable .

(8)Speculation and hoarding ; Rising prices encourage speculation and

hoardings . The entire society suffers from stock pilling

(9).Effect on debtors and creditors: Under inflation debtors are the gainers

and the creditors are the losers. Supposing a person borrowed a sum of Rs.

2000 for one year. Subsequently, inflation overlook the economy. When the

debtors repays Rs 2000 to the creditors, under inflationary situation, then he will

be returning less than purchasing power to the latter than what he borrowed

Rs. 2000 he could purchase 40 quintals of wheat with it . but on account of

inflation prices of wheat became twice as high and the said amount could

purchase just 20 quintals of wheat. Thus, debtor stands to gain and creditor

suffers a loss.

(10)Effect on investors: Investors are of two types (1) those who invest

their capital in the govt. Securities, debentures, bonds etc. Yielding a fixed- (2)

inters income and those who hold shares of joint - stock companies and whose

profits fluctuate.. of these two classes of investors, the former are the losers

and the latter gainers on account of inflation.

(11)Effect on producers or entrepreneur: This class gains by

inflation because : (1) They produce more to meet the rising demand. (2) They

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gain on the stock of raw material bought at pre inflation prices.(3) Wages

increases less than prices.

(12)Effect on agriculturalists: Inflation has the favourable impact on these

people. As they belong to the producers class. Prices of agriculturists products

increase more than their costs.

(13)Household savings: Inflation hits the savings badly. Becoz of the high

prices of the goods, consumption expenditure of the people goes up and their

power to save is drastically curtailed. Moreover, falling value of money induces

expenditure and discourges saving.

(14)Effect on employment: In the initial stage of inflation it has a good

effect on the employment. Becoz of rising in the prices producers earn extra

profits and they are encouraged to produce more. Several new industrial units

spring up. Once full employement situation is reached prices begin to rise

rapidly and soon galloping inflation is in the inflation.. as a result the people

with the low income suffers a lot. Aggregate demand begins to contract and

unemployement afflicts the economy.

(15)Effects on the public sectors: Costs of the government projects

under completion rise unexpectedly because of rising prices. This upset the

govt. budget. The government is obliged to borrow from yhe public . thus

public debt mounts.

(16)Effect on banks and insurance companies: Income of traders ,

industrialists and agriculturists increase. They deposit more funds in the banks

and give a fillip to banking institutions. Setting up new industrial units increase

element of risk to cover which many insurance companies come in to being.

(17)Effects on taxes: Rising prices increase the expenditure of the

government to meet which it has impose new taxes and enhance the rate of

existing taxes.

(18)Controls and rationing: It becomes difficult for the poor people to

buy ordinary consumer goods. Govt. Therefore imposes prices control,

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introduces rationing system and opens fair price shops to enable the poor people

to get essential goods at the reasonable prices.

(19)Moral effect: Inflation results into moral degradation . in order to

amass more and more wealth , trading community resorts to anti social

activities like profiteering, hoarding, adulteration. In the country , the gambling

spirit spread more and more. Nor was the reckless and corrupt spirit confined to

business man , it began to break out in the official circles and public men

who a few years before had been thought above all the possibility of taint

become luxurious and reckless, cynical and finally corrupt

(20)Social and political effects: Social and the political effects of the

inflation are the more dangerous the economic effects. One of the main reason

that the hitler and his party to come to power in between 1929-33 was the

horrible dilluge of inflation THAT overtook the country. Acc to dr. D.B

TURNEY, “ hitler was the foster child of inflation” wide spread of

discontentment among the masses let loose by inflation accounted for the

political upheavals in the countries like Italy, and spain and france etc.

(21)Corruption and moral degradation : Price rise in indi a has

encouraged corruption and moral degredation . On account of rising prices service

class, specially government employees finds it difficult to make two ends

meant.They try to supplement their meagre income by bribery and other anti social

immoral activities.It results in rampant corruption and moral erosion

Causes of increase in price

It is general law of economics that rise in prices as a result of equilibrium between

demand and supply .In india due to diverse reason, demand for goods far exceeds their

supply . Main causes of increase in prices as under.

(1)Increase in money supply : In india since second five years plan supply of

money has increased much more then the gross domestic product (GDP).

Consequently , price level has gone up .

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(2)Deficit financing: Deficit financing refers to meeting of deficit in government

expenditure by printing more currency notes.as a consequences supply of money

increases. If the production does not increase simultaneously,prices began to rise.

During the period of five years plans government has resorted to deficit financing

amounting to 60,253 crore. As a result of it, supply of money has increased

tremendously but increase in production of goods and services is fairly small in

camparision.hence price level has increased . fiscal deficit amounting to rs 111275

has been envisaged in 2000-2001 budget

(3)Increase in population: Indian population has been rising since 1921.

There has been explosion since 1951. Growth rate of population has been 2.1% . in

1951 total population was 34.5 crore. In 1981 it roses to 68.4 crore and in 1991 it

went up to 84.63 crore. On account of rise in population, demand for goods rises

rapidly. Although during this period on account of five years plan agriculture

production has increase at the rate of 2.8% per annum and the increase is actually

larger than the increase of increase in the population yet on the one hand population

is already very large on the other hand population has been rising at the rate of 1.9%.

becoz of this rise in prices is very much influenced by the excessive pressure of

population

(4)Setback to production: Price level has also increased on account of

fall in production especially agricultural production from time to time. Fall in the

production causes fall in the supply of goods in the market and encourages rise in

prices. Because of failure of monsoon in 1965-1968,1976-1977,1979-80, 1990-1992,

production of foodgrains was insufficient. Prices therefore increased steeply in these

years. Industrial production has also fallen considerably due to shortage of raw

material , coal, electricity, transport bottlenecks , insufficient supply of machines

and equipments , strikes and look outs.. these factors also account for rise in the

price level.

(5)Structural causes: With the economic development of the country many

structural changes have taken place. A significant change is rising trend of

urbanisation of population, it has lead to rise in demand for food in the urban areas.

Another structural changes refers to rapid increase in the number of agricultural

labourers and the marginal farmers who meet a part of their foodgrains

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requirements from purchasing from the market. Both the structural changes have

put on the great pressure on the demand for the foodgrains. To cope with the

situation public distribution system has been adopted. To keep this system

going it is necessary that foodgrains should arrive in the market for sale. It

can be possible only if the price of foodgrains are kept at renumerated and

every year procurement prices of the food grains are raised. Because of rise in the

prices in the procurement prices has been correspondingly rise in issue price as

well. On account of rise in prices of foodgrain not only the price level has

increased directly but also cost of living and the entire cost price structure have

been pushed up.

(6)Increase in wages: In india every price rise is followed by a wage increase

computing the problem of inflation. Every wage increase is followed by a new

price rise which is definitely far higher than the wage increase. Government

has given bonus and to the employees many a time. It also added money supply

and pushed the prices up.

(7)Administered prices: Price level in the country has also increased on

account of the frequent hike in the administered prices like railway, freight,

postal charges, coal, steel, iron and aluminium and goods produced by public

sector industries.

(8)Inflation across the borders: Prices in almost all the countries of the

world have been rising. These rising foreign prices have also influenced price rise

in our country. Since 1980 petrol and petroleum products prices have increased

manifold. Prices of almost all raw materials imported from abroad have gone up

very high. Gulf war also resulted in rise in prices.

(9)Indirect tax: Prices in india also rise on account of rise indirect taxes like

sales tax excise duty and custom duties etc .

(10)Unfavourable terms of trade: Terms of trade refers to the number of

units of imports can be obtained in exchange for one unit of exports. If one

unit of export gets less than one unit of imports in exchange, it is a situation of

adverse terms of trade. As a result of it , less quantum of goods will be available in

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the market. Either the country has to export more units to other countries or has to

be contended with less number of import units from other countries . on account of

less quantum of goods available in the domestic market their prices rise. In

1990-91, net terms of trade in india were 105(1979-80=100) the same increased

in 1995-96 to 138.

(11)Devaluation of rupee: Domestic price level has increased due to

devaluation of rupee also. After independence , first in 1949 and later in in 1966 ,,

rupee was devalued in terms of dollar . in 1949 the value of dollar in the terms of

rupee was rised to rupees 4.76 per dollar as against rupees 3.00 prior to devalution .

In 1966 the value of dollars in terms of rupee was further rised to rupee 7.50 per

dollars .Each devalution resulted into higher prices for import from dollar currency

area . Thus import becomes expensive .Similarly prices of imported goods in terms

of rupees also went up because for every one dollar worth of export from india

the exporter received 7.50 as against rupees’ 4.76 before devaluation .Thus ,prices

of imports and exports started looking up .Besides , prices of those goods also

increased which were produced with foreign raw material or components or with

foreign machines and implements . After july 1991 ,Indian rupee was devaluated

twice .Currently one us dollar is equivalent to Rs 39.00 approx .

( 12 ) Removal of prices and distribution controls : During world war 2

system of price control and distribution was introduced on wide scale .After

independence many of there controls were discontinued yet the supply of most of

the commodities could not increased . I t also was the reason to rise in prices.

(13) Expectations of rise in prices : Many factors inside and outside of

the country give rise to the expectations of future increase in the prices for example

bad monsoon from time to time , fall in the industrial production , doubts about non-

availability of important imports , deficit financing , more expansion of bank

credit , war with china and Pakistan ,rapid increase in other countries of world

etc .These apprehensions lead to hoarding and rising trends of prices is further

strength and prices continue to rises .

(14) Credit expansion : Doctor BRAAHANAND is of the opinion that in

india one of the main factors responsible for price rises is expansion of credit .

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In 1980 the total bank credit amounted to rupees 30180 crore . In jan 2001 it rise to

rupees 545184 crore. Expansion of credit such and extent has undoubtley

contributed to the rise in prices

(15)Black money: Unaccounted money plays a important role in the context of

inflation . We have a parallel economy in the country on account of this black

money , so far government has not been able to solve the problem of black

money and parallel economy. WANCHOO COMMITTEE was of the opinion

that in 1969-70 india had black money worth rupees 7000 crore in circulation . In

1996 -97 it is supposed to have gone up to more than 75000 crores . Those who

have black money spend it on luxuries and conspicuous consumption . It becomes

important factor of price rise.

INFLATION AND ECONOMIC DEVELOPMENT

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There is a great controversies among economist as to weather inflation has a

favourable and unfavourable effect on economic development .Some economists

are of the view that inflation is a necessary stimulant to economic growth.

On the other hand, some believe that the inflation slows down the rate of

economy ,and therefore not in the interst of economic development. Before

arriving at any conclusion in this regard it is essential to have a detailed

study of both the views,

(1)Inflation has the favourable effect on the economic development or

inflation promotes development : Inflation is a by product of

development. Increase in investment leads to increase in the monetary income but

not in the immediate increase in production. It takes time to complete production

activities. As a result there occurs an imbalance between demand and supply.

Inflation promotes economic development because of the following reasons.

(2)Increase in production: It creates an optimistic atmosphere in the

country that provides necessary inducement to invest. Marginal efficiency of

capital increases. It gives further impetus to invest. Increased investment generates

more employement and income. Increased income leads to more demand and

hence more production . thus inflation promotes economic development

(3)Redistribution of income : Inflation redistribution income in favour of

those sections of society having high propensity to save viz. Traders , industrialists.

As a result there is more saving in the country. More saving leads to more

investment which is the essential for the rapid rate of economic development

(4)Source of capital formation: Inflation results in forced savings in the

country. Because of increasing prices large number of people cannot afford to

consume most of the things. Hence real consumption goes down and real

saving goes up. This increased savings can be used for capital formation

(5)Mobilization of productive resources: Productive resources become

passive in under developed countries. Because of lacking the banking facilities

people have the tendency to hoard their savings. When the scope of economic

activities is enlarged in then hoardings are taken out for use in productive

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activities. Consequently, the rate of economic development accelerates of

inflation

.

(B)Adverse effect of inflation on economic development or inflation

is a retarding factor:

(1)Uncertainity : Inflation pushes up cost of production . labourers demand

higher wages. Industrial dispute become more frequent. There are fluctuations in

demand and prices for the goods. It imparts an element of uncertainity to the

economy. Consequently, economic development is adversely affected.

(2)Adverse effect on saving: Purchasing power of money fall due to

inflation. Hence the real value of savings effected in terms of money goes

down. It serves as a distinctive to saving

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(3)Unjust: Inflation is unjust . under its impact rich become richer and poorer

becomes poorer, adversely affecting social welfare. Even if national income

increases due to inflation increases due to inflation , it only adds to the

skewed distribution against the poorer strata of the society.

(4)Increase in the conspicuous consumption : People whose income

rises on account of inflation squander it away in conspicuous consumption ,

spectulative activities and hoarding instead of it directing it to same productive

channels. It leads to wastage of resources adversely affecting economic

development.

(5)Disequilibrium of balance of payment: Inflation encourages

imports and discourages exports. Prices of imported capital goods and raw

materials rise. As a result , the balance of payment become adverse. There

develops acute shortage of foreign exchange adversely effecting the process of

growth. It has an adverse effect on the economic development.

(6)Possibility of hyper inflation: Inflation is also criticised on the

ground that once it takes place there is no limit to it. Creping inflation gives

way to galloping inflation putting the entire economy out of gear. “there is

always a danger that mild inflation may gradually snowball into hyper inflation.

It would be folly to take a flippant attitude towards mild inflation”

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PRICING POLICY OF THE GOVERNMENT

PRICES IN INDIA HAVE BEEN rising almost consistently since 1956.

The measures taken by the govt. From time to time to stabilize the

prices during the period of planning are listed below;

(1)Monetary measures: In order to achieve the objective of price stability

reserve bank of india has regulated the supply of money. It has adopted both

quantitative and the qualitative methods of the credit control. Bank rates have

been raised frequently. In the year 1952, bank rate was 3% in march 2001, it

was 8%. Credit for the purpose of hoarding and the speculation has been

totally prohibited. In order to contract credit, cash reserve ratio has been

increased to 6% to 10% in 1997. Likewiswe, statutory liquidity ratio has been

raised to 25%. Nationalised banks give less credit on those goods whose prices

have a tendency to rise due to hoarding. More credit is given for

unproductive purpose.

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(2)Fiscal policy: Govt. has a adopted several fiscal policy measures to check

inflation. These are (1) reduction in unnecessary expenditure (2) additional taxes

to lower the purchasing power of the people

(3) Decision to reduce the quantum of deficit financing

(4) Exemption from tax and grant of subsidies to encourage production

(5) Mobilization of resources for economic development

(6) Checking of unnecessary consumption and unproductive expenditure

(7) Launching of various schemes to promote savings

But these government measures did not meet with much success.

Whenever attempted to scale down public investment, depression and

unemployement situations across in the organised sector of the economy.

On the contrary , whenever more taxes were levied, prices rose.

Government of india announced in 1991-92 and1997-98 budgets,

volountry disclosure of unaccounted money. No enquiry is initiated

against the income so declared

(3)Increase in agricultural and industrial production: During the

period of planning, govt. took several measures to increase industrial and

agricultural production. In order to increase agricultural production, irrigation

22

facilities have been expanded. Use of chemical fertilizers are high producing

variety of seeds has been increased. There has been extension in areas under

cultivation. Agricultural productivity has gone up. All these measures account

for increase in the fooodgrains production to 2,090 lakh tons in 1999_2000 as

against 550 lakh tons in 1951. Industrial development has been indeed

noticeable. Many new basic industries like iron, steel and heavy machines etc

have been established. Production of both consumer and the capital goods has

increased. Govt, has taken several measures to promote the development of

small and cottage industries. Inspite of all these measures , increase in the rate

of production of agricultural and industrial goods is less than the demand.

(4)Restriction on export of essential consumption goods: Govt. has

imposed export duties on several essential consumption goods and export of

certain other goods have been banned. The step has been taken to increase the

supply of these goods for domestic consumption. Government has also banned

the export of vegetables, fruits and pulses.

(5)Import of essential consumption goods : Government has arranged

for the import of essential goods to meet their domestic shortages. Edible oils

and pulses are being imported in large quantities. Regarding oilseeds, the

government has framed national edible oil in respect of oil seeds.

(6)Dual pricing policy: With regard to sugar and cement. Government has

adopted dual pricing policy. price of sugar supplied on ration is lower than in

open market.

(7)Public distribution system: Government has tried to make public

distribution system more extensive and efficient. As many 4 lakhs and 37

thousand fair price shops have been opened to distribute essential commodities.

23

Arrangements have also been made to distribute vegetables ghee, baby milk,

kerosene oil, tea, salt ,pulses etc through these shops.

(8)Check on hoarding : In order to discourage hoarding, the government

has fixed the maximum limit of stock of several goods under the essential

commodities act. In 1979, the preventive detention act was enforced again to

enable the government to take strict measured against hoarders.

(9)Buffer stock : Government has build buffer stocks of essential goods

like foodgrains, etc. When the crops are good, government buys foodgrains at

a fixed procurement price and stock it. When prices of foodgrains show a

rising tendency, government sells buffer stocks at a given issue price. This

prevents the prices from rising.

(10)Institutional measures: With a view to stabilise the prices of the

foodgrains, cotton, jute etc. Government has set up many institutions like

foodgrains, cotton corporations etc. These institutions maintain proper

equilibrium between demand for and supply of foodgrains and the raw

materials and seek to achieve the objective of price stability.

(11)Population policy: All attempts at checking rise in prices will come to

naught if no concrete steps are taken to check the growth rate of population .

government is seized with the problem. Top priority is being accorded to

various schemes of family welfare.

Suggestions to check rise in prices

In the opinion of eminent economists D.R K.N JAIN ,perhaps no other factor

has caused so much disaappointments as rapid rise in prices. In order to

24

achieve the economic development of the country, success of the plan , social

and the political stability and pragmatism of “alleviation of poverty”. It is

very essential that rise in prices can be curbed . price-rise has its adverse effect

on the workers, employees, landless labourers, agriculturalists labourer etc.

With a view to checking rise in prices, following measures are suggested.

(1)Check on supply money : To check rise in prices , it is essential that

supply of money is not allowed to expand.supply of money should be freezed

(2)Less deficit financing: The amount of deficit financing should be

reduced to the bare minimum. By levying taxes on the agricultural

sector,reducing unessential expenditure, withdrawing of subsidies, government

can bring down the quantum of deficit financing

.

(3)Increase in agricultural output: To check rise in prices it is a

necessary to promote the growth rate of agricultural production. Agricultural

production constitutes the major wage-goods in India. When the prices of wage

goods are established and stabilized, it would have a salutary effect on the

other prices. According to D.R. K.N. RAJ ,’’ special attempts should be made

to increase production of coarse grains and rice, as 75% of food products are

obtained from these grains”

Along with the production of food grains, special endeavours should Be made

to produce more oilseeds, pulses, sugarcane and jute.

(4)Industrial output be increased: Further it is very necessary to

increase the industrial production at low cost. To this end, both short run and

long run measures should be adopted. In this short run a proper production

policy should be adopted for fuller utilisation of the production capacity in the

25

vegetable oil, cotton textiles, sugar etc. With a view to increase in the

industrial production, some long run measures should be employed.

(5) Setting up of new industries for the production of mass

consumption goods. Greater reliance should be placed on the use of local

resources than the exports .More use of coal be made in petroleum based

fertilizers factories and diesel operated production units. Small scale and cottage

industries be developed expediously.

(6)National wage policy: Co-operations with the labourers must be sought

to increase production and check rise in prices in the country. A moratorium

should be declared on strikes and lock outs for some time. In this context.

PROF. DANTEWALA had suggested that the wages of the labourers for the

strike period be not paid in cash but credited to a separate fund. The amount

of the fund will be utilised at the time of retrenchment and unemployment. A

national labour policy should be enforced in the country and wages should be

linked with productivity.

(7)Fiscal policy: To check rise in prices fiscal policy can also be helpful.

By making the proper use of both the aspects of fiscal policy, viz,,

government revenue and the government expenditure, attempts can be made to

arrest the rise in prices. More taxes should be levied on the rich farmers.

Presently barely 0.82% of the total agricultural production is received by way of

taxes as against 1.6% on 1960-61. On the contrary, the burden of taxes on non-

agricultural production has increased from 4% to 22%. Thus, there is large

scope of earning more tax revenue from agricultural sector.

(8)Distribution through fair prices: To check rise in prices, essential

goods be distributed among the poor at low prices through fair price shops.

Such shops be opened in large numbers at villages and town levels and in the

26

backward regions. At present, there are about 4 lakh 50 thousand fair price

shops in the country.

(9)Check on hoarding: Strict measures should be taken by the government

to prevent hoardings of essential goods. Hoarding cannot be checked by the

monetary measures alone. Simply by contracting bank credit or raising of the

rate of interst, hoarding cannot be checked. Because when scope of profit is

large, the hoarders will borrow funds at higher rates of interst from

unorganised money market and good ahead with hoarding. The evil of

hoarding can be stopped only when it is made unprofitable. The tendency of

hoarding can be discourged and rise in prices in future checked if government

improves its distribution system.

(10)Problem of black money: Holders of black money are largely

responsible for price hike. On the one hand, black money has been increasing

with rise prices and on the other hand this money is actively spent on

conspicuous consumption. In this way, it maintains the pressure of demand

despite rise in prices. To solve this problem, demonetization of the currency is

suggested as was done by germany. The other suggestion is that those who

possess black money should not be penalised if they declare their income

voluntary and they should be given long term bonds equivalent to the amount of

black money so declared . these long terms equivalent to the equivalent to the

amount of black money so declared. These long term bond will drive black money

out of circulations.

(11)Consumers organisation: Consumers can also organise themselves to

protest against the rising prices. If consumers cut down their demand subsequent

to price rise and lodge their protest with the producers and traders, the prices

will not rise so easily. To achieve this objective, all india consumers society,

new delhi and consumers, guidance society, Mumbai have been established. In

every state consumers forums have been set up.

27

(12)Non- economic measures: In democratic country like india where

political parties have to spend huge amounts in contesting elections, rise in

prices cannot be checked by economic measures alone. When the political

parties collect election funds from big captalists, the former oblige the latter in

acquiring more and more wealth by questionable means like hoarding and

black - marketing . hence, there is need for reform in election system and

political climate of the country.

(13)Performance of planning: Each five year plan be implemented in

five parts, each of the duration of one year. efforts should be made to achieve

the targets of production and expenditure each year. The advantage of it will

be that huge amount , which is spent in the last year of the plan without

caring for achievement of the targets, will be checked. As a result production

will increase in the supply of money and prices will be stabilized.

(14)Control over population: Growth rate of population in india should be

brought down. With fall in growth rate of population , demand will also fall.

Fall in demand will arrest price rise. In this respect, government has been

making extensive publicity of family planning welfare programme.

(14) Monetary and fiscal mix: In order to check the rise in the

prices. Following monetary and the fiscal policy mix should be made use

of;

Supply of money should be reduced

Rate of interst should be increased

Smuggling should be checked

Credit be contracted

State level taxes be increased.

Public expenditure be pruned

28

(15)Restriction on the exports of consumption goods : Export of

mass production goods like, onions, vegetables, cement , sugar etc. should be

banned.

(16)Imports of essential goods: foreign exchange reserve is in a

comfortable state at present. It should be used to import essential goods. Such

imports will go a long way in checking the rise in prices.

(17)Growth of power and transport: Supply of electricity, coal and

other sources of power in india should be increased. It will result in more

production. Industries will get raw materials at the appropriate time as a result

of development of means of transport. There will be more production and prices

will be brought under control.

(18)Control over increase of administrated prices: Government

should fix low prices of basic raw materials like iron, steel aluminium etc.

Low administered prices will help stabilize the prices of other commodities.

Difficulties in controlling the inflation

The government has adopted various monetary, fiscal and other measures to

check price rise but the government could not get the desired results in so far

the control of prices rise is concerned. The price index in the country is always

compared to the price index of the previous year and it indicates a decline but

the reality is that there has been a continous rise in the price level of all

commodities and everyone is perturbed by it. The following difficulties are

being faced by the government in controlling the increasing prices.

(1)Uncoordinated price policy: There is no coordination in the price

policy adopted by the government. On the one hand, the reserve bank tries to

29

contract supply of money and credit through its monetary policy but on the

other hand , government under its fiscal policy indulges in a large scale deficit

financing as to push up the supply of money and hence the prices. Besides

this, the government tries to control the prices of the goods produced in the

private sector, but on the other hand it raise administrated prices of goods

produced in the public sector, notably the prices of iron, steel and coal etc.

Under such a situations counter balances the other measures and thus price rise

cannot be checked.

(2)Black money: The existence of black money has created a parallel

economy in the country. It has not reduced the money supply, rather it is a

becoming a hindrance in controlling the price level.

(3)Hoarding and profiteering: Although government has taken various to

check hoarding yet these measures have not proved very effective. The

hoarding of the goods is still creating its shortage and its sale in the black

market is causing a concern. Thus government is facing the difficulty in

controlling the rise in prices.

(4)Administrative difficulties: The framing of a policy on a paper books

very good but difficulties arise when the same is implemented . there has been

a paucity of efficient, honest and competent staff in its execution. The result is

that no price policy has been enforced effectively.

(5)Lack of appropriate increase in production : It has been observed

that with every price- rise by its employees and the trade unions. This has

been followed by a new price rise as the supply of agricultural and industrial

goods could not be increased in propotion rise in their demand.

30

(6)Deficit financing: The fiscal deficit in the annual budget has been

mounting up every year. New currency comes into circulation to cover this

deficit and thus it becomes difficult control the price level.

(7)Increase in population: The rapid increase in the population is a great

hindrance in the way of price control price. Various population policy

measures adopted in five years plan have failed to check its rise. New born

children constant by require feeding, but the shortage of feeding stuff is

causing a rise in the price level.

Evaluation of price policy

Many steps have been taken by the government to check rise in prices, but

due to following reasons governments price policy has not succeeded in

objective in achieving its objective.

(1)Uncoordinated policy: Main defect of government price policy is lack

of coordination among the different policy and measures. On the one hand,

reserve bank of india tries to contract supply of money and credit through its

monetary policy but on the other hand , government under its fiscal policy

indulges in such a large scale deficit financing as to push up the supply of

money and hence the prices. On the other hand, government controls the prices

of goods produced in the private sector , on the other, it raise administrated

prices of goods produced in the public sector, notably, the prices of iron, coal ,

steel and chemicals etc.

(2)Lack of income policy: to render price policy more efficacious it is

essential to pursue a proper wage and the income policy but its

recommendations could not be implemented.

(3)Defective planning: Another shortcoming of government price policy is

that it does not pay much attention to the proper planning of the supply of

inputs like power, raw materials, transport etc. So essential for production

31

capacity cannot be fully utilised . consequently , all attempts at erducing the

price level prove futile.

(4)Administrative difficulties: In a vast country like india, ther is an

acute shortage of honest and competent executives to enforce the price policy

effectively. Consequently , enforcement of any price regulation policy becomes

difficult.

ANALYSIS THE PAST TRENDS OF INFLATION

Trends in prices

In India prices have the tendency to rise since world war 2. After the

independence, the economy has experienced several long spells of rising . in

india a comprehensive study of changes in prices can be made in the

following manner.

(1)Rise in price before independence: Prices have been rising since

1939 when world war2 broke out. In 1939, the price index was 100. It rose

to308 in 1947-48.

(2)Rise in prices upto 1951: After world war2, it was hoped that prices

would fall sharply, but prices continued to rise unhindered. In 1951,prices

index number rose to 462.

(3)Fall in prices during first five year plans : (1951-56): During the

period of first five years plan, prices fell by 3.6% per annum.

(5)Rise in prices during the second five years plan(1956-61): Prices started rising again during this plan. Second plan witnessed a rise of

6.2% per annum on the average percent in prices.

32

(6)Rise in prices during third five year plan(1961-66): Tendency of

price rise continued in the third continued in third plan. During the plan period

prices rose by about 5.8% per annum on the average.

(7)Rise in prices during fourth plan(1969-74): trends of rising prices

persisted in fourth years and in this period prices rose about 9%per annum on

the average of this plan.

(8)Rise in prices during the fifth plan(1974-78): duration of this plan

was four years and in this period prices rose about 6.3% per annum on the

average percent compared with the fourth plan.

(9)Rise in prices during the sixth plan(1980-85): rising trends in

prices continued during the period of this plan. Prices rose up by 9.7% per

annum on the average percent of the plan.

(10)Rise in prise in the seventh five years plan(1985-90): rise in

prices persisted in this plan also. Average rate in rise in prices was 6.7% per

annum.

(11)Eighth plan: prices roses by 6.6% per annum on average during the 8 th

plan

(12)Ninth plan: during the first year of the plan , prices rose by 4.8% per

annum. In the year 1988-99 the prices rose by 6.9 percent and in 1999-2000 the

rise in the prices was very high.

(13)Tenth plan: the decline of unemployement is relatively high at above 7%

(14)Eleventh plan: India records 8% annual average economic growth in

11th Plan

33

(15)Twelth plan: In the backdrop of lower economic growth rates of 4.5 per

cent in first year of 12th Plan (2012-13) and 4.9 per cent in second year

(2013-14), the annual average economic growth rate target for the entire five

year policy could be revised downwards, it is felt

DETAIL ANALYSIS PAST TRENDS OF INFLATION

A recent speech by Subir Gokarn, RBI Deputy Governor,via Mostly

Economics) sheds interesting light on the growth-inflation dynamics of the

Indian economy and the "policy commitment to maintain a balance between

growth and inflation in the short run, while fostering faster growth with lower

inflation over long period of time". 

In another speech, Deepak Mohanty,executive director RBI, examined the nine

34

incidents of double-digit inflation since 1954, and argued that "volatility as

well as incidence and duration of double digit inflation has reduced over time".

He points to the fact that despite the recent rise in food prices,inflation

rates have been on a downward trend in India in recent decades. 

That there is nothing simple about the causes of recent inflation is borne out by

the near-uniform increases in inflation rates across all categories and on both

supply and demand sides. As the graphic below shows - now and in earlier

instances of high inflation - both food and fuel prices (reflecting supply-side

forces) and the prices of manufactured goods (reflecting demand-side

ones) have been on the rise. This raises doubts on the utility of monetary

policy alone in addressing these inflation episodes. 

Historically too, periods of high inflation has coincided with demand and/or supply-

side shocks, with food (mostly internal, monsoon failures etc) and fuel supply(mostly

external) shocks being the most persistent. However, unlike demand-side ones,

supply-side shocks are not amenable to being addressed with conventional monetary 35

and even fiscal responses. This raises the need for automatic fiscal stabilizers and

long-term efforts to improve farm productivity, besides more effective counter-

cyclical macroeconomic management. 

As is expected and can be seen from previous experiences, high inflation periods

have coincided with increases in government borrowings. However, over the past few

decades, inflation has remained relatively indifferent of the broad money growth

report Dr Gokarn attributes this stability to the increased depth of Indian money

markets which have been able to absorb the volumes and mitigated the potentially

inflationary pressures. 

Interestingly, inflation rates have been stable over the past two decades, with inflation

volatility coming down sharply. Dr Gokarn also points to a "universal 36

corelations between the level of the inflation rate and its stability" and the fact that the

reduction in the average inflation rate over the years has been accompanied by a sharp

reduction in the volatility of that rate". 

And he holds out hope about inflation prospects in the prevailing high inflation

environment. The clearest indicator that the inflation is on its way down comes from

the month-on-month rates of inflation which gives a sense about the momentum of

inflation. Since early 2010, the momentum has clearly been on the negative. 

37

From the the above graph it is clear that how the rates of inflation

are fluctuating.

38

Annual rate of inflation in percentage year wise

Trend in Food Prices

There have been three patterns in the trends in food prices in India as

compared to global food prices. First pattern is that Indian inflation in food

prices increased from 2005-06 to 2006-07 when global prices increased. Of

course, the rate of increase was much lower in India. Second pattern is that

39

inflation in food prices declined in 2007-08 as compared to 2006-07 when

global prices rose significantly. In the third pattern, global prices declined but

Indian inflation in food prices started increasing in recent months (third quarter

of 2008). These patterns show that global impact on India is limited because of

less exposure.

FAO food price index indicates that it increased more than 80 per cent

during the period 2005-2008. The wholesale price index in India for food

articles (foodgrains +non- food grains) increased 21 per cent over this period

(Fig A1 in Appendix). Cereal prices in India rose only 20 per cent as compared

to 170 per cent increase of global prices.

Rice price increased to around 7% only in 2007-08 and it hovered around 5 to

8% in 2008-09. The price increase in India was very low as compared to rise

in global rice prices. The inflation of pulses in India was 30% in 2006-07 but

showed an absolute decline (-4.5%) in 2007-08.

As compared to other commodities, oilseeds and edible oils recorded higher

inflation in 2007-08. Oilseeds showed 24% increase in prices in 2007-08 and

it is still high in 2008- 09 although it declined. The continued increase in oil

prices was on account of higher demand, lower estimated rabi crop as well

as rising global prices. The global prices of oilseeds rose by 70% to 90% in

March 2008 over March 2007. Surge in demand including demand for bio-

40

fuels, low stocks, higher oil prices contributed for the price rise. Soybean seeds

at global level showed an increase of 78.6% in March 2008 over March 2007.

In India, Soyabean seeds recorded 30% inflation in 2007-08 and this price

rise continued in 2008-09. Inspite of record production of 10 million tonnes,

soybean prices showed high inflation partly because of high global prices.

Domestic consumption of edible oils is estimated at over 10 million tonnes per

year, while domestic production has been hovering around 6 million tonnes.

Import of edible oils (mainly soyabean and palm group of oils), which

bridges the gap between domestic supply and demand, was 4.7 million

tonnes and 4.3 million tonnes in 2004-05 and 2005- 06, respectively.. As a

result, imports increased to 4.7 million tonnes. Because of higher global edible

oil prices, domestic prices also increased in 2006-07. The same situation

continued in 2007-08.

The global inflation was 100-106% in March 2008 over March 2007. The

inflation in edible oils in India was 14% and 20% respectively in March

2007 and March 2008. Thus the price increase in India is much lower than

that of global prices. In the case of food products under manufactured goods,

the inflation in oil cakes and dairy products was high 2007-08. The price rise

in oil cakes was nearly 40% in 2007-08. Increase in the price of oil cakes led

to rise in prices of dairy products.

The trends in food prices in India and global level show that the impact of

global rise in food prices on India are limited. Domestic production shortfalls

in wheat and maize, and dependency on imports of pulses and edible oils,

transmitted the international price shocks to domestic prices. However, the

increase in food prices in India was much lower as compared to sharp increase

in global prices. Food prices in India particularly for wheat and pulses

were higher in 2006-07. This is much before the sharp increase in global

prices in 2007-08. In fact, inflation for food grains and food articles was lower

in 2007-08 in India as compared to those of 2006-07. In the case of oilseeds

and edible oils, the global impact on India seems to be much more than other

commodities.

41

It is true that in the past few months, the prices of major cereals at global level

have fallen by about 30 to 40 per cent as a result of the economic slowdown

and favourable weather conditions. In the case of India, the food price inflation

started increasing in fourth quarter of 2008. The consumer price index for

agriculture labourers and industrial workers also increased in recent months.

Impact of inflation on the house hold budget

Impact of budget on common man

Most people have several questions in mind like 'how is it going to affect me and my

lifestyle?' Here we analyze the budget impact on the common man in our daily life.

Impact on individuals

The most direct way by which the union budget affects the common man is through  

changes in taxations- both direct and indirect. Direct taxation impact involves changes

in income tax exemption and deduction. For instance, in this year's budget the finance

minister may raise the income tax exemption limit to Rs. 3 lakh from the existing

42

Rs.1.8 lakh. This could have a long term impact on the spending and saving patterns

of individuals.

Impact of budget on common man

Most people have several questions in mind like 'how is it going to affect me and my

lifestyle?' Here we analyze the budget impact on the common man in our daily life.

Impact on individuals

The most direct way by which the union budget affects the common man is through  

changes in taxations- both direct and indirect. Direct taxation impact involves changes

in income tax exemption and deduction. For instance, in this year's budget the finance

minister may raise the income tax exemption limit to Rs. 3 lakh from the existing

Rs.1.8 lakh. This could have a long term impact on the spending and saving patterns

of individuals.

Another proposal that is expected if tax deduction increases on housing loan

then,this is eagerly expected by both the builder community as well as people looking

to purchase their homes as this would be an added incentive to look forward to!

Apart from such direct benefits, there are many indirect ways in which the budget

affects the common man. A hike in duties of consumer goods can affect the budget

planning of every middle class household. Similarly changes in subsidies of cooking

gas and other fuels will decrease the disposable income of middle class families. An

increase in service tax and sales tax would increase a plethora of expenses ranging

from mobile bills, insurance premium, property purchase, courier expenses, credit

card bills etc. These are awaited with a certain degree of anticipation as the budget

draws closer.

43

Changes in excise duties and sales tax can make a product dearer or cheaper. The budget

forecast suggests that duties on diesel cars as well as gadgets like laptop will increase

which can eventually lead to impact in purchase decisions.

Impact on business

The business classes in the society are the top groups who have much to look forward

in the budget the things they want to see in the forthcoming budget proposals.

As of now, high on the wish list are various boosters to investment and the

implementation of direct tax code, goods and services tax. The biggest fear is an

expected increase in the rate of corporate tax or surcharges. An easing in direct

taxation slabs will create surplus in the hands of businessmen, which may encourage

them in further investments and thereby leading to more employment and betterment

of the society.

As governments increase or decrease allocations for certain sectors, businesses in

those sectors will be affected. For instance, an increased spending in

infrastructure is expected, which will be a gain for the companies in that

segment.44

Budget is eagerly looked upon by investors as well to review the tax rates on trading

transactions in the stock market as well as foreign investments. Investor's budget

expectation is the cutting down of security transaction tax- i.e., the tax applied to all

transactions in the cash segment of the market which would make trading less

expensive and there by boost the market.

Last year's budget proposal to allow foreign investors to invest in equity mutual funds

was warmly welcomed in the markets as more foreign investments will make the

market buoyant. But unfortunately the buoyancy did not last long due to the global

economic slowdown. Many foreign investors became net sellers in the market.

Accelerating inflation squeezes india india middle class

But as economic analysis slows and inflation spirals – prices in November were 11.2

per cent higher than a year earlier – many families that have been on an upward

trajectory are increasingly anxious.

They say price rises are outpacing increases in income and eroding their hard-won

savings. Their concerns about tightening household budgets are likely to be an

important factor in forthcoming parliamentary elections, when the ruling Congress

party will face a stiff challenge from the Hindu nationalist opposition Bharatiya Janata

party.

A person say for an example, who earns about Rs40,000 per month, is feeling the

pinch. His income once allowed him to save about Rs10,000 a month, even after

sending money back to his parents, three married brothers and their families in his

home village. But he says he now struggles to make ends meet after paying his

Rs10,000 monthly rent, kids’ tuition, and soaring food and fuel bills.

To cut costs, now that person has stopped eating out, and is driving his scooter,

instead of his car, for work. “We have managed to fight our way out of the village,

and we will do anything to make sure that we don’t have to go back,” he says.

His business partner, who also comes from a humble rural background and now lives

in the same apartment building, says, “We don’t have a stable, regular source of

income, so we always worry about how much to save for the future to keep our

families secure.”

45

“I am doing whatever I can to make a better future for my children, as all parents do,

but inflation is setting us back. That is the main worry,” says Narendra Tomar, a 35-

year-old car mechanic, who employs six people at two small garages that have

combined monthly revenues of Rs100,000.

Such anger is shared by many other Indians striving to overcome their humble

origins, lack of education and limited opportunities, and claw their way up

India’s economic ladder.

But as economic conditions worsen, this optimism is slowly eroding.

“People don’t want to get major work done on their car repairs,” says Mr Tomar, the

auto-mechanic, whose entire joint family – at least 15 people – depends on the

earnings from his garages. “They just want to do the minimum that keeps the car

running.”

As India’s government raises fuel prices in an effort to curb costly energy

subsidies, Mr Tomar is considering whether he can still afford to ride his scooter

on his daily 150km round-trip commute from his home to his garages in ludhiana

. “The scooter costs Rs200 per day,” he says. “Very soon, I’ll have to start taking

the bus.

Effect of Inflation on the different different things that included

in the house hold budget

VEGETABLE HIGH PRICES AFFECT THE CONSUMERS

AND VENDORS AS WELL

Wholesale, retail inflation rise due to higher vegetable prices, raising

chances of interest rate hike

There were days when people used to spend very minimal time in vegetable

market. Buying vegetables used to be a child's play for homemakers. But today, the

scenario has changed. Vegetable buying has become more an analytical process due to

their soaring prices.

. Customers have been constantly complaining about the price which has been

inflating over the weeks. Purani sabzi market, one of the prominent vegetables market

46

in the city, has started witnessing shortage as very less vegetables come to the market.

"A kilogram of onion now costs Rs80. But, there are possibilities that the price would

increase further," said LB Shanmugham, vice president of onion mandi association

adding that the prices of onion alone have increased from Rs45 to Rs65, within three

days.

"And specially at the times of festivals like Diwali , the veggie prices are sure to

shoot up. the price of onion alone was go up to Rs80 a kilogram, a few months ago

while comparing other veggie.

Lady's finger and beans are the only vegetables which are said to be the cheapest, A

kilogram of both the vegetables costs Rs25. "Most of the essential vegetables such as

beans, drumstick and carrots used to come from the southern districts. However, the

produce has dipped due to the failure of monsoon and prices of pulses was also very

high that ,

     

 

Due to the rise in prices, families have also started reducing the consumption of

vegetables.The whole sale rate and the retail prices of the vegetables do not have

much difference, feels adding that the quality of vegetables is what determines the

price. "Onions of second quality are being sold as first quality in the markets," .

“For cereals, the government has set up a committee which is working out how to

release excess food stocks to control market prices,” he said. “It should complete its

work in a couple of weeks. Onions were a short-term problem in October; it is

cooling off already.”

47

Wholesale cereal prices rose 13.05% in September compared with 14.35% a month

ago.The finance ministry said in its review that the good monsoon augurs well for

lower food inflation in the post-harvest period of 2013-14. “Based on current trends

and the wearing of the base effect post October, WPI inflation is expected to be in the

range of 6.5 to 7.2% at the end of 2013-14,” it added.

EFFECT ON THE DIESEL AND LPG PRICES

Diesel basically is used in industrial and agriculture purposes whereas LPG is used for

household purpose. Increase in price of kerosene and cooking gas directly raise the

price of meal and light to the citizens resulting in more problems for the society

already grappling with price rise and poverty. Hence any increase in diesel price has

a very big impact on the poorest section.

Due to the hike in diesel rates, first of all the transportation charges will take a hike,

subsequently resulting in cost rise of almost all the commodities including the

packaged and the non-packaged products. Secondly it increases the cost of

production for farmers as this fuel is used in almost all the agricultural activities.

Additionally, public transportation would also grow costlier. The entire process will

add to the ever rising inflation within the country, further decreasing the value of

Rupee in the International Currency Market, which would in turn boggle the economy

of India for sure, resulting into an endless cycle of miseries.

; 6 subsidized LPG cylinders a year!!!! How is each and every family

supposed to spend a whole year with only 6 subsidized cylinders.

Food is a basic necessity, which would go for a toss by this decision. Only 6 cylinders

mean invitation for more nuclear families. A country with true morals and a

prosperous culture is being forced to quit its morals merely for a cylinder! Is it

justifying? Cooking gas prices rise also hampers Government’s plan to promote the

use of clean fuels for cooking in rural areas since people would not prefer costly

cooking gas to other cheaper domestic alternatives (i.e. woods and uplas).

After all these changes in the diesel and LPG prices how can an Indian citizen sit

quietly. Government quotes it was a risky act to raise the prices so as to cut down the

problem of fiscal deficit. They also mentioned 6 no. per annum will save subsidy on

one-third of the total LPG cylinders consumed, while the other two-third will still be

supplied at subsidized rate. Also it will prevent misuse of the cylinders to a large

48

extent. It will reduce the under-recovery on LPG by about Rs 5,300 crore for the

remaining part of the financial year. Yet, the total under-recovery on LPG durin2012

13 is estimated to be above Rs 32,000 crore

BUT ULTIMATELY A COMMON MAN HAS TO SUFFER. The government

has granted exemption from customs and excise duty on non-subsidized LPG

cylinders only for domestic consumption to reduce the price burden on the

common man, Nene said.Now the latest rate of LPG cylinders is RS. 1320.

Which cannot be afford able In this way how ever a common man is not in

position to survive whose salary is just in between RS 5000 TO 10000

Effect on the medical bills.

If onion prices didn't make you cry, your medical bills will. Inflation in medical costs

has been running in double digits - higher than overall inflatio0n for the past four

years and is scorching the middle class and the poor alike, a survey has found.

With medical costs rising at a rate beyond this and growing at over 10 per cent four

years in a row, the burden of healthcare has become increasingly heavy on the middle

class. The five per cent service tax on health care introduced in finance minister

Pranab Mukherjee's Budget on Monday will only make matters worse.. A senior

doctor at the All India Institute of Medical Sciences (AIIMS) said the high charges of

private hospitals, especially for those having a health insurance cover has also

contributed to the adverse claims ratio of insurance companies and the consequent

increase in premiums

49

The Comptroller and Auditor General of India (CAG) had pointed out in a recent

report that private hospitals were charging higher rates from patients with medi claim

policies compared with those who did not have any health insurance cover for the

same treatment.

India has seen a steady rise in the range of 15 to 25 per cent in healthcare premiums

even as life insurance premium  are easing, says Towers Watson. The rise in

healthcare premium cost is attributed to the high claims-to premium ratio of more than

100 per cent, which the study has observed in more than half the companies it

surveyed.

The survey states that the demand for healthcare in India is expected to increase at a

staggering rate of 25 per cent a year, driven by rapidly rising cost of medical treatment

and a growing middle class.

Inflation has manifested in the middle-class household in areas other than

the bare necessities. And how its affects the common man

Usual discussions on the fall in the rupee bring up macro-economic matters such as

slowing economic growth, corporate earnings and market volatility However, the

woes aren't restricted to corporate corridors or the Dalal Street. For the common

man, the falling rupee is going to hit where it hurts the most-the pocket.

From essentials such as food and education to foreign vacation and the swanky gadget

you plan to buy, the falling rupee will hurt you in more ways than one.

GROCERY BILL

High inflation has been pinching you for more than a year now. Now, the weakening

rupee has made crude oil, fertilisers, medicines and iron ore, which India imports in large

quantities, costlier. Though these items are not for your daily consumption, they impact

your finances indirectly. 

50

For instance, since India depends on imports for a large part of crude oil it consumes, a

weak rupee will influence petrol and diesel prices. "Fuel being directly connected with the

cost of transportation, prices of goods that are transported from one part of the country to

another, such as food, are bound to rise. This will have a direct impact on the

household budget" says Paresh Parekh, Tax Partner.

Impact on FMCG, or fast moving consumer goods , ;

Such as soaps, detergents, deodorants and shampoos, of which crude oil is an

input, are likely to become more expensive. 

"The impact of rupee depreciation on the FMCG sector will be due to higher

cost of imported raw materials. The companies were already facing cost

pressures. The rupee depreciation has added to their woes. They will have to

revise prices. Hindustan Uniliver and Procter & Gamble have already taken

steps in this direction. Many others will increase prices in the coming months,"

says Kaustubh Pawaskar, FMCG analyst.

Impact on pulses and oilsPulses and oil, which account for a large part of India's imports, will also be

affected. "Crude palm oil prices set the pace for prices of other edible oils. It is

imported in large quantities and any rise in its price will add to the inflationary

pressure

"The depreciation of the rupee has considerably affected the price of the

edible oil complex in a big way, as we import 60-70% of our requirement. For

instance, in November-December 2011, the price of refined soya oil shot

up by Rs 75 per 10 kg from Rs 651 to Rs 724," says Hanish Kumar Sinha,

head, trade and commodity intelligence group, NCMSL. Sinha expects

that refined soy oil will test the Rs 800 per 10 kg level by April.

51

Impact on education

The cost of education from pre-primary to college level has soared. Not only are

private colleges and schools seeking exorbitant fees, most families incur additional

expenses on coaching, extra study material, tests, subscriptions and books and

secondly if some one has to go for foreign education it would be so difficult to afford

This concept would be more clear with the help of an example;

For Abin Biswas (21), a B.Tech in biotechnology, an opportunity to work as a

trainee intern in a Harvard-MIT joint venture project was a dream come true and a proud

moment for his parents. The cost was high but Dr Anup Biswas, Abin's father, decided to

bear the expenses. 

"The institute is providing him just a daily travel allowance.. but instead of it ,With

the rupee weakening, the burden has increased. The rent ($378) of a room he shares

with friends was Rs 17,000 (at Rs 45/$) in mid-August 2011 when he went. Now, it is

Rs 19,500 (Rs 51.52/$). A meal ($6) which cost him Rs 270 then now costs Rs 300.

This means an additional food expense of Rs 1,800 per month. 

"Abin's monthly budget, roughly $1,000, has risen from Rs 45,000 to Rs 53,000, the

last instalment we paid. It will be difficult for us to bear his expenses if the trend

continues," .Students who have taken loans to fund their foreign degree are also

bearing the brunt. Education loans are usually in rupees, but as students pay their

expenses in a foreign currency, the cost of education and stay has increased. For

$100,000, a student had to pay Rs 45 lakh. Now, he has to shell out Rs 52-54 lakh,

depending upon the exchange rate. "The cost is in a foreign currency while the

borrowing is in rupees. So, the students may fall short of funds as the loan would have

been taken according to the initial requirements. In such a scenario, either the

student's personal contribution will have to increase or he will have to ask the bank

to increase the loan amount.

52

IMPACT ON JOBS AND REMUNERATION

Not only is the rupee falling, for some, the pay cheque may shrink as well. Every

industry which is dependent on imports will have to face an increase in cost of production

and operations. And this is the reasons that salaries have been cutted out and

it ultimately effects the house hold budget.because salaries are not

increasing with the increase in prices rather it is decresing."In order to nullify

the increase, these companies will have to rationalise costs within their control. One

of this will be human resources. So, either lesser number of people will be hired or the

salary bill will be kept constant or reduced," says Rituparna Chakraborty, co-founder

and senior vice president, Team Lease Services.

However, it is a good time for industries which earn in dollars. "The information

technology sector stands to gain, but global recessionary conditions may set off the

impact,.The cost of buying a house; Across major cities is beyond the reach of most.

They either pay a very high rent, or have taken loans to buy a house, mostly in the

suburbs. The EMI is the biggest draw on a family's income.

The next big drain is in the form of transportation expenses to commute to school,

work and social outings. Several maintain multiple vehicles, from cars to a bike per

adult family membersThe next big drain is in the form of transportation expenses to

commute to school, work and social outings. Several maintain multiple vehicles,

53

fromcars to a bike per adult family members

Impact on VACATIONS - The falling rupee is bad news for Indians and

vacationers to a foreign country. "Air fares are going up due to an increase in fuel

surcharge. The stay will be costlier by at least 3-5%. Also, shopping can become

expensive by 5%. Eating out will also be costlier by the same percentage," says Karan

Anand, head, relationships, Cox & Kings India.

However, that holiday package you booked in advance before the rupee fell is safe.

The impact of rupee depreciation will not become evident immediately as most people

usually make travel plans well in advance

Actual impact is that the patterns'holidays are

being cut short, short-haul destinations are being preferred and people are opting for

non dollars destinations such as Sri Lanka d, Dubai, Bali and Phuket or sticking

to domestic destinations such as Kashmir, Kerala and Goa," says Anand

Kandadai, senior vice president, holidays, Makemytrip.com..

54

Impact on re -insurers

The depreciation of the rupee will not impact customers but will cost re-insurers more.

But if this trend continues there is a strong case for upward revision of premiums,"

says Gaurav Garg, MD and CEO, Tata AIG General insurance

Impact on BUYING A CAR

The depreciation of rupee has impacted the automobile sector in three ways. First,

input costs have risen as these companies use imported components. Second, some

companies will have to pay higher royalty to foreign parent firms. Third, many

have foreign currency loans in the form of external commercial borrowings and

foreign currency convertible bonds. Therefore, more or less all auto companies will

have to increase prices.

Ultimate effect of all these - that the common man is not in position to buy

a car in india even with a good and normal salary in todays era.

Impact on entertainmentThe imported paperback, your favourite pizza and the latest laptop will also become

more expensive. "There is an increase in the cost of imported books as well as the cost of

sourcing them. 

In most cases we are trying to absorb the increased cost, but there may be scenarios where

the end-user will get impacted," says Ankit Nagori, VP, categories, Flipkart.com.

Electronic consumer goods such as computers, televisions, mobile phones, etc, with

imported components will also become costlier. International food chains which run

outlets in India are not denying the impact on profitability. 

55

"The depreciating rupee has had a significant impact on our capital expenditure as we

import a lot of special kitchen equipment. There has been an indirect impact too as a small

part of inputs are imported by our suppliers. If the trend continues, it will be forced to

pass on some burden to customers .

CHAPTER -2

56

OBJECTIVES OF THE STUDY

OBJECTIVES OF THE STUDY

This research is conducted with a view to study the impact of

inflation on the house hold budget of Indian citizens especially

in Ludhiana city.

To study the effects and causes of inflation

To analyse the past trends of inflation

To study the effects of inflation on the house hold budget

on the citizens of India.

57

CHAPTER - 3

58

RESEARCH

METHODOLOGY

RESEARCH METHODOLOGY

Research is regarded as a systematic process of identifying market problems and

than gathering recording and analyzing the data about in order to get a justified

solution for the problems.

Research methodology enumerates the description of the sampling plan, reaserch

instruments used for the collection of the data, pretesting of the questionnaire, the

use of the statistical tools and the technique for the analysis of the collected data

It is the way to systematically solve the research problem. It is the specification

method of acquiring the information needed to structure or solve the problem at

hand.

This part of report describe the methodology for conducting the reaserch.

RESEARCH DESIGN: the research design is the conceptual structure with

in which the research is conducted: it consists of the blueprint for the

59

collection, measurement and analysis of data. The purpose of the research design

is to ensure that the data collected is accurate and relevant. Any research work

requires clarify of objectives to be achieved efficiently. Research design is to

chosen that the analysis is accurate. The design for the research conducted is

descriptive in nature.

SAMPLING DESIGN: it is a definite plan for obtaining a sample from a

given population. It refers to the technique or the procedure a researcher would

adopt in selecting the items for the sample.

It includes:-

Selection of population:-Due to the constraints, the study has been

conducted in the city Ludhiana.

Selection of sample:

A random sample of population of And the normal house wives women and

service class men and some educated persons are chosen for this.

Sample size: The sample size refers to the number of items to be selected

from the population to constitute a sample, the sample for this research was

100 respondents of which some are students and the people of house hold.

Sampling techniques:

The sampling technique used in this research is convenience sampling to reach

the ultimate target group.

Research method:

Both primary and the secondary sources of data were used to collect the

information. The primary data was collected through unbiased structured

60

questionnaire . the questionnaire was developed so as to obtain responses relevant

to objectives of the research while designing the questionnaire every attempt

was made to make it precise so that the process of filling up the reponses

doesn’t consume too much time.

The secondary information was collected from book, newspaper and internet.

Data analysis and interpretation technique:For data analysis and

interpretation, the data was processed with various tools such frequencies of

responses and percentages. For interpretation, the various tools such as tables,

graphs and pie charts have been drawn

61

CHAPTER - 4

62

DATA ANALYSIS AND

INTERPRETATION

4.1 AWARENESS OF THE PEOPLE REGARDING THE INFLATION .

TABLE 4.1 SHOWS THE AWARENESS OF THE PEOPLE REGARDING THE INFLATION

OPTIONS FREQUENCY NO.OF RESPONDENTS

YES 98 98%

NO 2 2%

TOTAL 100 100%

63

GRAPH 4.1 SHOWS THE AWARENESS OF THE PEOPLE REGARDING THE

INFLATION .

ANALYSIS : Out of 100 respondents , 98% people are aware about the concept of inflation where as

2% people are unaware.

INTERPRETATION : Majority of people are aware about the concept of inflation

.

4.2- MONTHLY SALARY OF PEOPLE Table 4.2 shows the monthly salary of the

people

OPTIONS FREQUENCY NO.OF RESPONDENTS (%)

10000 TO 20000 50 50%

20000 TO 40000 30 30%

40000 TO 60000 12 12%

60000 TO 100000 8 8%

TOTAL 100 100%

64

Graph 4.2 shows the different different salaries of the people

Analysis:Out of 100 respondents,

50% salary of the people is between 10000 to 20000, 300% salary of the people is between

20000 to 40000, 12%salary of the people is between 40000to 60000, 8% salary of the

people is between 60000 to 100000.

Interpretations : Majority of the people salary is between 10000 to 20000 rather than

comparing the salary in Between 60000 to 100000.

65

4.3:Monthly household budget of the common man showing the expected

expenses.Table 4.3 shows the monthly expenses in the house hold budget of the common man

OPTIONS FREQUENCY NO.OF RESPONDENTS (%)

8000TO 12000 19 19%

12000 TO 16000 62 62%

16000 TO 20000 12 12%

20000 TO 24000 7 7%

TOTAL 100 100%

Graph 4.3 shows the various expenses of the common man in thier house hold budget

Analysis: out of 100 respondents

19% the people 'expenses is between 8000 to 12000

62% of the people' household expenses is between 12000 to 16000

12%of the people' household expenses is between 16000 to 20000

7% of the people's house hold expenses is between 20000 to 24000

Interpretation: Majority of the people's expenses is between the ranging 12000 to 16000

66

4.4:Effect of inflation on different different classes of

consumer Table 4.4 shows the class of the consumer which is more affected

OPTIONS FREQUENCY NO.OF RESPONDENTS (%)

LOWER LEVEL 20 20%

MIDDLE LEVEL 75 75%

UPPER LEVEL 5 5%

TOTAL 100 100%

Graph 4.4 shows the THREE VARIOUS CLASS WHICH IS MORE LIKELY TO

EFFECTED BY INFLATION

ANALYSIS: OUT OF 100 RESPONDENTS

20% People is more likely to effected which are belong from lower level

75% people is more likely to effected which are belong from the middle level

5% people is more likely to effected which are belong from the upper level

Interpretation: Majority the middle level of consumers is likely to be effected

.67

4.5:- MOST EFFECTED ITEM IN THE HOUSEHOLD BUDGET DUE TO

INFLATION.

Table 4.5 shows the the most effected item in the house hold budget of the citizen

OPTIONS FREQUENC

Y

NO.OF RESPONDENTS

(%)TELEPHONE BILL 12 12%

GROCERY BILL 58 58%

VACATIONS / ENTERTAINMENT BILL 5 5%

CHILDREN EDUCATION BILL 25 25%

TOTAL 100 100%

Graph 4.5 shows the item in the house hold budget which is more likely to be effected

Analysis: out of 100 respondents

12% of the people says that the telephone bill is effected, 58% of the people says that the grocery bill is effected, 5% of the people says that the vacations is effected, 25% of the people says that the children education is effected.

Interpretations : Majority of the expense which is effected is the grocery bill.

68

4.6: INVESTMENT OF SAVINGS IN DIFFERENT DIFFERENT

ALTERNATIVES ACCORDING TO THE PEOPLE PRECEPTION

IN ORDER TO SAVE THEMSELVES FROM :

Table no 4.6 shows the investments of savings in different different alternatives

OPTIONS FREQUENCY NO.OF RESPONDENTS (%)GOLD 50 50%

PROPERTY OR REAL ESTATE 20 20%

SECURITY MARKET 5 5%

BANK 25 25%

TOTAL 100 100%

Graph 4.6 shows that that people preception towards savings in different diferent

alternatives

Analysis: out of 100 respondents

50% of the people would like to invest thier savings in gold

20% of people would like to invest their savings in property and real estate

5% of people would like to invest their savings in the security market

25% of people would like to invest their savings in the bank

Interpretations:Majority of the people would like to invest in gold.

69

4.7 : ACCORDING TO THE PEOPLE THE BASIC REASONS FOR

INFLATION .

Table 4.7 shows basic reasons for the inflation

according to the people

OPTIONS FREQUENCY NO.OF RESPONDENTS (%)

DEVALUATION OF RUPPEE 12 12%

INCREASE IN POPULATION 55 55%

LOW PRODUCTION AND LOW TECHKONOLOGY 22 22%

GOVERNMENT NON WORKING ACTIVITIES 11 11%

TOTAL 100 100%

Graph 4.7 shows the basic reasons of inflation to the people

Analysis: out of 100 respondents

12% of the people says that devaluation of the rupee is the reason

55% of the people says that increase in population is the reason

22% of the people says that low in production and low technology is the reason

11% of the people says that government non working policies and activities is the reason.

Interpretations:Majority of the people says that increase in population is the reason.

4.8 – INFLATION EFFECT ON LPG CYLINDER VERY MUCH SPECIALLY TO 70

COMMON MAN

Table 4.8 shows the effect of increase in the prices of lpg on common people

OPTIONS FREQUENCY NO.OF RESPONDENTS (%)

STRONGLY AGREE 65 65%

AGREE 25 25%

DISAGREE 8 8%

STRONGLY DISAGREE 2 2%

TOTAL 100 100

Graph 4.8 shows the effect on common man due to increase in the prices of lpg

cylinders

Analysis: out of 100 respondents

65% of the people are strongly agree that increase in lpg prices effected them.

25% of the people are agree that increase in lpg prices effected them

8% of the people disagree that increase in lpg prices effected them

2% of the people strongly disagree that increase in lpg prices effected them

Interpretation: Majority of the people strongly agree that increase in the lpg prices

has really effected them

71

4.9–STEPS THAT GOVERNMENT SHOULD TAKE TO REDUCE INFLATION .

Table 4.9 shows the steps that governm ent should taken

OPTIONS FREQUENCY NO.OF RESPONDENTS (%)

CHECK ON BLACK MONEY 50 50%

STOPPAGE OF CORRUPTION 20 20%

IMPORT OF ESSENTIAL GOODS 5 5%

CONTROL ON POPULATION 25 25%

TOTAL 100 100%

Graph 4.9 shows the steps that government should need to take

Analysis: out of 100 respondents

50% of the people says that government should check on the black money

20% of the people says that government should stoppage of the corruption

5% of the people says that government should import only essential goods

25% of the people says that government should control on population

Interpretation:Majority of the people says that government should check on black money.

72

4.10 – PEOPLE GOT THEIR LANDLINE TELEPHONE DISCONNECTED BECAUSE OF FIXED COST.

Table 4.10 shows that people got their landline phone disconnected because of fixed costOPTIONS FREQUENCY NO.OF RESPONDENTS (%)STRONGLY AGREE 64 64%

AGREE 22 22%

DISAGREE 6 6%

STRONGLY DISAGREE 8 8%

TOTAL 100 100%

Graph 4.10 shows that the people got their telephone dissconnected due to fixed costsAnalysis: out of 100 respondents,64% of the people are strongly agree that they got their telephone

disconnected .

22%of the people are agree that they got their telephone

discoonnected

6% of the people are disagree that they got thier telephone

disconnected

8% of the people are strongly disagree that they got their telephone

disconnected.

Interpretation; Majority of the people are strongly agree they got their telephone disconnected.

4.11 – STEPS TAKEN BY THE PEOPLE IN RESPECT OF 73

THEIR TRAVELLING EXPENSES DUE TO INFLATION .

Table 4.11 shows that steps taken by the people in respect of their travelling

expenses due to inflation

OPTIONS FREQUENCY NO.OF RESPONDENTS (%)

LESS TRAVELLING 48 48%

USE CHEAPER MODE OF TRANSPORTATION 35 35%

PREFER WALK INSTEAD OF USING VEHICLE FOR SHORT DISTANCE 5 5%

NO CHANGE 12 12%

TOTAL 100 100

Graph 4.11 shows that steps taken by the people in respect of their travelling expenses due to inflationAnalysis: out of 100 respondents

48% of the people says that they do less travelling

35% of the people says that they prefer cheaper mode of transportation

5% of the people says that they prefer walk instead of using vehicle for short distance

12% of the people says that they will remain same and no change occur

Interpretations: Majority of the people says that they would like to travell less.

4.12- PURCHASING POWER OF THE PEOPLE HAS BEEN REDUCED DUE TO

74

INFLATION.

Table 4.12 shows the purchasing power has been reduced due to inflation

OPTIONS FREQUENCY NO.OF RESPONDENTS (%)

STONGLY AGREE 48 48%

AGREE 44 44%

DISAGREE 8 8%

STRONGLY DIS AGREE 2 2%

TOTAL 100 100%

Graph 4.12 shows the purchasing power has been reduced due to inflation

Analysis : out of 100 respondents,48% of the people are strongly agree the that the purchasing power has been reduced to inflation

44% of the people are agree that the purchasing power has been reduced to inflation

8% of the people are disagree that the purchasing power has been reduced to inflation

2% of the people are strongly disagree that the purchasing has been reduced to inflation

Interpretations:Majority of the people strongly agree that the purchasing power has been reduced.

75

4.13- PEOPLE PRECEPTION ABOUT THERE IS ANY ACTION TAKEN BY

GOVERNMENT TO REDUCE INFLATION ON FOOD PRICES.

Table 4.13 shows that people preception about

about is there any action taken by government or not

OPTIONS FREQUENCY NO.OF RESPONDENTS (%)

YES 15 15%

NO 85 85%

TOTAL 100 100

Graph 4.13 shows the people preception about is there any actions taken by governmentAnalysis : out of 100 respondents,

15% of the people says that they think that government is taking actions to control over

the prices

85% of the people says that they think that government is not taking any actions to

control over the prices

Interpretaion: Majority of the people considers that government is not taking any

actions

76

4.14 –PEOPLE PRECEPTION ABOUT HOW COMMON MAN

CAN HELP THE GOVERNMENT TO REDUCE INFLTION .

Table 4.14 shows that the preception of people how a common man can help the Government to reduce the inflation

OPTIONS FREQUENCY NO.OF RESPONDENTS (%)

YES 45 45%

NO 55 55%

TOTAL 100 100

Graph 4.14 shows that preception of people how a common man can help

the government to reduce the inflation

Analysis: out of 100 respondents,

45% people says that the common man can help the government to reduce the prices

55% people says that the common man can not help the government to reduce the prices.

Interpretation:Majority of the people says that the common people cannot help the government to reduce

the prices.

77

4.15 – PEOPLE PRECEPTION ABOUT THE FUTURE SCENARIO OF INFLATION IN INDIA .

Table 4.15 shows the people preception about the future scenerio of inflation in india

OPTIONS FREQUENCY NO.OF RESPONDENTS (%)EFFECT ON STANDARD OF LIVING

23 23%

EFFECT ON HEALTH AD EDUCATION

37 37%

HIGH RATES OF LOAN 18 18%EFFECT ON VALUE OF CURRENCY

22 22%

TOTAL 100 100

Graph 4.15 shows the people preception about the future scenario of inflation in india

Analysis: out of 100 respondents23% people says that if it will continue like that it will effect on the living standard of the people37% people says that if it will continue like that it will effect on the living standard of the people18% people says that if it will continue like that it will effect on higher rates of inflation22% people says that if it will continue like that it will effect on the value of currencyInterpretations:Majority of the people says that it will effect on the standard living of the people

78

CHAPTER- 5

FINDINGS & RECOMMENDATIONS

Findings:

79

OUT OF 100 RESPONDENTS , 98% PEOPLE ARE AWARE ABOUT THE CONCEPT

OF INFLATION WHERE 2% ARE UNAWARE

50% salary of the people is between 10000 to 20000

300% salary of the people is between 20000 to 40000

12%salary of the people is between 40000to 60000

8% salary of the people is between 60000 to 100000.

19% the people 'expenses is between 8000 to 12000

62% of the people' household expenses is between 12000 to 16000

12%of the people' household expenses is between 16000 to 20000

7% of the people's house hold expenses is between 20000 to 24000

20% People is more likely to effected which are belong from lower level

75% people is more likely to effected which are belong from the middle level

5% people is more likely to effected which are belong from the upper level

12% of the people says that the telephone bill is effected

58% of the people says that the grocery bill is effected

5% of the people says that the vacations is effected

25% of the people says that the children education is effected.

50% of the people would like to invest thier savings in

gold

20% of people would like to invest their savings in property and real estate

5% of people would like to invest their savings in the security market

25% of people would like to invest their savings in the bank

12% of the people says that devaluation of the rupee is the reason

55% of the people says that increase in population is the reason

22% of the people says that low in production and low technology is the reason

11% of the people says that government non working policies and activities is the reason.

65% of the people are strongly agree that increase in lpg prices effected them.

25% of the people are agree that increase in lpg prices effected them

8% of the people disagree that increase in lpg prices effected them

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2% of the people strongly disagree that increase in lpg prices effected them

50% of the people says that government should check on the black money

20% of the people says that government should stoppage of the corruption

5% of the people says that government should import only essential goods

25% of the people says that government should control on population

64% of the people are strongly agree that they got their telephone disconnected .

22%of the people are agree that they got their telephone discoonnected

6% of the people are disagree that they got thier telephone disconnected

8% of the people are strongly disagree that they got their telephone disconnected.

48% of the people says that they do less travelling

35% of the people says that they prefer cheaper mode of transportation

5% of the people says that they prefer walk instead of using vehicle for short distance

12% of the people says that they will remain same and no change

occur

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Recommendations(1)It has been recommended the banking system should reduce interst rates. This is

expected to make money available for businesses to invest in producing what the

households demand, while also enabling them to borrow for their homes, education

and vehicles at a lower cost

.

(2)This is expected to increase the production of goods and services in the system

(what is measured as GDP growth) and bring down the prices eventually.

(3)The underlying cause for the uncontrolled inflation in the key consumbales of the

household is the failure of the government to do its job. Providing good quality public

transport, ensuring that real estate markets g are not skewed in favour of developers

and builders, constructing quality educational institutions to meet the growing demand

of a young population is the responsibility of the government

(4)Private players should offer these services at unsurious costs to meet the demands

of a growing middle class, which aspires to move up the ladder and secure a higher

level of income. If policy action is needed to help households manage inflation, it is in

building the infrastructure that the growing middle class needs to manage its monthly

budgets efficiently

(5)State government should tap new sources of revenue and reduce unnecessary

expenditure . central government should also make efforts to cut down its non-

development expenditures. Government should encourage savings and investment

by making use of its fiscal weapons.

(6)Unless u give a boost to national products they will not get boost and the quality

will also not improve I tend to bye national products I agree they a bit lower in quality

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but unless u bye them they can not develop an r&d to develop them one must bye

national products that is gandhiji started his campaign

CHAPTER- 6

LIMITATIONS OF THE

STUDY

83

SCOPE AND LIMITATIONS OF THE STUDY

SCOPE :

Scope was limited to the geographical boundary of the Ludhiana city.

LIMITATIONS OF THE STUDY

Due to the resources and time constraints the study was limited to the

Ludhiana city.

Sample was chosen according to the convinience and such sample might not

be representative of the universe.

Being an opinion survey the personal biases of the respondents might have

entered in their responses.

At various stages, the basic objective of the study is suffered due to

inadequacy of time series data from related agencies.there has also been a

problem of sufficient homogenous data from different sources.

As this study and its result are based on primary data, the probability of

personal bias cannot be overruled.

Since the sample size was 100, so the findings and conclusion of the study are

only suggestive not conclusive, in spite of the best and honest efforts.

It cannot be accepted as a piece of excellence and is limited to the knowledge

and different different experience of house wives and another people.

Above all ,since it is a B.B.A project and the research was faced with the

problem of various resources like time and mo

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CHAPTER-7

CONCLUSION

85

CONCLUSION

The conclusion arrived from the above from the analysis, shows that

1. In short , in india, the tendency of price rise is being encouraged by the

several factors such as rise in demand, fall in supply, failure in

administration, anti social activities of vested interst and unfavourable

global situations.

2. it is difficult to reach any decision regarding the relation between

inflation and economic development . historically, economic development

and inflation have no definite relationship. For example, between 1870

and 1895 prices fell in America yet the rate of economic development

remained high. In india, during the first plan period prices remained low

yet economic growth was satisfactory.

3. The price rise has clearly impacted the poor rural households, leaving the

poorer among them in a state of helpless desperation. Not only has the price

rise rendered many commodities unaffordable on a regular basis (and thereby

reduced consumption below levels termed as adequate nutrition), but it has

also resulted in the household facing hardships in other spheres of the

household. Over the long term worrying trends are likely to consolidate,

wherein households are forced to sacrifice necessities such as professional

healthcare and children’s education just to make space for sufficient food to

survive. Urgent action is the need of the hour.

4. It is not necessary that the inflation promotes economic development or

that falling prices invariably prove condusive to economic growth.

5. It has been concluded that the mild dose of inflation is useful for the

economic growth. But one must not be indiscreet. Inflation must be kept

well within the limits.

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6. As a matter of fact , economic development depends upon several

economic and non economic factors. It is therefore difficult to say with

certainity whether inflation promotes or retards growth.

7. One advantage of it will be that propensity to consume of the rich

farmers will go down. The other will be that the burden of taxes on

non agricultural sector will be reduced.

8. Another aspect of the fiscal policy is to reduce the unnecessary public

expenditure to the minimum

9. From the above it is clear that rise in level could not be checked

inspite of the best efforts put by the government. The political changes

in the country is also becoming a stumbling block in its way.

10. There has been no stable government at the centre for the last so many

years, only elections and elections are being seen. No proper policy has

been framed.

11. The present politicians are worried more for their chairs than in any

economic reform. Under such a situation only the chair can be protected

and safeguarded no economic reform can be implemented. conclusion

12. In short, the problem of rise in prices has put economists all over the

world in a great fix. So it is not only a economic problem but a

political, social and the international problem also. And so has got to

be tackled at the economic, social and the political levels.

13. If the rise in prices is not checked it might endanger the very

existence of capitalism not only in india but through out the world. We

have to choose between alternatives of checking of the price rise or be

perished. In the words of S.S AIYAR ,’’ INCREASE IN SUPPLY ARE

NOT DOUBT IMPORTANT FOR CONTROLLING PRICES BUT

THEY ARE NOT ENOUGH . WE MUST ALSO HAVE MONETARY

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DISCIPLINE, PRICING DISCIPLINE, EFFICIENT PUBLIC

INVESTMENT AND BALANCED IMPORTS

SUGGESTIONS

(1)Buy only products manufactured by wholly indian companies.

(2)People don’t need to give up their lifestyle.they just need to choose an alternate

products.all categories of product are available from wholly indian companies .

The list of products are:

Cold drinks: drink lemon juice,fresh fruit juices,butter milk,jaljeera instead of

coca cola , pepsi,lmca,mirinda,sprite etc.

Bathing soap: use cinthol and other godrej

brands,santoor,shikakai,medimix,ganga instead of

lifebuoy,rexona,liril,dove ,pears,hamam

Toothpaste: use neem,babool,vicovaradanti instead of cibica,colgate,close up

and pepsodent.

Shaving cream: use godrej,emami instead of old spice and gillete.

Telcum powder: use santoor,babypowder instead of ponds johnsons

Shampoo: use nirma instead of sunsilk, pantene.

Food items: eat tandoori chicken,home made food instead of axe,faa etc.

So every indian products you buy makes a big difference. It will save india

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BIBLOIGRAPHY

89

BIBLIOGRAPHY

WEBSITES:

http://www.deal4loans.com/loans/uncategorized/effects-of-inflation-on-

common-man-budget/

http://www.hindustantimes.com/business-news/inflation-effect-living-only-

on-special-occasions-surviving-on-a-daily-basis/article1-1095809.aspx

http://www.resolutionfoundation.org/media/media/downloads/

Priced_Out.pdf

http://www.studymode.com/subjects/inflation-and-its-impact-on-

household-budgets-page1.html

http://post.jagran.com/Budget-is-causing-rise-in-inflation-household-

budgets-under-pressure-1333564536

http://wiki.answers.com/Q/

What_is_inflation_and_its_impact_on_Indian_economy?#slide=1

http://stockshastra.moneyworks4me.com/basics-of-investing/inflation-

and-the-common-man/

http://indiatoday.intoday.in/story/inflation-forces-common-man-

compromise-his-lifestyle/1/158722.html

http://en.wikipedia.org/wiki/Middle-class_squeeze

http://articles.economictimes.indiatimes.com/2012-09-03/news/

33563220_1_household-budget-inflation-household-income

http://indiatoday.intoday.in/story/inflation-forces-common-man-

compromise-his-lifestyle/1/158722.html

http://www.mybudget360.com/inflation-middle-class-poor-fed-qe3-

impact-on-inflation-cpi-components

http://www.nielsen.com/us/en/newswire/2013/middle-class-state-of-mind-

or-share-of-wallet-.html90

http://wiki.answers.com/Q/

What_is_the_impact_of_inflation_in_Indian_economy?#slide=1

http://www.slideshare.net/BabasabPatil/effect-of-inflation-on-indian-

economy-ppt

http://www.frbsf.org/education/publications/doctor-econ/2007/november/

oil-prices-impact-economy

http://www.brookings.edu/blogs/up-front/posts/2011/07/05-india-inflation-

prasad

http://www.economywatch.com/inflation/effects.html

http://www.deal4loans.com/loans/articles/impact-of-inflation-on-home-

loan/

http://www.livemint.com/Politics/L84eV0jEY66KH0plk61RRN/Inflations-

impact-on-the-middleclass.html

http://iamsam.hubpages.com/hub/The-Effects-of-Inflation

http://www.commodityonline.com/news/inflation-causes-sharp-drop-in-

real-income-of-indian-middle-class-57044-3-57045.html

http://economictimes.indiatimes.com/opinion/guest-writer/inflation-will-

crush-middle-class/articleshow/7394653.cms

http://indianexpress.com/tag/impact-of-inflation-among-the-middle-class/

http://www.domain-b.com/economy/general/20130622_survey.html

http://www.abhinavjournal.com/images/Commerce_&_Management/

Apr12/8.pdf

http://trak.in/tags/business/2011/04/05/inflation-middle-class-consumer-

spending/

http://www.foodnavigator-asia.com/Markets/Survey-Food-inflation-

biting-hard-into-India-s-middle-class

http://www.foodnavigator-asia.com/Markets/Survey-Food-inflation

BOOKS:91

C.N.SONTAKKI - reaserch methodology

INFLATION RATES OVER THE YEARS available at http;//

business.mapsofindia.com/inflation (accessed on 7 october 2012)

Ball, R.J. “Inflation and The Theory of Inflation”, by ashwini arora

T.R.JAIN “INDIAN ECONOMY”

ANNEXURE

92

Budget calculator

93

You need a budget to check if you are on the right track to savings and investments. A

budget will also keep a tab on your daily spending habits.

Mouseover on   the for more information

  IncomeMonthly Income

(Rs)

Annual income

(Rs)

Salary

Pension

Rental Income

Interest

Dividends

Others

  Total

 

  Housing and debtMonthly Income

(Rs)

Annual income

(Rs)

Home Loan EMI

Car loan

94

Personal loan

Credit Card

Others

  Total

Ideal budget allocation should not be more than 30%

 

  TaxMonthly Income

(Rs)

Annual income

(Rs)

Income tax on salary

Tax on rental income

Tax on interest/ dividends

  Total

Ideal budget allocation should not be more than 30%

 

  InsuranceMonthly Income

(Rs)

Annual income

(Rs)

95

Life

Medical

Car

Household

Others

  Total

Ideal budget allocation at least 4%

 

  Savings and investmentMonthly Income

(Rs)

Annual income

(Rs)

EPF

PPF

Mutual funds

NSC

Deposits

96

Others

  Total

Ideal budget allocation at least 15%.

 

  Living expensesMonthly Income

(Rs)

Annual income

(Rs)

Food

Clothing

Electricity

Petrol

Other transport

Cable

Newspaper/ magazines

Household help

Society charges

Milk

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Telephone

Water

Children school fees

Tuition fees

Personal care

Doctor/ medicines

Entertainment/ hobbies

Others

  Total

Ideal budget allocation should not be more than 21%

QUESTIONNAIRE

I Neha kumari, student of bba 3 of KHA;SA COLLEGE FOR

WOMEN,I am conducting a survey on “ impact of inflation on the

house hold budget of indian citizens”. Kindly help me in filling the

questionnaire completely.

Name : ………………………………………………………….

Address : ……………………………………………………….

98

Phone no. : ………………………………………………..

Gender: male ( ) female ( )

Q.1: Are you aware about the the concept of inflation in india?

Yes ( ) no( )

Q.2: What is your monthly estimated salary?

(1) 10000 to 20000 [ ]

(2) 20000 to 40000 [ ]

(3 ) 40000 to 60000 [ ]

(4) 60000 to 100000 [ ]

Q.3: What is your monthly household budget for expenses?

(1) 8000 to 12000 [ ]

(2) 12000 to 16000 [ ]

(3) 16000 to 20000 [ ]

(4)20000 to 24000 [ ]

Q.4: Which class of consumer is more effected

(1 ) Lower level [ ]

99

(2) Middle level [ ]

(3) Upper level [ ]

Q.5: Which is the most effected item in your household budget due to inflation

(1) Telephone bill [ ]

(2) Grocery bill [ ]

(3) Vacations and entertainment bill [ ]

(4) Children education expenses [ ]

Q.6: How you are investing your savings in different different

alternatives?

(1) Gold [ ]

(2) Property/real estate [ ]

(3 ) Security market [ ]

(4) Bank [ ]

Q.7: According to you what are the basic reasons for inflation?

(1) Devaluation of rupees [ ]

100

(2) Increase in population [ ]

(3) Government non working activities [ ]

(4) Unfavourable terms and trade [ ]

Q.8: Increases in the prices of lpg cylinders have effected my budget

very much

(1) Strongly agree [ ]

(2) Agree [ ]

(3) Disagree [ ]

(4) Strongly disagree [ ]

Q.9: According to you which steps government should taken to

reduce the inflation?

(1) Check on black money [ ]

(2 ) Stoppage of corruption [ ]

(3) Import of essential goods [ ]

(4) Control on population [ ]

Q.10: I got my landline telephone disconnected because of fixed cost.

(1) Strongly agreee [ ]

(2 ) Agree [ ]

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(3) Disagree [ ]

(4) Strongly dis agree [ ]

Q.11: What are the steps you took with respect of your travelling

expenses due to inflation?

(1) Less travelling [ ]

(2) Use cheaper mode of transportation [ ]

(3) Prefer walk instesd of using vehicle for short distance [ ]

(4) No change [ ]

Q.12: The purchasing power of people has been reduced due to

inflation?

(1) Strongly agree [ ]

(2) Agree [ ]

(3) Disagree [ ]

(4) Strongly disagree [ ]

Q.13: Do u think that government is taking any actions to reduce the

inflation on food items?

(1) Yes [ ]

(2) No [ ]

102

Q.14: Do you think that a common man can help the government to

reduce the inflation ?

(1) Yes [ ] (2) No [ ]

Q.15: According to you what would be the future scenario of inflation

in india?

(1) Effect on standard of living [ ]

(2)Effect on health/education [ ]

(3) High rates of loan [ ] (4) Effect on currency [ ]

103