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
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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
80
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
81
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
82
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
84
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.
86
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
87
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
88
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
97
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 [ ]
101
(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
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