1. International
Business
Inflation rate
In India
Prepared by -
Mohit makhija
Roll no. 29

2. What is Inflation ?
Inflation is an increase in the price of a basket of goods and
services that is representative of the economy as a whole.
Every week we talk about inflation and we might have to know
how its calculated in India. There are several ways every country
use first we will see how India calculates it .
How India calculates Inflation?
India uses the Wholesale Price Index (WPI) to calculate and
then decide the inflation rate in the economy.
What is Wholesale Price Index?
WPI is the index that is used to measure the change in the
average price level of goods traded in wholesale market. In India,
a total of 435 commodities data on price level is tracked through
WPI which is an indicator of movement in prices of commodities
in all trade and transactions.
Inflation
The industrial houses as well as the policy makers are all worried
with the constant increase of the inflation in India since March of
2008. In economics, inflation refers a general increase in the
prices measured against a general level of the power to purchase.
In earlier times this term used to refer to increase in money
supply. This is currently referred as monetary inflation or
expansionary monetary policy. The measure of inflation is
measured by comparing two sets of goods at different times.
The computing for the increase in the cost which is not reflected
by increase in the quality is carried out. The various measures of
inflation depend on the particular circumstances. The most
popularly known method is the CPI. In this method the measures

3. are the consumer prices, as well as the Gross Domestic Product
(GDP) deflator. In this way the total domestic economy is
measure. The prevalent view for economics (mainstream) is due
to the interaction of the supply of money with output and interest
rates. The views of the economists are broadly divided in two
camps- the "monetarists" and the "Keynesians".
The related concepts for calculating inflation of a country
comprise deflation, disinflation as well as hyper-inflation.
Deflation is in general the falling level of prices. The disinflation
and the hyper-inflation are all important aspects while calculating
the inflation rate of a country.
Inflation rate in India
The inflation rate in India was last reported to be 9.72 percent in
September of 2011. Since the year of 1969 till the year of 2010,
the average inflation rate in India was 7.99 percent. The inflation
rate of the country reached an historical high of 34.68 percent
during the month of September in the year of 1974. The lowest
was recorded in the month of May in the year of 1976. It was
reported to be as low as -11.31. The inflation rate in general
refers to the rise in the prices measured against the purchase
power at a standard level. The best known measure of Inflation is
the CPI which measures the consumer prices. The GDP deflator
also measures inflation in the total domestic economy.

4. India Inflation Rate Chart (in %)
Year Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec
2011 9.35 9.54 9.68 9.70 9.56 9.44 9.22 9.78 9.72 9.73
2010 16.22 14.86 14.86 13.33 13.91 13.73 11.25 9.88 9.82 9.70 8.33 9.47
2009 10.45 9.63 8.03 8.70 8.63 9.29 11.89 11.72 11.64 11.49 13.51 14.97

5. Causes of inflation
A sustained rise in the prices of commodities that leads to a fall in
the purchasing power of a nation is called inflation. Although
inflation is part of the normal economic phenomena of any
country, any increase in inflation above a predetermined level is a
cause of concern.
High levels of inflation distort economic performance, making it
mandatory to identify the causing factors. Several internal and
external factors, such as the printing of more money by the
government, a rise in production and labor costs, high lending
levels, a drop in the exchange rate, increased taxes or wars, can
cause inflation.
Different schools of thought provide different views on what
actually causes inflation. However, there is a general agreement
amongst economists that economic inflation may be caused by
either an increase in the money supply or a decrease in the
quantity of goods being supplied. The proponents of the Demand
Pull theory attribute a rise in prices to an increase in demand in
excess of the supplies available. An increase in the quantity of
money in circulation relative to the ability of the economy to
supply leads to increased demand, thereby fuelling prices. The
case is of too much money chasing too few goods. An increase in
demand could also be a result of declining interest rates, a cut in
tax rates or increased consumer confidence.
The Cost Push theory, on the other hand, states that inflation
occurs when the cost of producing rises and the increase is
passed on to consumers. The cost of production can rise because
of rising labor costs or when the producing firm is a monopoly or
oligopoly and raises prices, cost of imported raw material rises

6. due to exchange rate changes, and external factors, such as
natural calamities or an increase in the economic power of a
certain country.
An increase in indirect taxes can also lead to increased production
costs. A classic example of cost-push or supply-shock inflation is
the oil crisis that occurred in the 1970s, after the OPEC raised oil
prices. The US saw double digit inflation levels during this period.
Since oil is used in every industry, a sharp rise in the price of oil
leads to an increase in the prices of all commodities.
While money growth is considered to be a principal long-term
determinant of inflation, non-monetary sources, such as an
increase in commodity prices, have played a key role in triggering
inflation in the past four decades.
Inflation has become a major concern worldwide in 2008, with
global prices rises in oil, food, steel and other commodities being
the culprit

7. Inflation is caused due to several economic factors
Below is listed the many reasons behind the cause of
inflation in India in 2011
Inflation can be caused if the government prints notes in
excess. If there is a lot of money circulating in the market
then prices increase just to keep pace with the increase in
currency.
Sometimes a country demands more goods and services
than what it actually produces. This type of inflation is
known as Demands pull inflation.
Sometimes the price of a finished good is strikingly high, this
happens mainly if there is increase in its production and
labor cost. This increase in the cost of the final product also
leads to inflation.
Inflation also occurs with increasing interest rates.
Sometimes countries borrow money, which have high
interest rates attached to it. The burden that this rate of
interest causes also results in inflation.
Consumer products that carry high taxes can also cause
inflation.
Sometimes if a commodity or product is unavailable in the
market its prices tend to go up. This is known as Cost push
inflation or supply shock inflation.

8. Inflation in India in future
It is expected that the emerging markets, including India, will
perform well withstanding challenges like higher inflation as well
as the rising prices of the oils. It is assumed that the price of the
commodity will continue to maintain the upward march since the
developing countries are maintaining a very strong growth
momentum motivated by the by robust consumption. The
emerging markets will continue to do well. The strong growth
momentum is accelerating the growth. Indian economy is
expected to grow at 8 percent in this fiscal year 2011-12. The
developed markets are growing at the rate of 1.6 percent. The
emerging markets are experiencing the bull nature. The bear
nature is short-lasting in these economies. This bull phase is
going through a 20 year high. The growing price of oil in the
country is the factor behind the growth of the price of all other
commodities in India.
It is calculated on an annual basis on the Wholesale Price Index.
The Wholesale Price Index includes around 435 goods, based on
which the rate of inflation is calculated. However it is only in India
that the rate of inflation is calculated on the WPI in other
countries the rate of inflation is calculated on the Consumer Price
Index (CPI).
Inflation in India 2010 - 2011 was last recorded at 8.82 percent
in the month of February. Inflation in India in 2011 has already
touched the 9 percent mark which is a matter of concern for the
economy. The rate of inflation in January 2011 was 9.30 which
came down a little in February. The rate of inflation over the last
45 years maintained an average of about 7.99 percent. The rate
of inflation generally refers to rise in the prices of goods and
services measured against a basic level of purchasing power of
the people of the country. There are two well known instruments
used to measure Inflation namely; the Consumer Price Index and
the GDP deflator. The Consumer Price Index measures consumer

9. prices whereas the GDP deflator measures the total inflation of
the domestic economy.
The results of Inflation can actually be seen in Indian when we
end up buying lesser goods by paying excess. Such a
phenomenon mostly takes place when either there is too much
money supply in the economy or there is less supply of goods and
services. Over the years the one common factor of inflation has
been the increase in the supply of money. In order to give a
boost to the GDP during the economic slowdown that India faced
two years back, the government let loose its monetary policies.
The rates of Interest were lowered so that people could have
more disposable incomes. To add to this the price of crude oil
soar very high, this further fueled the inflationary pressure in
India.
Threats like building deficits, real estate bubbles and
manufacturing overcapacity also add to the inflationary trends in
the future. One of the most prevailing types of inflation that has
been plaguing the country since decades is 'Food Inflation'. This
is still one area where the government of the country is yet to
take notice about. Also the fast growing population, lack of proper
irrigation infrastructure, slow production capacity of land and
water shortage is a matter of concern for the future. These
factors put together can account for high rates of inflation in the
country.