Impact of Inflation during crisis of recession: An Indian Scenario

3.  Economic output slows
 Unemployment on rise
 Wage rate inflation trade off becomes exploitative.
 Industrial sector slows
 Inflationary pressure ( Negative and Positive)

4. Major Variables Recovery Recession
1. Industrial
production
Gradual
increase
Decline
2. Commodity prices -do- Decline
3. Cost of
production
Gradual
increase
Gradual
decline
4. Profits Satisfactory
level
Gradual
decline
5. Investment Replacement of
existing capital
equipment
Falls slowly

5. 6. Employment Gradual increase Starts
falling
7. Wage rate Improvement Starts
falling
8. Bank credit Liberal loans and
satisfactory
demand for
advances
improvement
Starts
falling
9. Bank Reserves Improvement Suffer a
setback

6. Country GDP growth rate
2006 2007 2008 2009
(forecast)
United states 2.8 2.0 1.4 -0.7
Germany 3.0 2.5 1.7 -0.8
United kingdom 2.8 3.0 0.8 -1.3
Japan 2.4 2.1 0.5 -0.2
India 9.7 8.7 7.8 6.3/ 5.8 *
Source: IMF and ES 2007 – 08, * - World bank

7. Countries Current Inflation (%)
New Zealand 3
UK 2.9
Australia 2.5
EU 0.6
Japan -0.3
US -0.4

8.  Industrial growth
◦ 11.8 per cent in 2006
◦ 9.2 per cent Nov 2007
 Index of industrial production (IIP) (released by GOI, on
12th
Dec 08)
◦ Factory output falling at a rate .4 per cent change in IIP
◦ Capital goods output growth was only 3.1 percent year on year
basis from 18.6 per cent in Sept 08.
◦ IIP for textile fabrics increased by 7.6 percent in 06 – 07 and has
slowed to 3.4 per cent
◦ Export sector declined 2.1 per cent in one month from Oct 08 to
Nov 08.

9. 0
10
20
30
40
50
60
70
1983 1993 - 94 1999 - 00 2004 - 05
Agriculture
Manufacturing
Construction
Trade, hotel
Services ( financial,
real, insurance
Transport , storage
and communication

10.  Business cycle and inflation are showing pro – cyclic
nature
 Unemployment is counter cyclic

11.  Mounting govt
expenditure – 3,08550
crores in Xth Plan)
 Increase in money
supply along with black
money.
 Population growth
 Fluctuation in out and
supply
 Administered prices
 Hike in oil prices
 Global inflation leading
to imported inflation

12. Year WPI
( percentage change)
CPI-IW (industrial Works)
( percentage change)
2000 – 01 7.1 3.8
01 – 02 3.7 4.3
02 – 03 3.4 4.0
03 – 04 5.4 3.9
04 – 05 6.4 3.8
05 – 06 4.4 4.4
06 – 07 5.4 6.7
07 – 08 4.7 6.2
08 – 09 8.3 9.1
09 – 10* 1.6 9.9

13. Figure 1: Depicting the trend comparision of WPI and CPI
0
2
4
6
8
10
12
2000
– 01
01 –
02
02 –
03
03 –
04
04 –
05
05 –
06
06 –
07
07 –
08
08 –
09
09 –
10*
Year
Percentchangeinpriceindex
WPI CPI Linear (CPI) Linear (WPI)

14. Fiscal yearArticles Weighted
% 2006 -07 2007 –
08
2008 -
09
2009 –
2010
(CMIE
Projected)
Primary articles 22.03 7.8 7.7 10.0 7.3
Fuel, power, light and
lubricant
14.23 5.6 1.0 7.4 -3.9
Manufactured products 63.75 4.4 5.0 8.0 1.4
Food products 11.54 3.2 4.3 9.7 15.0
Beverages tobacco and tobacco
product
1.34 7.4 10.3 9.5 4.5
Textiles 9.80 2.2 -1.1 6.1 3.2
Wood and wood products 0.17 6.1 4.6 8.8 1.6
Paper and paper products 2.04 6.9 1.8 4.4 1.2
Leather and leather products 1.02 -4.4 4.2 1.1 -1.0
Rubber and plastic products 2.39 6.6 7.3 4.6 2.7
Chemicals and chemical
products
11.39 3.0 5.6 7.1 3.7
Non-metallic products 2.52 12.9 8.9 3.7 3.4
Basic metals alloys and metal
products
8.34 6.7 7.1 14.3 -10.2
Machinery and machine tools 8.36 5.6 7.1 4.7 -1.4
Transport equipment and parts. 4.29 1.6 2.8 5.2 0.1
All Commodities 100.0 5.4 4.7 8.3 1.6

15.  The current economic scenario calls for public private
partnership, wherein both preventive and corrective
measures need to be taken up at various levels. This
is so advocated to prevent the society at large from
devastating effects of current WPI and CPI trends.
Rising energy, commodity prices have boosted
inflationary pressure
 Need to adapt to shift in purchasing power from
commodity users to entrepreneurs that can generate
employment as the people are the consumer as well
as the producers.

16.  The fluctuations in crude oil prices globally need to
be carefully handled as the entire burden of rising
import bill (3,20,641 crores; 33 percent of total
imports in 07 – 08)) is rising and with recovery the
disposable income also rises compounding the rising
demand.
 RBI should focus on CPI control as compared to WPI
and simultaneously promote growth, employment and
price stability.

17.  Need to emphasize on food grain production and
strictly work on strategy boosting agriculture sector
like Visesh Krishi Upaj Yonjana.
 The present sharp rise in prices in CPI is due to sharp
increase in prices of wheat, rice pulses etc. this rise is
leading to social problems like worsening the
economic condition of weaker sections, increased
corruption and pilferages in PDS ( Public
Distribution System).

18. Thank You