A Project Report

on
A study on the expansion of Inflationary Trends
in India

Submitted in partial fulfillment of the requirements

For the award of the degree of

Bachelor of Commerce ([Link]) (H)

To

Guru Gobind Singh Indraprastha University, Delhi

Guide: Ms. Isha Gupta Submitted by: Tanisha Aggarwal

Enrollment No.: 03490388822

Institute of Innovation in Technology & Management,

New Delhi– 110058
Batch (2022-2025)

1
 Certificate

I,[Link] Aggarwal , Roll No.- 03490388822 certifies that the Project Report

(BCom 216) entitled “A Project Report on expansion of inflationary trends in

India ” is done by me and it is an authentic work carried out by me at Institute of

Innovation in Technology and Management. The matter embodied in this project

work has not been submitted earlier for the award of any degree or diploma to the

best of my knowledge and belief.

Signature of the Student

Date:

Certified that the Project Report (BCom 216) entitled "A Project Report on

expansion of inflationary trends in India ” done by Ms Tanisha Aggarwal, Roll

No- 03490388822, is completed under my guidance.

Signature of the Guide

Name of the Guide:

Designation:

Date:

Countersigned

(Director/Project Coordinator)

FORMAT FOR CONTENTS & LIST OF TABLES/FIGURES/ SYMBOLS

2
 CONTENTS

S No Topic Page No

1 Certificate (s) ____

2 Chapter-1: Introduction of Topic 4-24

3 Chapter-2: Literature Review 25-31

4 Chapter-3: Research Methodology 32-36

5 Chapter-4: Data Analysis 37-56

6 Chapter-5: Conclusion and Suggestions 57-59

7 References 60

CHAPTER 1

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 INTRODUCTION

The rate at which the general level of prices for goods and services keep on rising, and

leads to subsequent fall in purchasing power of the currency, is often referred to as

inflation. So, when inflation rises, every Rupee spent by us would buy a smaller Quantity

of goods and/or services. Central banks i.e. The Reserve Bank in case of India, therefore

attempts to stop the severity of inflation.

In India, the Inflation is measured as the percentage change in the value of the Wholesale

Price Index (WPI) of a basket of goods and services on a year-on year basis.

Inflation is the percentage change in the value of the Wholesale Price Index (WPI) on a

year-on year basis. It reflects the change in the prices of a basket of goods and services in

a year. In India, inflation is calculated by taking the WPI as base. But, to the contrary, in

the majority of other countries, it is measured as a retail or consumer price index.

Formula for calculating inflation:-

(WPI in the month of current year-WPI in same month of previous year)

4
---------------------------------------------------------------------------------------------- X 100

WPI in same month of previous year

Inflation is the price rise of goods and services, which decrease the purchasing capacity

of the people. When the general price level rises, for every unit of currency fewer goods

and services can be purchased. Consequently, the purchasing power of customers would

gradually decrease. In this situation the real value of currency would lose, the value of

goods and services would increase

Inflation occurs due to an imbalance between demand and supply of money, changes in

production and distribution cost or increase in taxes on products. When the economy

experiences inflation, i.e. when the price level of goods and services rises, the value of

currency reduces. This means now each unit of currency buys fewer goods and services.

It has its worst impact on consumers. High prices of day-to-day goods make it difficult

for consumers to afford even the basic commodities in life. This leaves them with no

choice but to ask for higher incomes. Hence the government tries to keep inflation under

control.

Inflation is the decline in purchasing power of a given currency over time. A quantitative

estimate of the rate at which the decline in purchasing power occurs can be reflected in

the increase of an average price level of a basket of selected goods and services in an

economy over some period of time. Inflation measures how much more expensive a set

of goods and services has become over a certain period, usually a year. Inflation affects

all aspects of the economy, from consumer spending, business investment and

employment rates to government programs, tax policies, and interest rates. Understanding

5
inflation is crucial to investing because inflation can reduce the value of investment

returns.

Inflation also impacts the cost of living, the cost of doing business, borrowing money,

mortgages, corporate, and government bond yields, and every other facet of the economy.

Inflation is a rise in prices, which results in the decline of purchasing power over time.

Inflation is natural and the U.S. government targets an annual inflation rate of 2%;

however, inflation can be dangerous when it increases too much, too fast. Inflation makes

items more expensive, especially if wages do not rise by the same levels of inflation.

Additionally, inflation erodes the value of some assets, especially cash. Governments and

central banks seek to control inflation through monetary policy

Inflation can affect the economy in several ways. For example, if inflation causes a

nation’s currency to decline, this can benefit exporters by making their goods more

affordable when priced in the currency of foreign nations.

On the other hand, this could harm importers by making foreign-made goods more

expensive. Higher inflation can also encourage spending, as consumers will aim to

purchase goods quickly before their prices rise further. Savers, on the other hand, could

see the real value of their savings erode, limiting their ability to spend or invest in the

future.

Inflation causes a rise in interest rates and as interest rates go up the government will

have to incur higher expenditure to pay interest to the public who has invested in

government bonds, bank fixed deposits and company fixed deposits.

6
The supply side inflation is a key ingredient for the rising inflation in India. The

agricultural scarcity or the damage in transit creates a scarcity causing high inflationary

pressures. Similarly, the high cost of labor eventually increases the production cost and

leads to a high price for the commodity. These supply driven factors have basically a

fiscal tool for regulation and moderation. Further, the global level impacts of rising prices

often impact inflation from the supply side of the economy.

Inflation is a rise in prices, which can be translated as the decline of purchasing power

over time. The rate at which purchasing power drops can be reflected in the average price

increase of a basket of selected goods and services over some time. The rise in prices,

which is often expressed as a percentage, means that a unit of currency effectively buys

less than it did in prior periods. Inflation can be contrasted with deflation, which occurs

when prices decline and purchasing power increases.

Contrary to its negative effects, a moderate level of inflation characterizes a good

[Link] growth of the nation reflects its global status and regional dominance.

An inflation rate of 2 or 3% is beneficial for an economy as it encourages people to buy

more and borrow more, because during times of lower inflation, the level of interest rate

also remains low. Hence the government as well as the central bank always strive to

achieve a limited level of inflation.

Inflation is a core part of a nation's economic policies,without it no policy can be

prepared. It is good to have low inflation as it is a sign of economic activities and growth.

It is like a double side sword, it acts as an obscure tax on common citizens and on

financial lenders and on the other side it reduces the savings. It is an increase in the

7
general price level of goods and services which ultimately depreciates the savings and is

typically measured as a rate of change or as an annual percentage increase.

In general the value of inflation is measured in terms of purchasing power, which is a real

power through which we purchase goods and services. With increase in inflation rate

purchasing power comes down and every rupee owns buys a smaller percentage of goods

and services in comparison to the past. Due to inflation the intrinsic value of all goods

and services remains the same.

If inflation increases by 0.5 percent then the currency power will depreciate in value at an

annual rate of 5 percent in terms of goods and services we purchase. With rising inflation,

nations currency cannot stay stable it will fluctuate with comparative movement of

inflation.

Moderate inflation is reluctantly acceptable but high inflation needs minute assessment of

all economic factors and prevailing conditions as it impacts the profitability and liquidity

of the economic entities and affects their working capital directly. Its movement results in

an increase or decrease in the purchasing power of the currency. It is a phenomenon

which exists in every economy in the form of inflation, defilation, hyperinflation or

stagflation.

In the present global economic environment most of the economies have developed and

adopted measures to minimize the impact of inflation if they may not control its rate. The

accepted ideal inflation rate is between 2 to 3 percent.

Inflation could hamper economic growth mainly due to the following reasons:-

➢ Economies that are not fully adjusted to a given rate of inflation usually suffer

from relative price distortions caused by inflation. Nominal interest rates are often

8
 controlled, and hence real interest rates become negative and volatile,

discouraging savings. Depreciation of exchange rates lag behind inflation,

resulting in variability in real appreciation and exchange rates.

➢ Real tax collections do not keep up with inflation, because collections are based

on nominal incomes of an earlier year (the Tanzi effect) and public utility prices

are not raised in line with inflation. For both reasons, the fiscal problem is

intensified by inflation, and public savings may be reduced. This may adversely

affect public investment.

➢ High inflation is unstable. There is uncertainty about future rates of inflation,

which reduces the efficiency of investment and discourages potential investors.

Inflation aims to measure the overall impact of price changes for a diversified set of

products and services. It allows for a single value representation of the increase in the

price level of goods and services in an economy over a specified [Link] also aims

to understand measures of unemployment and inflation as measure of macroeconomics

performance.

Prices rise, which means that one unit of money buys fewer goods and services. This loss

of purchasing power impacts the cost of living for the common public which ultimately

leads to a deceleration in economic growth. The consensus view among economists is

that sustained inflation occurs when a nation's money supply growth outpaces economic

growth to combat this, the central bank takes the necessary steps to manage the money

supply and credit to keep inflation within permissible limits and keep the economy

running smoothly.

9
Monetarism is a popular theory that explains the relationship between inflation and the

money supply of an economy. For example, following the Spanish conquest of the Aztec

and Inca empires, massive amounts of gold and silver flowed into the Spanish and other

European economies. Since the money supply rapidly increased, the value of money fell,

contributing to rapidly rising prices.

Inflation is measured in a variety of ways depending on the types of goods and services.

It is the opposite of deflation, which indicates a general decline in prices when the

inflation rate falls below 0%. Deflation shouldn't be confused with disinflation, which is a

related term referring to a slowing down in the (positive) rate of inflation.

KEY POINTS TO REMEMBER

➢ Inflation is the rate at which prices for goods and services rise.

➢ The most commonly used inflation indexes are the Consumer Price Index and the

Wholesale Price [Link] price index is a measure that examines the

weighted average of price of consumer goods and services i.e. transportation,food

& medical [Link] price index is a stock index in which each stock

influences the index in proportion to its price per share.

➢ Inflation can be viewed positively or negatively depending on the individual

viewpoint and rate of change.

➢ Those with tangible assets, like property or stocked commodities, may like to see

some inflation as that raises the value of their assets.

10
IMPACTS OF INFLATION

Inflation has a deep impact on the livelihood of the people living in any nation as the

prices of all basic necessities increase with inflation. The prices of certain commodities

increase with time but whenever there is a huge increase in the prices of basic

commodities within a lesser period of time then it can be said that the nation is under

inflation. However, there is not always a single reason for inflation there can be multiple

reasons behind it are-

➢ Increased Consumer Spending: When consumers increase their

spending significantly, it creates higher demand for goods and services. If

production cannot keep up with this increased demand, prices tend to rise.

➢ Rising Production Costs: If the cost of production for goods and services

increases, businesses may pass these higher costs on to consumers in the

form of higher prices. This can be due to factors such as increased wages,

higher raw material costs, or increased energy prices.

➢ Wage Price Spiral: This occurs when workers demand higher wages to

keep up with the rising cost of living. When businesses accommodate

these wage increases by raising prices, it can create a cycle where wages

and prices continually rise.

➢ Money Supply Growth: Inflation can be influenced by an increase in the

money supply. If the supply of money grows faster than the supply of

goods and services, it can lead to more money chasing fewer goods,

resulting in higher prices.

11
 ➢ Exchange Rates: Fluctuations in exchange rates can impact the prices of

imported goods. A depreciation of the national currency may increase the

cost of imported goods, contributing to inflation.

CAUSES OF INFLATION

A. Demand-Pull Inflation

The prices of certain goods and services rise as their demand increases. However,

a huge demand for specific good services doesn’t cause an imbalance in the

12
demand and supply. The demand and supply of any good or service can create a

huge impact on the prices of that particular good. The prices of goods increase as

the demand increases. For example whenever the supply of any good decreases

the prices of that specific good begin to rise and in such conditions, people are

forced to buy goods at higher prices. There are many other factors that contribute

significantly to inflation like lower unemployment, higher cash flow, less repo

rate, increased wages, etc.

B. Cost-Push Inflation

The price of the finished product directly depends upon the cost involved in its

production for example if the production cost is less then the price of the product

will be less and vice versa. Thus this increases the prices of goods and services

due to increases in the production cost can be referred to as the cost-push inflation

and also it’s one of the main causes of inflation. The cost-push inflation mainly

affects the prices of the goods and services whose price is driven by the raw

material cost. Metal is one of the major raw materials for the industries as a result

of an increase in the prices of oil and metal the prices of many finished goods

13
 increases as metal is the major raw material for numerous industries and oil

fulfills the energy demand of almost all industries.

Along with the raw material prices and production costs, employee wages also

have a significant impact on the prices of finished goods. For example, if a

company hires a skilled worker to manufacture a particular item, then the

company pays him high for his skills and collects the same amount from the

customer by charging them high for that specific product.

C. Economic Policies of the government

The economic policies of the government play a significant role in causing or

controlling inflation. Inflation is mainly controlled by regulating the flow of

money in the market which is done by the government. Thus the economic

policies of the government can sometimes lead to inflation and can even help in

controlling inflation. The government can regulate the level of inflation by

regulating taxation, maintaining the repo rate, and introducing better economic

policies that can help both the buyer and the seller.

Not everyone suffers a loss due to inflation, there are many who get profited from it and

mainly the investors and stakeholders.

➢ Investors– Investors enjoy a great profit due to inflation as the price of their

assets and investments multiplies with an increase in the rate of inflation. For

example, for an investor who has bought some precious metal or a piece of

land years back, at present its rate has been multiplied significantly.

14
 ➢ Shareholders– It’s a usual trend in the stock market that the prices of stocks

go up with the time and thus as the rate of inflation increases the prices of the

stocks also increase thus generating a decent profit for the shareholders.

➢ Construction Companies– Construction and house building companies also

enjoy a great profit with the inflation as they build the buildings as per the

current rates but then sell them at higher prices after some years when the rate

of inflation has been increased.

➢ Wholesale suppliers and large distributors– It has been observed that the large

distributors and the wholesale suppliers hold the supply to increase the prices

of goods. So that they can make a higher profit by selling when the demand

rises and supply shortfalls.

➢ TYPES OF INFLATION

15
Inflation is usually categorized on different basis which are given as below:

A. On the basis of Rate: Inflation has been categorized into following types on the basis

of its different rates:

1. Creeping Inflation: Creeping Inflation also known as a Mild Inflation or Low Inflation

refers to that type of inflation when the rise in prices is very slow like that of snail or

creeper. It is the mildest form of inflation with less than 3% per annum.

2. Chronic Inflation: If creeping inflation persists for a longer period of time then it is

often called Chronic or Secular Inflation. It is called chronic because if an inflation rate

continues to grow for a longer period without any downturn which may possibly lead to

Hyperinflation.

3. Walking or Trotting Inflation: When prices rise moderately with a single digit of less

than 3% but less than 10% per annum it is called as Walking Inflation.

4. Running Inflation: A rapid acceleration in the rate of rising prices is referred to as

Running Inflation. This type of inflation occurs when prices rise by more than 10% per

annum.

5. Galloping Inflation: Galloping inflation also known as Jumping inflation occurs when

prices rise by double or triple digit inflation rates of more than 20% but less than 1000%

per [Link] other words,Higher rates of price rise are classified ‘moderate’ and further

study of the increase in prices is known as Galloping.

6. Hyperinflation: when prices rise at an alarming high rate with quadruple or four digit

inflation rate of above 1000% per annum then is termed as Hyperinflation. It is a

16
situation where the prices rise so fast that it becomes very difficult to measure its

quantity.

B. On the basis of Causes: Inflation has been categorized into following types on the

basis of its different causes:

1. Demand-Pull Inflation: Demand-Pull Inflation also known as Excess Demand Inflation

takes place when aggregate demand for a good or service outstrips aggregate supply. In

other words, when aggregate demand for all purposes- consumption, investment and

government expenditure-exceeds the supply of goods at current prices then it is called

Demand-Pull Inflation. Demand-Pull inflation gives rise to a situation often economists

describe as “Too much money chasing too few goods”.

2. Cost-Push Inflation: When prices rise due to growing cost of production of goods and

services then it is known as Cost-Push Inflation. Cost-push inflation also known as “New

Inflation” is determined by supply-side factors mainly caused by higher wage-push,

Profit-Push and higher costs of raw materials.

3. Scarcity Inflation: Scarcity inflation occurs due to hoarding by unscrupulous traders

and black marketers so as to create an artificial shortage of essential goods like food

grains, kerosene,etc. with an intention to sell them only at higher prices to make huge

profits.

4. Structural Inflation: Structural inflation is that type of inflation often experienced in

developing countries which is caused by structural rigidities such as agricultural

17
bottlenecks, resource constraints bottlenecks, foreign exchange bottlenecks, physical

infrastructural bottlenecks etc.

C. On the basis of Coverage: Inflation has been categorized into following types on the

basis of its coverage:

1. Comprehensive Inflation: When the prices of all commodities rise throughout the

economy it is known as Comprehensive Inflation also known Economy Wide Inflation.

2. Sporadic Inflation: When prices of only a few commodities in a few regions rise, it is

known as Sporadic Inflation. It is sectional in nature. For example, rise in food prices due

to bad monsoon represents this type of inflation.

D. On the basis of Occurrence: Inflation has been categorized into following types on

the basis of its time of occurrence:

1. War-Time Inflation: when inflation that takes place during the period of a war-like

situation is known as War-Time inflation. During a war, scarce productive resources are

all diverted and prioritized to produce military goods and equipment resulting in extreme

shortage of resources used for producing essential commodities. Consequently, prices of

essential goods keep on rising in the market resulting in War-TimeInflation.

2. Post-War Inflation: Inflation that takes place soon after a war is known as Post-War

Inflation. After the war, government controls were relaxed, resulting in a faster hike in

prices than what experienced during the war.

18
3. Peace-Time Inflation: When prices rise during a normal period of peace then it is

known as Peace-Time Inflation. It is due to huge government expenditure or spending on

capital projects of a long gestation period.

E. On the basis of Government Reaction: Inflation has been categorized into following

types on the basis of Government's degree of reaction:

1. Open Inflation: When the government does not attempt to restrict inflation, it is known

as Open Inflation. In a free market economy, where prices are allowed to take its own

course, open inflation occurs.

2. Suppressed Inflation: When the government prevents price rise through price controls,

rationing, etc., it is known as Suppressed Inflation. It is also referred to as Repressed

Inflation. However, when government controls are removed, Suppressed inflation

becomes Open Inflation. Suppressed Inflation leads to corruption, black marketing,

artificial scarcity, etc.

F. On the basis of predictability: Inflation has been categorized into following types on

the basis of its predictability:

1. Anticipated Inflation: If the rate of inflation corresponds to what the majority of

people are expecting or predicting, then it is called Anticipated Inflation. It is also

referred to as Expected Inflation.

2. Unanticipated Inflation: If the rate of inflation corresponds to what the majority of

people are not expecting or predicting, then it is called Unanticipated Inflation. It is also

referred to as Unexpected Inflation.

19
HISTORY OF INFLATION

Inflation is a part of the economy and holds important and respectful status. Without

inflation no economic policy can be prepared. It has perpetual existence and exit in

different forms in economies depending on economic performance. India holds the

distinction of saving and is also deeply intolerant of high inflation. Policy makers in India

in general make policies considering savings as a backbone to answer future financial

uncertainties.

Globally the history of inflation is found to be mysterious and unpredictable. Indian

economic history provides evidence that India has faced some severe inflation but not

disease called hyperinflation which can cause breakdown to the nation's monetary

system.

The most famous example is the hyperinflation that struck the German Weimar Republic

in the early 1920s.

The nations that were victorious in World War I demanded reparations from Germany,

which could not be paid in German paper currency, as this was of suspect value due to

government borrowing. Germany attempted to print paper notes, buy foreign currency

with them, and use that to pay their debts.

This policy led to the rapid devaluation of the German mark along with the hyperinflation

that accompanied the development. German consumers responded to the cycle by trying

to spend their money as fast as possible, understanding that it would be worth less and

less the longer they waited. More money flooded the economy, and its value plummeted

20
to the point where people would paper their walls with practically worthless bills. Similar

situations occurred in Peru in 1990 and in Zimbabwe between 2007 and 2008.

Global economic histories provide evidence that many Asian and Latin American nations

have worse records in inflation than India; it is due to their economical performance in

comparison to Indian economic performance. In the year 1923 Germany faced the worst

hyperinflation in which price escalated to 2500 percent in one month and caused

monetary breakdown.

In Japan, the year 1945 is recognised as a year of economic defeat and economic collapse

due to war and nuclear destruction. In this year inflation increased and touched the level

of 568 percent. In the year 1947, due to the civil war in China, inflation rose

astonishingly and touched 1,579 percent.

In the year 1951 due to war between North Korea and South Korea the economy

suffered and declined drastically and during the period inflation rate increased and

touched the level of 210 percent.

In the present global economic environment Zimbabwe is facing the worst hyperinflation,

according to the report of Reuter from Harare that every citizen of Zimbabwe is a

billionaire with minimum purchasing power. Impact of hyperinflation can be analyzed as

Zimbabwe's central bank introduced a 500 million dollar note which has power only to

purchase two loaves of bread. It has been reported that in many African nations prices

change every passing day and some time it changes hour to hour and it has been reported

that it is rising at an annual rate of 66,000 percent.

21
According to the Indian history of economy, in the year 1943 the highest level of

hyperinflation which India has faced since 1801 was 53.8 percent. This hyperinflation

was due to famine and the reason was the Indian independence movement.

Amartya Sen the Nobel Prize winning economist in his book has revealed many facts,

causes and impact of Indian inflation.

Satyajit Ray in the year 1973 produced a movie on inflation Ashani Sanket and won the

Oscar award. Through his movie he presented the harsh truth and suffering of people.

Global economic history provides evidence that greedy politics to make the world their

subordinate resulted in World War II and due to which almost the entire world was facing

economic disaster and because of this greed most of the countries became victims of

inflation, recession and hyperinflation. Every nation wants to control the price whether

they are active participants in war or victim of war, it is paramount important for their

survival, political stability and governance.

The modern history of wars reveals the fact that India took active part in all the world

wars and during the period it was also passing through independence struggle, the

collective impact of the period pushed the price which became uncontrollable and

converted into inflation. With prudent policy to curb inflation and saving habits, Indian

people efficiently managed the inflation in comparison to other nations.

Indian economic history provides evidence that India has performed much better than its

competitors and Asian neighboring countries including Japan, China, Pakistan, Malaysia

and indonesia.

It is found that every eighth year India has faced inflation in which price escalated but

inflation remained under 20 percent. Keeping inflation under 20 percent shows India’s

22
better economic performance, good governance and economic strength and its ability to

control inflation which distinct it from other nations. India not only controlled inflation

but also cleared off foreign defaults by rescheduling foreign debt in 1958, 1969 and 1972.

All advanced economies, emerging economies and undeveloped economies are involved

in economic activities according to their strength and expertise and thus also have faced

inflation from time to time according to growth stages and applied all their measures to

control it in acceptable limits.

SIGNIFICANCE OF THE STUDY

Any report has its own importance to different stakeholders. Generally inflation is a

process of increase in the general level of prices for goods and services or fall in the

purchasing power of money. So, Inflation is an increase in the price of a basket of goods

and services that is representative of the economy as a whole. Hence, it is considered that

Inflation is the result of excessive money supply in the market. This report is important to

those stakeholders who want to know about inflation. This report is significant to

researchers, students, government, various organizations etc. Thus it is important to all.

OBJECTIVE OF THE STUDY

The core objectives of the study are to evaluate the impact of Inflation on Indian

Economy in general arising due to global financial crises, recession and Inflation and will

analyze qualitative, quantitative and collective impact on various economic sectors. In

addition, for better future growth will suggest a rational approach to reduce inflation

23
impact which can be considered as a judicious recommendation for improvements of

economic performance.

➢ To Identify the best tool for Inflation measure in India.

➢ To Identify the most impacting factors on the WholeSale price Index (WPI).

➢ To Identify sub-classifications of the most impacting factors of Food Articles.

➢ To identify which most impacting factors are hindering the purchasing power of

customers.

METHODOLOGY OF THE STUDY

The study is done to analyze the impact of inflation on Indian economy in general and for

the purpose secondary data and reports are used which are collected from published

economical and commercial reports, magazines, RBI annual report, research articles and

financial institutions websites. After judicious evaluation of inflation impacts suggestions

and recommendations are made. The outcome of the study depends on the selected period

by the researchers which may differ from other analyses.

24
 CHAPTER 2

LITERATURE REVIEW

Literature review is an important part of all research activities. It provides reason to the

researcher to carry out new research and unearth the hidden and unexplored part of the

area of research. It plays an anchor role and provides direction and analytical inputs to

the study which is analyzed and compared by the researchers with present facts and

findings in order to forecast the future.

With growing globalization complexities are also growing and the economic scenario

keeps on changing with prevailing circumstances. Outcomes of the studies also keep on

changing according to the time period and prevailing socio- political and economic

environment. Every carried out study adopts some different and innovative methodology

which is rationally distinct from the past and produces solutions to prevailing situational

requirements. Large number of studies were carried out worldwide in the past and are

being carried out in the present to find an appropriate solution to the perceptual

phenomena of inflation. Most of the studies were carried out in advanced economies who

are parent nations to most of the giant multinational organizations. Marginal numbers of

studies were conducted by the developing and underdeveloped nations. Due to

globalization many underdeveloped economies transformed into world economic growth

engines and thus also got exposed to inflation implications. Jerks of inflation forced them

to examine inflation and to analyze the varying impacts in order to develop answers to

unpredictable phenomena, hidden tax inflation.

25
Therefore realizing the importance of inflation this study is designed by the researchers to

understand, examine and critically analyze the degree of inflation and its varying impacts

by minutely investigating the reasons and causes which stoke inflation. For this purpose

researchers have evaluated various economic reports, economic theories, empirical

studies conducted worldwide by academicians, economists and independent research

agencies and revealed significant findings which gave new dimensions and highlighted

hidden reality of inflation and recession along with relevant solutions to control the

inflation and its impact.

The last study has set high parameters for future study to be followed by others are as

follows:-

Keynes (1936) in his studies found a negative relationship between output and variability

and average growth, arguing that businesses take into account the fluctuations in

economic activity when they estimate the return on investment.

Solow (1956) found that there is an encouraging impact of real uncertainty on output

growth. He further said that uncertainties encourage higher precautionary savings and

higher equilibrium rate of economic growth.

Jadhav (1994) in his study found that there is a complete relationship between

government deficits, money supply and inflation which possibly lead to a self

perpetuating process of deficit-induced inflation and inflation- deficit. He further said

that these situations are due to fiscal dominance and even after the complete phase out of

automatic monetization of deficit, government deficit remains the core factor causing

incremental growth in reserves money on the source side, and overall expansion in

money supply and inflation.

26
Rebecca Hellerstein (1997) in his carried out study found that public concern about

inflation generally heats up in step with inflation itself. He also found that most

economists do not always agree that when inflation starts to interfere with market signals,

the public tends to express serious alarm once the inflation rate rises above 5 or 6 percent.

Islam and Stiglitz (2001),Kose, Prasad and Terrones (2005) in their carried out studies

found that due to crisis volatility trends also shifted. They also found that during the post

crisis period volatilities have increased in developed nations economies but in developing

nations it has generally declined.

Khundrakpam and Goyal (2009) through their study revealed that growth in inflation is

due to adverse supply shocks which may not merit monetary tightening as long as the

permanent changes in relative energy price do not lead to a change in the underlying

trend rate in inflation”. They also found that in possibilities of short term trade off

between inflation and growth monetary policy actions will be concentrated to control

inflation which may ultimately result in growth decline and priorities. Khundrakpam

(2009) in his conducted study found that the degree of inflation persistence in India is

comparatively low irrespective of all alternative measures. The study also found that

among components of the wholesale price index (WPI), manufacturing’ inflation is the

highest. Friedman, in his carried out study found that the presence of inflation is a

monetary phenomenon. He in his monetarist theory argued that if the supply of money

increases faster than the growth rate of national income then inflation is bound to occur

and if money supply and inflation increase with equal rate then there will be no inflation.

He also emphasized that an unwarranted increase in the money supply causes inflation.

Carmen M, Reinhart and Kenneth Rogoff (2012) from their conducted study tried to

27
highlight the complexities of financial crises which have been present in the global

economy for centuries. They also found that serial default is a universal rite of passage

through history for nearly all countries as they pass through the emerging market state of

[Link] further said that inflation and currency debasement is just as much a

universal rite of passage as serial default.

Deepk Mohanty, (2013) through his study tried to find the reasons because of which

inflation remained entrenched despite a negative gap in output. He found that sustained

level of rising inflation in economy is not good as it impose real cost directly which are

borne disproportionately through diversified economic segments. He further said that to

minimize the degree of inflation on an enduring basis, to anchor the inflation

expectations, there is a need for combined short term, long and midterm policy at all

economic fronts.

[Link] Zafar, Waleed Hmedat and Adeel Maqbool (2016), suggested that policy

makers have to make effective policy, supply side policies, fiscal policies, exchange

policies along with liquidity trap. They also suggested that they must keep on revising

inflation baskets according to inflationary condition They also suggested that to reduce

inflation government have to control its wasteful and unwanted spending, have to control

tax evasion, have to encourage fast economic growth, have to maintain quality debt, have

to restrict government borrowing which later convert into government default or

hyperinflation, have to borrow only for productive infrastructure which accelerate GDP

growth and generate revenue. They also emphasize that the government may not borrow

funds for subsidies or unproductive, corrupt and wasteful schemes and must promote

planned spending. They also suggested that to generate funds the government must sell

28
its assets, share in government companies, and its holdings in corporate, spectrum and

minerals blocks rather than expanding fiscal deficit.

Draghi (2016) through his conducted study revealed that inflation projections have

continued to be downgraded, complicating further deleveraging efforts. He also found

that 1 percentage decline of inflation from the target over a five year period will raise

private debt by around 6 percent.

George Akerlof, William Dickens and George Perry argue that moderate inflation yields

significant efficiency gains by “greasing” the wheels of the labor market. Firms use

inflation to “to cover” adjustments in real wages and at zero inflation nominal wage cuts,

never popular among workers, would necessarily be more common

Congress Federal Reserve Board Chairmen Alan Greenspan observed that firm’s

productivity may rise quickly with price stability, as the “inability to pass cost increase

through to higher prices provides powerful incentives to firms to increase profit margins

through innovation. Inflation thus may weaken our judgment about how well we are

doing, both as individuals and as firms.

Shiller's survey found a striking number of people over 75 percent of respondents believe

that their income would not fully adjust for several years after an inflationary episode.

Economists have tried to measure whether wage increases lag price increases since the

1890s but have consistently found the relationship difficult to estimate. He further finds

that worry about inflation’s costs increases dramatically as individuals near retirement

age.

29
Economists Peter Dimond, Eldar Shafir and Amos Tversky in their carried out study “On

Money Illusion,” argued that people seem to base their sense of satisfaction on nominal

earnings rather than real earnings.

Lynn Browne of the Boston Fed. High rates of inflation accelerated home buying by

increasing the real, after tax returns to investment in owner occupied housing relative to

alternative investments. A lag in interest rates reinforced this uptick in demand. As house

prices in turn began to rise faster than the general price level, people rushed to buy rather

than face higher prices later.

The relationship between inflation and real growth has all along been a key concern in

macro-economic research. According to Rangarajan (1998), the question, in essence,

presupposes a possible trade-off between price stability and growth either in the long or

short run. The new endogenous growth theories, for instance, surmised that inflation has

an adverse impact on growth because of its harmful effects on productivity and

efficiency.

Choi, Smith and Boyd (1996) echoed a similar view and argued that inflation, in the

presence of information asymmetry can harm growth by accentuating financial markets

frictions and thereby adversely affecting the provision and allocation of investment. The

rational expectations revolution inter alia, criticized the non-neutrality proposition of

Keynesians by arguing that, under flexible markets, repeated monetary shocks meant to

facilitate growth could only lead to ever increasing levels of inflation in the long run.

According to some analytical study inflation has become a major issue for both

academics and policymakers. They explained how it is a hindrance to the growth of the

nation. They have done clear analysis over the past five years, particularly on food

30
inflation, demand and supply side factors behind surging food prices. Pointing out how

the policies are impacting on raising and falling of food articles and its prices. They

emphasized on increasing agricultural productivity.

According to the Assoc ham Eco Pulse study FY 2009-2010 the inflation averaged near

5%. According to AEP study titled inflation concerns for the Indian economy stated the

surge in international commodity markets led by energy (crude oil, natural gas and coal),

metals (copper, aluminum and iron ore) and food (cereal and meat) is likely to push the

domestic prices up once the heavy fiscal and monetary measures taken as the crisis

response starts to firm up the economic activity.

According to some schools of thought, they explained about what is the best measure for

inflation. Which is the suitable measure and relevant for monetary policy. In the present

conditions of the economy, Consumer price index for industrial workers is preferable to

either the wholesale price index or the GDP deflator

According to some analytical framework, they studied that aims at empirically

identifying the determinants of inflation in [Link] a cointegrated vector autoregressive

framework, the empirical estimation is carried out. The error correction mechanism of the

cointegrated variables is also carried out. The impulse Response function of the

cointegrated VAR system shows that there is a lag in the VAR System. There is a

systematic analysis which is the best measure for inflation and what causes for inflation

31
 CHAPTER 3

RESEARCH METHODOLOGY

METHODOLOGY OF STUDY

Research methodology is the plan, structure and strategy of investigations conceived to

answer the research question or test the research hypothesis and to control variance.

Research methodology refers to the various sequential steps to adopt by a researcher in

studying a problem with certain objectives in view. It describes the methods and

processes applied in the entire subject of the study. It is the way to study systematically

about the research problem.

In order to complete the report various methods will be applied. The data will be

collected from secondary sources. Most of the information will be gathered through the

use of newspapers, magazines, articles, published documents, websites etc. It includes

research design, sample size and selection process, data collection procedure and data

processing techniques and tools.

RESEARCH DESIGN

A research design is the arrangement of conditions for collection and analysis of data in a

manner that aims to combine reference to the research purpose with economy in

procedure.

32
SOURCES OF DATA

This study was conducted on the basis of secondary data. The main source of secondary

data comprises related journals, newspapers, Internet, official publication, related studies

and thesis etc.

DATA COLLECTION PROCEDURE

The relevant data will be collected visiting the website of Nepal Rastra Bank. The review

of related study will be based on textbooks, official publications, various journals etc.

METHODS OF DATA ANALYSIS AND PRESENTATION

The collected data during the fieldwork will be classified into different categories as per

their nature and the purpose of the study. Later, they will be thoroughly analyzed. The

category of data will be about descriptive analysis. The relevant data will be presented in

tabular form and their relationship will be shown in diagram. The data will be analyzed

comparing them.

OBJECTIVES OF THE STUDY

There are the following objectives of inflation are as follows:-

➢ Define and describe unemployment trends.

➢ Define and describe inflation trends.

➢ Analyze the relation between inflation and interest rates.

➢ Evaluate the effects of inflation.

33
SCOPE OF THE FUTURE RESEARCH

The gross domestic product of the country is showing an increasing trend. At the same

time inflation is also gradually increasing. This situation can be called “growth-inflation”.

Further research can be extended on, consumer price index and its implication on the

economy. further research can be extended on inflation impact on other goods and

services etc.

ADVANTAGES OF THE RESEARCH

Inflation is an opportunity for economic growth. Inflation provides the economy with an

opportunity to increase production and expand. This gives the producers scope to expand

their supply and meet the excess [Link] is not only a situation of excess

demand over supply. It is also an opportunity to increase production scale to meet the

excess demand.

➢ Economic growth

A moderate rate of inflation indicates that the economy is expanding and growing. It

indicates that the economy is targeting to reduce involuntary unemployment. Reducing

unemployment can be successful if a moderate inflation rate is maintained. This shows

that the individuals are ready to procure more goods and services and are willing to spend

more to obtain them.

34
 ➢ Inflation Is Better Than Recession

The recession is said to be one of the worst possible economic scenarios. It pulls the

growth, GDP, and per capita expenditure down and decreases the economy's overall

growth. This reduces the income level of businesses and entrepreneurs, which further

causes a reduction in the employees' income or even forced unemployment. Hence,

inflation is better than deflation as it provides an opportunity to expand the supply.

➢ Adjustment of Wages

Inflation allows employees and workers to avail an increase in their incomes. It also

allows them to increase their incomes to match up with the rate of inflation. In inflation,

excess demand has to be managed by increasing the supply. To increase the supply, it is

essential to increase the employment rate. Hence, inflation allows individuals to adjust

their wages per the inflation rate. This increases the income of efficient and productive

employees and workers.

LIMITATIONS OF INFLATION

Inflation is a common stage in every economy. Its occurrence is normal. However, if it is

not managed appropriately, it can create huge monetary pressure on individuals,

companies, and the government. However, it also has multiple disadvantages, which are

inevitable for the economy. These disadvantages impact the middle and lower section of

the economy the worst.

35
 ➢ Reduces Purchasing Power

The increase in the rate of prices of goods doesn't match the increase in income. This

makes individuals lose approximately 2% of their purchasing power. Inflation impacts

the middle and lower section of the population the [Link], inflation drastically

impacts the purchasing power of individuals and questions the survival of individuals in

an economy.

➢ Creates A Greater Burden on The Poor

The loss of purchasing power impacts the middle class and poor population the most.

Since the poor section of the population has limited resources, this loss of purchasing

power impacts them the worst. With limited means, they can only afford limited

commodities, and inflation limits them even more. Hence, inflation reduces the limited

purchasing power of people who belong to the poor section of the economy.

➢ The Higher The Rate Of Inflation Worse The Recession

A very high inflation rate means that the prices of goods and services are increasing

drastically. This drastic increase in prices reduces the purchasing power of individuals.

Over time, this reduces the demand for goods and services. Hence, the economy's fall

becomes inevitable as the decrease in demand is not avoidable. The excess supply is not

supported by demand, forcing the entrepreneurs to produce fewer goods. So, the higher

the inflation rate, the worse the upcoming recession.

36
 CHAPTER 4

DATA ANALYSIS

EFFECTS OF INFLATION ON VARIOUS SECTORS OF THE

ECONOMY

The occurrence of inflation has resulted in higher costs of regular products such as food,

shelter, and medicines, as well as want-based products such as jewelry or vehicles. Being

an underdeveloped country, India suffers from various factors that affect its core

economy, out of which inflation is one. Hence, inflation’s impact on various sectors of

India are as follows-

➢ Effect on Healthcare:

During inflation, the irregular rise of prices unavoidably diminishes the

purchasing power of several consumers. When it comes to medical inflation is a

situation when the average cost and per-unit costs of healthcare services increase

down the line. It comprises the price of new and modernized treatments and their

extensive availability and services. The upward rising trend in the cost of medical

treatments, supplies, and medications than the cost of other products and services

causes it. Since a substantial amount of money is invested in discovering new

treatment methods, the medical charges in India increase by a considerable

margin. In addition, therapies and treatments for ailments like cancer, transplants,

etc., grow costlier with additional research and increased cost of raw materials.

Furthermore, the COVID-19 pandemic was a turning point in the medical field

37
 that made doctors and medical specialists work round-the-clock to cater for the

needs of COVID patients. During this period, there was a steep rise in

hospitalization charges.

➢ Effect on Tourism:

Inflation is a problem in India and worldwide. The tourism industry also

experiences a price rise. The increasing cost of tourism is due to increased

production costs or tourism demand. The tourism-pull inflation is caused due to

an escalation in aggregate demand owing to the financial resources brought to the

country by foreign tourists. Furthermore, during the COVID-19 pandemic, the

tourism industry faced a tremendous challenge due to the intense increase in

global inflation. Overall, these situations caused an increase in travel-related costs

and lowered the purchasing power of travelers.

➢ Effect on Debtors and Creditors:

During periods of rising prices, debtors gain and creditors lose. When prices rise,

the value of money falls. Though debtors return the same amount of money, they

pay less in terms of goods and services. This is because the value of money is less

than when they borrowed the money. Thus the burden of the debt is reduced and

debtors gain.

On the other hand, creditors lose. Although they get back the same amount of

money which they lent, they receive less in real terms because the value of money

falls. Thus inflation brings about a redistribution of real wealth in favor of debtors

at the cost of creditors.

38
➢ Effect on Salaried Persons:

Salaried workers such as clerks, teachers, and other white collar persons lose

when there is inflation. The reason is that their salaries are slow to adjust when

prices are rising.

➢ Effect on Wage Earners:

Wage earners may gain or lose depending upon the speed with which their wages

adjust to rising prices. If their unions are strong, they may get their wages linked

to the cost of living index. In this way, they may be able to protect themselves

from the bad effects of inflation.

But the problem is that there is often a time lag between the raising of wages by

employees and the rise in prices. So workers lose because by the time wages are

raised, the cost of living index may have increased further. But where the unions

have entered into contractual wages for a fixed period, the workers lose when

prices continue to rise during the period of contract. On the whole, the wage

earners are in the same position as the white collar persons.

➢ Effect on Fixed Income Group:

The recipients of transfer payments such as pensions, unemployment insurance,

social security, etc. and recipients of interest and rent live on fixed incomes.

Pensioners get fixed pensions. Similarly the rentier class consisting of interest and

rent receivers get fixed payments.

39
 The same is the case with the holders of fixed interest bearing securities,

debentures and deposits. All such persons lose because they receive fixed

payments, while the value of money continues to fall with rising prices.

Among these groups, the recipients of transfer payments belong to the lower

income group and the rentier class to the upper income group. Inflation

redistributes income from these two groups toward the middle income group

comprising traders and businessmen.

➢ Effect on Equity Holders or Investors:

Persons who hold shares or stocks of companies gain during inflation. For when

prices are rising, business activities expand which increase profits of companies.

As profits increase, dividends on equities also increase at a faster rate than prices.

But those who invest in debentures, securities, bonds, etc. which carry a fixed

interest rate lose during inflation because they receive a fixed sum while the

purchasing power is falling.

➢ Effect on Businessmen:

Businessmen of all types, such as producers, traders and real estate holders gain

during periods of rising prices. Take producers first. When prices are rising, the

value of their inventories (goods in stock) rise in the same proportion. So they

profit more when they sell their stored commodities.

The same is the case with traders in the short run. But producers profit more in

another way. Their costs do not rise to the extent of the rise in the prices of their

40
 goods. This is because prices of raw materials and other inputs and wages do not

rise immediately to the level of the price rise. The holders of real estate’s also

profit during inflation because the prices of landed property increase much faster

than the general price level.

➢ Effect on Agriculturists:

Agriculturists are of three types, landlords, peasant proprietors, and landless

agricultural workers. Landlords lose during rising prices because they get fixed

rents. But peasant proprietors who own and cultivate their farms gain. Prices of

farm products increase more than the cost of production.

Prices of inputs and land revenue do not rise to the same extent as the rise in the

prices of farm products. On the other hand, the landless agricultural workers are

hit hard by rising prices. Their wages are not raised by the farm owners, because

trade unionism is absent among them. But the prices of consumer goods rise

rapidly. So landless agricultural workers are losers.

➢ Effect on Government:

The government as a debtor gains at the expense of households who are its

principal creditors. This is because interest rates on government bonds are fixed

and are not raised to offset expected rise in prices. The government, in turn, levies

less taxes to service and retire its debt.

41
 With inflation, even the real value of taxes is reduced. Thus redistribution of

wealth in favor of the government accrues as a benefit to the tax-payers. Since the

tax-payers of the government are high-income groups, they are also the creditors

of the government because it is they who hold government bonds.

As creditors, the real value of their assets decline and as tax-payers, the real value

of their liabilities also declines during inflation. The extent to which they will be

gainers or losers on the whole is a very complicated calculation.

MEASURES TO CONTROL INFLATION

The important measures to control inflation are as follows:

1. Monetary Measures

2. Fiscal Measures

3. Other Measures.

Inflation is caused by the failure of aggregate supply to equal the increase in aggregate

demand. Inflation can, therefore, be controlled by increasing the supplies of goods and

services and reducing money incomes in order to control aggregate demand. The various

methods are usually grouped under three heads: monetary measures, fiscal measures and

other measures.

42
1. Monetary Measures:

Monetary measures aim at reducing money incomes.

(a) Credit Control:

One of the important monetary measures is monetary policy. The central bank of the

country adopts a number of methods to control the quantity and quality of credit. For this

purpose, it raises the bank rates, sells securities in the open market, raises the reserve

ratio, and adopts a number of selective credit control measures, such as raising margin

requirements and regulating consumer credit. Monetary policy may not be effective in

controlling inflation, if inflation is due to cost-push factors. Monetary policy can only be

helpful in controlling inflation due to demand-pull factors.

(b) Demonetisation of Currency:

However, one of the monetary measures is to demonetise currency of higher

denominations. Such a measure is usually adopted when there is abundance of black

money in the country.

(c) Issue of New Currency:

The most extreme monetary measure is the issue of new currency in place of the old

currency. Under this system, one new note is exchanged for a number of notes of the old

currency. The value of bank deposits is also fixed accordingly. Such a measure is adopted

when there is an excessive issue of notes and there is hyperinflation in the country. It is a

very effective measure. But it is inequitable because it hurts the small depositors the

most.

43
2. Fiscal Measures:

Monetary policy alone is incapable of controlling inflation. It should, therefore, be

supplemented by fiscal measures. Fiscal measures are highly effective for controlling

government expenditure, personal consumption expenditure, and private and public

investment. The principal fiscal measures are the following:

(a) Reduction in Unnecessary Expenditure:

The government should reduce unnecessary expenditure on non-development activities in

order to curb inflation. This will also put a check on private expenditure which is

dependent upon government demand for goods and services. But it is not easy to cut

government expenditure. Though this measure is always welcome, it becomes difficult to

distinguish between essential and non-essential expenditure. Therefore, this measure

should be supplemented by taxation.

(b) Increase in Taxes:

To cut personal consumption expenditure, the rates of personal, corporate and commodity

taxes should be raised and even new taxes should be levied, but the rates of taxes should

not be so high as to discourage saving, investment and production. Rather, the tax system

should provide larger incentives to those who save, invest and produce more.

Further, to bring more revenue into the tax-net, the government should penalize the tax

evaders by imposing heavy fines. Such measures are bound to be effective in controlling

inflation. To increase the supply of goods within the country, the government should

reduce import duties and increase export duties.

44
(c) Increase in Savings:

Another measure is to increase savings on the part of the people. This will tend to reduce

disposable income with the people, and hence personal consumption expenditure. But

due to the rising cost of living, people are not in a position to save much voluntarily.

For this purpose, the government should float public loans carrying high rates of interest,

start saving schemes with prize money, or lottery for long periods, etc. It should also

introduce compulsory provident fund, provident fund-cum-pension schemes. All such

measures increase savings and are likely to be effective in controlling inflation.

(d) Surplus Budgets:

An important measure is to adopt anti-inflationary budgetary policy. For this purpose, the

government should give up deficit financing and instead have surplus budgets. It means

collecting more in revenues and spending less.

(e) Public Debt:

At the same time, it should stop repayment of public debt and postpone it to some future

date till inflationary pressures are controlled within the economy. Instead, the

government should borrow more to reduce money supply with the public.

Like monetary measures, fiscal measures alone cannot help in controlling inflation. They

should be supplemented by monetary, non-monetary and non-fiscal measures.

45
3. Other Measures:

The other types of measures are those which aim at increasing aggregate supply and

reducing aggregate demand directly.

(a) To Increase Production:

The following measures should be adopted to increase production:

(i) One of the foremost measures to control inflation is to increase the production of

essential consumer goods like food, clothing, kerosene oil, sugar, vegetable oils, etc.

(ii) If there is need, raw materials for such products may be imported on preferential basis

to increase the production of essential commodities,

(iii) Efforts should also be made to increase productivity. For this purpose, industrial

peace should be maintained through agreements with trade unions, binding them not to

resort to strikes for some time,

(iv) The policy of rationalization of industries should be adopted as a long-term measure.

Rationalization increases productivity and production of industries through the use of

brain, brawn and bullion,

(v) All possible help in the form of latest technology, raw materials, financial help,

subsidies, etc. should be provided to different consumer goods sectors to increase

production.

46
(b) Rational Wage Policy:

Another important measure is to adopt a rational wage and income policy. Under

hyperinflation, there is a wage-price spiral. To control this, the government should freeze

wages, incomes, profits, dividends, bonus, etc.

But such a drastic measure can only be adopted for a short period as it is likely to

antagonize both workers and industrialists. Therefore, the best course is to link increase

in wages to increase in productivity. This will have a dual effect. It will control wages

and at the same time increase productivity, and hence raise production of goods in the

economy.

(c) Price Control:

Price control and rationing is another measure of direct control to check inflation. Price

control means fixing an upper limit for the prices of essential consumer goods. They are

the maximum prices fixed by law and anybody charging more than these prices is

punished by law. But it is difficult to administer price control.

(d) Rationing:

Rationing aims at distributing consumption of scarce goods so as to make them available

to a large number of consumers. It is applied to essential consumer goods such as wheat,

rice, sugar, kerosene oil, etc. It is meant to stabilize the prices of necessaries and assure

distributive justice. But it is very inconvenient for consumers because it leads to queues,

artificial shortages, corruption and black marketing.

47
TREND ANALYSIS OF INFLATIONARY TRENDS OVER PAST

TEN YEARS IN INDIA

Inflation refers to an overall increase in the Consumer Price Index (CPI), which is a

weighted average of prices for different goods. The set of goods that make up the index

depends on which are considered representative of a common consumption basket.

Therefore, depending on the country and the consumption habits of the majority of the

population, the index will comprise different goods. Some goods might record a drop in

prices, whereas others may increase, thus the overall value of the CPI will depend on the

weight of each of the goods with respect to the whole basket. Annual inflation refers to

the percent change of the CPI compared to the same month of the previous year.

According to the data released by the National Statistics Office (NSO), India’s retail

inflation rate surged to 5.69 percent in December, the highest in four months. The retail

inflation rate registered an increase of 0.19 percent in one month, as it stood at 5.55

percent in November. The current inflation remains in the Reserve Bank of India (RBI)

tolerance band, which is set at 2 to 6 percent.

The inflation rate in the rural areas, at 5.93 percent, remains 0.47 percent higher than the

urban areas, as inflation in the rural areas stood at 5.46 percent in December. The food

inflation in December stood at 9.53 percent. At 27.64 percent in December, vegetable

inflation registered a sharp increase of 9.94, as it stood at 17.7 percent in the previous

month.

48
 INDIA INFLATION RATE (PAST DATA)

Year Average Inflation Rate Annual Change

2023 5.69% (December 2023) -1.6%

2022 6.7% 1.57%

2021 5.13% -1.49%

2020 6.62% 2.89%

2019 3.73% -0.21%

2018 3.94% 0.61%

2017 3.33% -1.62%

2016 4.95% 0.04%

2015 4.91% -1.76%

2014 6.67% -3.35%

2013 10.02% 0.54%

49
India witnessed moderately high inflation from 2013 to 2022, generally oscillating

between 4% and 6%. The country's inflation dynamics were influenced by various

factors, including domestic economic activities, monsoon patterns affecting agricultural

output, and policy decisions. India's central bank, the Reserve Bank of India,

implemented several measures to control inflation, including monetary policy

adjustments.

Over the past decade until 2022, consumer price inflation in India averaged 5.5%, which

was above the Asia-Pacific's regional average of 2.1%. The 2022 average figure was

6.7%.

50
Highest rate of inflation in end 2013 :

As per the Times of India Dec. 13, 2013 The Indian economy, Asia's third-largest one,

had a difficult situation where the economic growth slowed to a decade low and price

pressures have shown an upswing. It had one of the highest inflation rates in the world,

and the highest in Asia. Weak growth and high inflation also complicated the policy

choice for the central bank.

According to the Central Statistics Office, industrial output had slumped 1.8% in October

compared with an annual growth of 8.4% in the same month last year. It was also lower

than the 2% expansion in output reported for September 2013. In rural areas retail

inflation was at 11.7%, while in urban areas it stood at 10.5%, highlighting the extent of

pain for households, especially those with low incomes. The increase in retail inflation

also affected the ruling Congress party, in state elections. Rising prices, particularly of

food, was identified as one of the factors, which had angered voters in elections. High

inflation has been affecting the manufacturing sector and overall growth in the economy

as well. The RBI has raised the interest rates 14 times, since March 2010, to control

inflation. So, the economic growth in severely affected

In 2013, there was the taper tantrum. The US Fed decision to taper their purchases of

debt, caused the rupee to devalue to Rs. 68 to the dollar, with investors pulling out.

Inflation (mostly because of higher rupee cost of imports) went through the roof at 9%+

until Subbarao raised short term rates to 12%, and then Rajan followed up by raising

overall repo rates to higher levels.

51
In 2014-15, the major crude oil price crash resulted in inflation falling to below the 5%

mark, ending closer to 3%.

The Covid crisis in 2020 took the rupee to a USDINR rate of 75, and with supply shocks

all over the world, inflation moved up to 6% again, before cooling down to below 5% in

the subsequent year.

India's inflation rate has been volatile over the past decade. In November 2013, the

inflation rate reached an all-time high of 12.17%, while in June 2017, it hit a record low

of 1.54%. In December 2023, the inflation rate was 5.69%, which was higher than the

previous month's rate of 5.55%. Food inflation increased to 9.53% in December 2023,

from 8.70% in November 2023. The Reserve Bank of India (RBI) uses consumer

inflation as a key measure of inflation to set the monetary and credit policy. The most

important category in the consumer price index is food and beverages, which accounts

for 45.86% of the total weight. The RBI aims to maintain an optimum level of inflation to

promote spending to a certain extent instead of saving, thereby nurturing economic

growth.

In 2012-13, inflation was at 9.9% (official) which makes it the highest since 1994-95,

when it was 12.6%.

In the early days of the Indian republic, other than 1956, inflation stayed at a controlled

level below 10%. No one could even set their own prices, since everything was

52
government controlled. At some level integration issues would have given rise to price

validity problems as well.

In the 60s, we faced spiky inflation as wars hit our economy – the Chinese war in 62, and

then the war with Pakistan in 65. Prices of wholesale goods spiked and after India

devalued its currency, things got slightly better, with inflation going below the zero level

in 1969.

This is why, in all pubs in India, it is mandatory to play Bryan Adams’ Summer of 69 at

least once. Someone needs to fast to get this rule removed.

The 70s saw the great oil spike which led to extremes in inflation – the Emergency

calmed things down because let’s face it, you don’t raise prices when Sanjay Gandhi’s

threatening to cut off people’s private parts. After ‘77, when the emergency was lifted,

prices spiked again, and spiked to over 18% in 1981-82.

The rest of the 80s were about benign inflation as rules were eased, slowly, over supply

and prices. But government control flourished, with manufacturers being told how much

of any commodity they could produce, how much they could increase capacity by, every

year. Rahul Bajaj had (earlier) famously increased capacity beyond these limits, because

there was a 10 year waiting period for a scooter due to the controlled pricing and supply.

Reliance Industries was “caught” by Indian express reporters for having more than their

licensed capacity, an artificial and in hindsight, ridiculous constraint.

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Inflation spiked again in the 90s as India devalued and went through a payments crisis.

The liberalization of the early 90s helped keep inflation low as supply pressures eased,

and productivity increased. But even through the Russian crisis, the Asian currency crisis

and the downturn after the 2000 dot-com bust, Indian inflation remained above zero and

didn’t spike into double digits.

The 2008 oil price rise saw inflation temporarily go into double digits (not reflected in

annual numbers) and interest rates went all the way to 9%. The Lehman bust then took

inflation down to very low numbers in 2009. As the elections removed the left from

power in 2009, the subsequent recovery then took inflation back up vigorously, and it has

been above the 8% mark since.

Impact of Inflation on Economy

➢ Fall in inflation has a positive impact as it increases the saving of common

citizens of the nation and is also good for lenders and the banking industry. When

inflation comes down in general then commodity prices in all segments follow it

with equal pace. Economy without inflation means that the nation 's economy is

saturating and will impact further and influence other macroeconomic factors.

➢ Rise in inflation acts as a hidden tax and reduces the savings. It affects business

decisions by its interaction with the corporate income tax code, through the tax

deductible depreciation allowance for equipment and structure. Because

depreciation is not adjusted for inflation, an increase in the rate for inflation

favors investment in inventories and short lived equipment. Most of the capital

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 intensive sectors rely disproportionately on long lived plants and equipment and

suffer losses. Due to inflation distortion occurs in capital gains taxation as well.

➢ When inflation is high on taxes take a greater share of the assets real value. Under

such conditions tax becomes due even if the respective asset is sold with no real

appreciation in its value but owners have to pay the due taxes as higher capital

gains taxes is to be paid on the assets real value. After inflation, governments in

general do not change the tax structure and consecutively people face additional

burden of tax along with hidden tax ‘inflation’.

➢ Due to increase in inflation, investment decline, FDI inflow decline, consumption

decline, demand decline, purchasing power decline. When it continues for a long

period then unemployment starts increasing with corresponding levels.

➢ It impacts the profitability and liquidity of the companies and directly impacts

their working capital. Its declination up to an extent is good for the economy, if it

declined and became negative then again it is worse for the economy. Inflation

impacts the companies who have excess cash.

➢ It impacts investors who have fixed income investment and surviving on fixed

generated return, especially retirees. Investors who have invested in stocks have

to wait for a long time to recover their investment in general companies’ returns

are found to be overstated.

➢ Inflation impacts the nominal interest rate and real rate of interest.

➢ Inflation erodes public faith in the reliability of political leaders. Inflation impacts

moral virtues, a strong work ethic, and prevails deferred gratification.

➢ Inflation impacts savings and encourages consumption.

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➢ Inflation impacts consumer spending increases which heats up the economy and

later it converts into spiraling inflation and reduces standard of living.

➢ Inflation impacts treasury bonds, as these fixed income assets pay the same return

every year. Inflation also impacts financial assets like CDs, insurance policies,

stocks and bonds and makes them more complex to evaluate. If inflation becomes

part of economic behavior then it is a difficult task to remove its influence and

impacts.

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 CHAPTER 5

CONCLUSION AND SUGGESTIONS

The conclusion for a project on the expansion of inflationary trends in India should

highlight the impact of rising inflation on the Indian economy and suggest strategic

measures to address this issue.

The project research indicates that high inflation affects markets, income distribution,

international competitiveness, and can trigger a wage-price spiral.

To conclude, it is crucial for the Indian government and the Reserve Bank of India to

collaborate on managing inflationary pressures by stabilizing food prices, enhancing

supply chain efficiency, and maintaining a cautious monetary policy. Additionally,

focusing on a balanced budget, reducing unnecessary expenditure, and implementing

reforms to boost economic growth are essential steps.

The RBI should continue its monetary policy approach, adjusting interest rates to manage

inflation while considering its impact on economic growth.

Overall, a comprehensive approach involving targeted measures and policy coordination

is necessary to mitigate the adverse effects of rising inflation on the Indian economy.

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To address the issue of expanding inflationary trends in India, the following suggestions

can be considered:

1. Monetary Policy: Implement a monetary policy to reduce the supply of money within

the economy, lowering the prices of bonds and raising interest rates. This can help reduce

demand, lower economic growth, and slow down inflation.

2. Money Supply Management: Regulate the money supply to maintain a near correlation

between money supply and inflation, effectively controlling inflation by regulating the

money supply.

3. Supply Side Policies: Boost the economy's productivity and efficiency through supply-

side policies, which can place downward pressure on long-term costs and help control

inflation.

4. Fiscal Policy: Utilize fiscal policy tools such as increasing taxes, reducing government

spending, or implementing subsidies to curb demand and manage inflation.

5. Public Education and Awareness: Raise public awareness about the causes and effects

of inflation, encouraging responsible consumption and saving habits.

6. Regular Monitoring and Adjustment: Continuously monitor inflation trends and adjust

policies accordingly to maintain a manageable level of inflation that supports economic

growth.

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By implementing these measures, the Indian government and the Reserve Bank of India

can work together to control inflationary trends and maintain the stability of the Indian

economy

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 CHAPTER 6

REFERENCES

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➢ International journal of research

➢ [Link]

➢ Project-Report

➢ [Link]

➢ Investopedia

➢ [Link]

➢ Modern Diplomacy

➢ ECONOMIC TIMES

➢ [Link]

back-demonetisation-november-2016-8618788/

➢ [Link]

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