BCom Pricing Trends and Inflation in India Notes Study Material
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BCom Pricing Trends and Inflation in India Notes Study Material
INTRODUCTION
The problem of prices in the country, largely that of rising in them, has engaged the attention of all for a long. For quite many years the economy has witnessed a rise in prices, with many harmful effects. It is necessary, therefore, to analyze the phenomenon, investigate its causes, and devise suitable solutions.
In India, the prime objective of our economic planning is to promote economic growth through price stability. Except for the first plan period (195156) when there was a fall in prices, the Indian economy has been plagued with rising prices of varying intensity, with some slight dips here and there. In India the trend of price-rise has prevailed for very many years and continues to do so at present is harmful to the poor of the country.
MEANING OF INFLATION
Inflation refers to an economic situation under which there is a constant rise in the price level. It denotes the increase in the general level of prices measured by the price index which is an average of consumer or producer prices. An irregular price rise cannot be called Inflation.
Some important features of inflation are as below:
(i) Inflation is always associated with a continuous rise in price.
(ii) Under this situation there is excess demand over the available supply.
(iii) There are two types of inflation—a) Demand-pull inflation, (b) Cost-push inflation.
(iv) It can be measured by Price Index.
TYPES OF INFLATION
Inflation may be two types:
(i) Demand-Pull Inflation: Demand-Pull inflation is a situation when the demand for goods and services exceeds the supply at current prices. In fact, a strong inflationary pressure has been built into the Indian economy for a long time, partly through ever-mounting demand on the one side and inadequately rising supply, on the other. The expanding demand for goods and services is due to the rapid multiplication of our population, rapid economic growth, rising money incomes, expansion in money supply and liquidity in the country, and rising volume of black money, etc. (BCom Pricing Trends and Inflation in India Notes Study Material)
(ii) Cost-Push Inflation: Cost Push Inflation is also known as wage-push inflation, profit-induced inflation, or supply inflation. Factors responsible for this type of inflation are fluctuations in production, increased rate of taxes, use of backward technology, line in global prices of crude oil, etc.
In both the above situations there is a rise in the prices of factor inputs and there is a rise in the prices of final goods.
STAGES OF INFLATION
There are mainly four stages of inflation;
(i) Low Inflation: Under this stage, the percentage rate of inflation stands from 1 to 5%. In case of no inflation, this percentage becomes zero. Below zero it means minus a country faces deflation.
(ii) Moderate Inflation: Moderate inflation will be considered when it ranges from 5% to 25-30%. It is beneficial for developing countries in the world.
(iii) Extremely High Inflation: High Inflation is a situation under which the rate of inflation is 30% to 50%. This is harmful to any economy because it accelerates price rises. (BCom Pricing Trends and Inflation in India Notes Study Material)
(iv) Hyper Inflation: It is the most extreme condition of inflation. Under this stage, yearly price increases of three digits percentage points, and after some time it be explosive for the economy.
TRENDS OF PRICES IN INDIA
Our economy has witnessed a rise in prices for many years. Economic development is not possible without inflation in an underdeveloped country, But the excessive rise in price has an adverse effect on the economic development of the country. The Government of India started the Wholesale Price Index (WPI) of all commodities with 1950-51 as the base year. The government has been changing the base year every decade from 1950-51 to 1960-61, then to 1970-71, and finally to 1981-82. The usual plea taken by the government is that the new series has a considerably larger coverage of items, grades, and markets, and that is also based on a larger number of quotations.
Whatever the reasons, with the change in the base year every decade, we are unable to make any valid and broad comparison of price movements. Since planning was introduced in 1950-51. (BCom Pricing Trends and Inflation in India Notes Study Material)
We can study trends in prices and inflation as under:
(i) Price situation during 1951-71: One of the declared objectives of the first plan was to combat inflationary pressure. At the end of the First Plan period, the general price index number stood at 99 (with 1952-53 = 100) but the index number of food articles had declined to:
Food Articles: 95
Cereals: 88
Pulses: 77
Accordingly, during the first plan, the price situation was very favorable and the common man was happy.
The success of the first plan and the favorable movement of price encouraged the Government of India to launch more elaborated plans and undertake a greater degree of deficit financing. Throughout the second plan period, there was a gradual and steady rise in prices. So, the price level rose by 20 percent by 1964-65. (BCom Pricing Trends and Inflation in India Notes Study Material)
The price Index during the third five-year plan (1961-1965) rose fastly. Due to the China war of 1962 and the Indo-Pakistan conflict in 1965, our defense expenditure had increased. Above all the serious famine conditions of 1965-66 were responsible for the rapid rise in prices. Between 1961 and 1966, the rise in the prices was:
Foodstuffs: 40 percent
Cereals: 45 percent, and
Pulses: 70 percent
The next two years were years of acute inflation-galloping inflation-when the index number of wholesale prices shoot up by 14% and 11% respectively.
(ii) Inflation during the Seventies: The upward movement of prices during the fourth plan (1961-74) was going on. For instance, the rise in price level during the first three years of the fourth plan ranged between 7 points to 9 points. Last year, however, the price level rose by 47 points. (BCom Pricing Trends and Inflation in India Notes Study Material)
Large expenditure of the government on Bangladesh refugees, the widespread failure of Kharif crops in 1972-73, and the complete failure of the government takeover of wholesale trade in wheat resulted in an unprecedented rise in the price level during 1973-74. With all the characteristics of galloping inflation. From 1977 to 1979 when Janta Party Government came into the center, was indeed successful in holding the price line. (BCom Pricing Trends and Inflation in India Notes Study Material)
(iii) Price Movement during the Eighties: After Janata Party, the Congress Party returned to power in January 1980. The poor agricultural crop of 1979-80 and the consequent adverse effect on industrial production and the hike in oil price by 130 percent in 1980 above were responsible for boosting the price level still further. (BCom Pricing Trends and Inflation in India Notes Study Material)
In 1980-81 the wholesale price Index (WPI) rose by 38 points i.e. 218 to 256 an increase of 17% in one year. The Govt. of India was prompt in taking anti-inflationary measures on both the demand and supply sides. On the demand side, the Government made a series of adjustments in the CRR of the Commercial Banks to check the growth of liquidity in the banking system. On the supply side, the government attempted to increase the supply of goods and services through both short-term and long-term measures.
(iv) Price Trend in the Nineties: At the beginning of the nineties (since 1990), prices were on a rising trend. The reason was behind this, that our government deliberately raised administrated prices and indirect taxes on commodities and services. Apart from this, there were some other causes, that are responsible for the price rise during the Nineties. These are, increases in the prices of food grains, high prices of petroleum products due to the gulf surcharge, and a heavy fiscal deficit resulting in expansion of the money supply.
The average annual rates of inflation were quite high and it was 10% to 14% till 1994-95 also known as double-digit inflation. Since 1995, the inflation situation come under control with a decline in the prices of primary food articles as well as manufactured food products.
The average annual inflation rate has steadily declined from 10.6. percent (1991-96) to 4.91 percent to 4.91 percent (1996-2005). But the rate of inflation has unfortunately moved up to 6.7 percent between 2005-2012. During these years the prices of primary articles were in increasing trend line from 1991 to 1996-113 percent and between 2005-2012 it was 10.4 percent.
(v) Recent Price Trend: A rise in Inflationary Pressure: The price trend was nearly stable during the Tenth plan (2002-07) period. Later during the 11th five-year plan, we find acceleration in the price level. During this planning period, the price rise in primary commodities was relatively higher than the general price level. (BCom Pricing Trends and Inflation in India Notes Study Material)
The inflation rate in India was recorded at 5.17 percent in March 2015. The inflation rate in India averaged 8.69 percent from 2012 until 2015, reaching an all-time high of 11.16 percent in November 2013 and a record low of 4.38 percent in November 2014.
We can see India’s recent inflation rate with the help of the next Chart:
India’s Annual CPI inflation decreased to 5.17 percent in March 2015 from 5.37 percent in February 2015, below market expectation. It is the lowest rate in three months due to a slowdown in food costs. The corresponding provisional inflation rates for rural and urban areas for March 2015 are 5.58 percent and 4.75 percent. (BCom Pricing Trends and Inflation in India Notes Study Material)
In India, consumer price changes can be very volatile due to dependence on energy imports, the uncertain impact of monsoon rains on its large farm sector, difficulties regarding transporting food items to market because of its poor roads and infrastructure, and high fiscal deficit.
Thus, Government needs to directly attack the basic causes of inflation. No doubt Government has no control over fast-rising international crude prices, but its impact is very bad as prices like in other commodities. It should be encouraged for balanced inflation.
CAUSES OF INFLATION
Various factors are responsible for the inflationary rise in prices in India in recent years. We can categorize these causes into two groups:
(A) Demand-Pull Factors
There are various sub-factors under the category of demand-pull factors. Which are given as below:
(i) Mounting Public Expenditure: The public expenditure in India has been steadily and continuously increasing over the year. The government (Central Government, State Government, and Union Territories) expend more money on infrastructural work and public welfare through various planning and has thus generated considerable inflationary pressures.
Mounting Government expenditure implies a growing public demand for goods and services and a consequent rise in prices. Besides, continuous increase in Government expenditure has the effect of putting large money incomes in the hands of the general public. Expenditure of the government becomes income for the people. Thus the inflationary pressure will be excessive.
(ii) Deficit Financing and Increase in Money Supply: Deficit financing is also an important factor for inflation. The Government of India was responsible for adopting deficit financing as a method of financing economic development. In the Budget, presentation government shows its expenditure more than revenue. So, our Budget Shows always deficit balance, and to recover this deficit our government pumps extra money into circulation. This extra money increases purchasing power of the public and they demand more and more goods and commodities. (Pricing Trends and Inflation in India Notes Study Material)
(iii) Rapid Growth of Population: Indian population has been a continuous and rapid increase since 1951. The population which was 36.0 crore in 1951 has risen to approximately 121 crores at present time. That’s why the growing population emphasizes pressure on aggregate demand and on the price level. (BCom Pricing Trends and Inflation in India Notes Study Material)
(iv) Role of Black Money: In India, there is a huge accumulation of unaccounted money in the hand of tax evaders, smugglers, builders, and corrupt politicians and government servants. The extent of black money was estimated to be Rs. 6,00,000 crore in 1997-98 and nearly Rs. 36,00,000 crore in 2011-12. No doubt in recent years. Black Money is one of the major factors for demand-pull inflation.
(v) Increased Wages and Salaries: In the last decade, there has been a good increase in wages and salaries of the Employees, both in the public as well as private sectors. The government has increased employee salaries continuously through additional bonuses, incentives, increments, and other monetary benefits for the wellness of society. But, this has raised market demand and contributed to price rises in recent years. (BCom Pricing Trends and Inflation in India Notes Study Material)
(B) Cost-Push Factors
The cost-push factors which are responsible for price rise in India are given below:
(i) Unsatisfactory Agricultural Growth: Indian Agriculture largely depends on monsoons and thus crop failures due to drought and flood have been a regular feature of agriculture in this country. Whenever the agricultural output declined in this country, the marketable grains also declined. In this condition, foodgrains prices are rising rapidly.
(ii) Inadequate rise in Industrial Production: Industrial sector has not to have Sufficient Growth to check inflationary pressure. The performance of the essential consumer goods sector which includes textiles, footwear, heavy machines, food manufacturing, oil, etc. was particularly unsatisfactory. (BCom Pricing Trends and Inflation in India Notes Study Material)
The causes behind the inadequate increase in their production are (i) Lackness of raw materials, (ii) Capital equipment, (iii) Transport and communication facility, (iv) Industrial unrest; etc. Thus, in the wake of a large expansion of the money supply creating a big demand for goods inadequate increase in their production pushed up their prices. (BCom Pricing Trends and Inflation in India Notes Study Material)
(iii) Taxation: It is the main factor in rising costs and prices. With every budget, the government imposed fresh commodity taxes and gave an opportunity to the traders to rise the prices, often more than the levy of the taxes.
(iv) Administered Prices: In India, Public Sector undertakings are continuously raising the prices of their products and services which generally constitute raw materials for other industries. Every rise in administered prices is responsible for inflationary pressure in the country. (BCom Pricing Trends and Inflation in India Notes Study Material)
(v) Hike in Oil Prices and Global Inflation: In recent years, the price of crude oil in the international market has been steadily rising under the new economic set-up. The prices of petrol and diesel are changed frequently according to the international market. So, serious inflationary pressure has arrived. (BCom Pricing Trends and Inflation in India Notes Study Material)
(vi) Hoarding and Speculation of Essential Commodities: Due to the large scale of hoardings and speculation of essential commodities by trade brokers and black marketers, prices of commodities increase in the general market.
CONSEQUENCES OF INFLATION
Apart from uncertainties in production, inflation has caused certain serious imbalances in the Indian economy. The main effects of inflation are:
(i) Adverse effect on production
(ii) Adverse effect on the distribution of income.
(iii) It caused to increase in economic inequalities.
(iv) Adverse effect on the economic growth of the country.
(v) Balance of payments position gets adversely affected.
(vi) Foreign investment gets adversely affected.
(vii) It discourages the savings of the common man.
(viii) Fall in quality of products.
(ix) Adverse effect on the standard of living.
REMEDIAL MEASURES TAKEN BY THE GOVERNMENT
The Government of India has taken various corrective measures from time to time. Since inflation is often the outcome of shortages in basic goods and services and rapid growth in money supply and bank credit. Various types of measures relating to the money supply, pricing, and distribution of commodities have been taken as below:
(i) Fiscal Measures: The Government of India has generally insisted on controlling its own expenditure and keeping in check both its revenue deficit and fiscal deficit. For this purpose Govt. adopts a number of fiscal measures as, to check unnecessary consumption and unproductive expenditure; impose additional taxes on higher income groups; exempt tax on essential commodities; encourage production through liberal licensing and financing for productive units, etc. (BCom Pricing Trends and Inflation in India Notes Study Material)
(ii) Monetary Measures: Monetary measures include credit control measures taken by RBI. RBI uses credit control measures like Bank rate, CRR, SLR, and open market operation to check inflation or recession. Accept of this, the RBI relied heavily on selective credit controls on bank loans against foodgrains, cotton, oil seeds, oils, sugar, and textiles to discourage speculative hoardings.
(iii) Fixation of Maximum Prices: Govt. of India has fixed the wholesale and retail prices of foodgrains, for eliminating hoardings and speculation. Further, the Govt. also fixes minimum procurement prices (MAP) for major crops on the recommendation of the Agricultural Prices Commission (APC). (BCom Pricing Trends and Inflation in India Notes Study Material)
(iv) Production Policy: Govt. of India emphasizes such a production policy that promotes agricultural and industrial production. For industrial production, various measured have been taken to develop and promote small-scale and cottage industries.
For agricultural products, the Government has adopted measures like the use of fertilizers, a high-yielding variety of seeds, an extension of agricultural area, etc. (BCom Pricing Trends and Inflation in India Notes Study Material)
(v) Public Distribution System (PDS) and Consumers Protection: The prime aspect of the Government’s policy is the strengthening of the PDS system even covering rural areas. The Government set up a network of fair price shops numbering nearly 4,00,000 which covers a population of over 500 million and which distribute wheat, rice, sugar, edible oils (Palm oil), kerosene, etc. system helps to hold down prices of essential commodities. (BCom Pricing Trends and Inflation in India Notes Study Material)
(vi) Other Relevant Measures: Following are the other relevant measure that has been taken by Govt. of India to check inflation:
(a) Adoption of OGL (Open General License) import policy for importing sugar, pulses, oils, etc.
(b) Adjustment of trade and tariff policies in his budget to ensure that domestic prices of industrial products remain competitive.
(c) Substantial reduction in excise duties on a number of items expected to accelerate industrial growth.
BCom Pricing Trends and Inflation in India Notes Study Material
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