BCom Pricing Trends and Inflation in India Notes Study Material
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Pricing Trends and Inflation in India Notes Study Material
The problem of prices in the country, largely that of rise in them, has engaged the attention of all since long. For quite many years the economy has witnessed rise in prices, with many harmful effects. It is necessary, therefore, to analyse the phenomenon, to investigate its causes, and to 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 India 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 for the poors of 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 price index which is an average of consumer or producer prices. 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 of demand over the available supply.
(iii) There is two types of inflation—a) Demand-pull inflation, (b) Cost push inflation.(Pricing Trends and Inflation in India Notes Study Material)
(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 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 the production, increased rate of taxes, use of backward technology, line in global prices of crude oil etc.
In both the above situations there is rise in the prices of factor inputs and there is 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 is become zero. Below zero it means in 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 world.
(iii) Extremely High Inflation: High Inflation is a situation under which the rate of inflation is 30% to 50%. This is harmful for any economy because it accelerate price rise.(BCom Pricing Trends and Inflation in India Notes Study Material)
(iv) Hyper Inflation: It is most extreme condition of inflation. Under this stage yearly price increases of three digits percentage points and after some times its be an explosive for economy.
TRENDS OF PRICES IN INDIA
Our economy has witnessed rise in prices from many years. Economic development is not possible without inflation in an under developed country, But excessive rise in price has an adverse effect on the economic development of the country. The Government of India started Wholesale Price Index (WPI) of all commodities with 1950-51 as the base year. Then 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 be 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
We can study of 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.(Pricing Trends & Inflation in India Notes Study Material)
The success of the first plan and the favourable 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 that, 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) has rose fastly. Due to China war of 1962 and Indo-Pakistan conflict in 1965, our defence expenditure had increased. Above all the serious famine condition of 1965-66 were responsible for rapid rise in prices. Between 1961 and 1966, the rise in the prices was:
Food stuffs : 40 percent
Cereals : 45 percent, and
Pulses : 70 percent
The next two years were year 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, rise in price level during the first three years of the fourth plan ranged between 7 points to 9 points. In last year, however, the price level rose by 47 points.
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 a galloping inflation. During 1977 to 1979 when Janta Party Government came in centre, was indeed successful in holding the price line.
(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 demand and supply side. On the demand Side, Government made a series of adjustment 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: In the beginning of nineties (since 1990), prices were in rising trend. The reason was behind this, our government deliberately raising administrated prices and indirect taxes on commodities and services. Apart from this there were some other causes, who are responsible for price rise during Nineties. These are, increase in the prices of foodgrains, high prices of petroleum products due to gulf surcharge and heavy fiscal deficit resulting in expansion of money supply.
The average annual rates of inflation were quite high and it was 10% to 14% till 1994-95 also know 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 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 in 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 Tenth plan (2002-07) period. Later during 11th five year plan, we find acceleration in price level. During this planning period, the price rise in primary commodities was relatively higher than general price level.
The inflation rate in India was recorded at 5.17 percent in March 2015. Inflation rate in India averaged 8.69 percent from 2012 until 2015, reaching an all time high of 11.16 percent in November of 2013 and a record low of 4.38 percent in November 2014. (Pricing Trends and Inflation in India Notes Study Material)
We can see India’s recent inflation rate with the help of next Chart:
India Annual CPI inflation decreased to 5.17 percent in March of 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 cost. 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, the 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 on basic causes of inflation. No doubt Government has no control on fast rising international crude prices, but its impact is very bad as price like in other commodities. It should be encouraged for balanced inflation.(Pricing Trends and Inflation in India Notes Study Material)
CAUSES OF INFLATION
Various factors are responsible for inflationary rise in price in India in recent years. We can categorise these causes into two groups as under:
(A) Demand-Pull Factors
There are various sub-factors under 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. Government (Central Government, State Government and Union Territories) expends more money in 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 consequent rise in prices. Besides, continuous increase in Government expenditure has effect of putting in large money incomes in the hands of 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 a important factor for inflation. The Government of India was responsible for adopting deficit financing as a method of financing economic development. In Budget presentation government shows his expenditure more than revenue. So that, our Budget Shows always deficit balance and to recover this deficit our government pumps extra money in circulation. This extra money increases purchasing power of 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 crore at present time. That’s why the growing population emhasises the pressure on aggregate demand and on the price level.
(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 factor for demand-pull inflation.(BCom Pricing Trends and Inflation in India Notes Study Material)
(v) Increased Wages and Salaries: In last decade, there has been a good increase in wages and salaries of the Employees, both in public as well as private sectors. Government has increased employees salary continuously through additional bonus, incentives, increments and other monetary benefits for wellness of society. But, this has raised market demand and contributed to price rise 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 as below:
(i) Unsatisfactory Agricultural Growth: The Indian Agriculture largely depends on monsoons and thus crop failures due to drought and flood have been regular feature of agriculture in this country. Whenever the agricultural output declined in this country, the marketable grains also declined. In this condition, foodgrains price are rising rapidly.(Pricing Trends and Inflation in India Notes Study Material)
(ii) Inadequate rise in Industrial Production: Industrial sector has not Sufficient Growth to check inflationary pressure. The performance of essential consumer goods sector which includes textiles, footwear, heavy machines, food manufacturing, oil etc. was particularly unsatisfactory. The causes behind 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 lage expansion of the money supply creating big demand for goods inadequate increase in their production pushed up their prices.
(iii) Taxation: It is a main factor in rise 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 are responsible for inflationary pressure in the country.
(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 new economic set-up. The prices of petrol and diesel are changed frequently according to international market. So, a serious inflationary pressure has arrived.
(vi) Hoarding and Speculation of Essential Commodities: Due to large scale of hoardings and speculation of essential commodities by trade broker and black marketers, prices of commodities increase in 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 economic growth of country.
(v) Balance of payments position gets adversely affected.
(vi) Foreign investment gets adversely affected.
(vii) It discourages savings of common man.
(viii) Fall in quality of products.
(ix) Adverse effect on standard of living.
REMEDIAL MEASURES TAKEN BY 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 a rapid growth in money supply and bank credit. Various types of measures relating to money supply, pricing and distribution of commodities has 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; to impose additional taxes on higher income group; exemption of tax on essential commodities; to incourage production through liberal licensing and financing for productive units, etc.(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 and selective credit controls on bank loans against foodgrains, cotton, oil seeds and oils, sugar and textiles as to discourage speculative hoardings.(BCom Pricing Trends and Inflation in India Notes Study Material)
(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).
(iv) Production Policy: Govt. of India emphasises on a such production policy which promotes agricultural and industrial production. For industrial production, various measured have been taken to develop and promote small scale and cottage industries.(Pricing Trends and Inflation in India Notes Study Material)
For agricultural products, Government has adopted measures like use of fertilizers, high yielding variety of seeds, extension of agricultural area etc.
(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 shop 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.
(vi) Other Relevant Measures: Following are the other relevant measure have been taken by Govt. of India to check inflation:
(a) Adoption of OGL (Open General License) import policy for importing sugar, pulses, oils etc.(Pricing Trends and Inflation in India Notes Study Material)
(b) Adjustment of trade and tarrif 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.
Pricing Trends and Inflation in India Notes Study Material
Pricing Trends and Inflation in India Notes Study Material