Inflation of India – Fundamentals We Need to Know – General Studies Paper 3 [ Detailed Analysis - Economics ]

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Inflation is the continuously rising rate of prices for goods and services and the falling of purchasing power of currency. Basically inflation occurs because of imbalance between demand and supply. For ex. Increasing taxes on products, changing in production etc.

Indicators of Inflation are:

Image of indicators inflation

Image of indicators inflation

Two indicators inflation: WPI and CPI

  1. Wholesale Price Index (WPI):
    • It is the price of representative basket of wholesale goods.

    • WPI is charges as a central measure of Inflation.

    • Ten-Day Price Index method is used to calculate WPI.

  2. Consumer Price Index (CPI):

  • It measures price of manufacture goods and services.

  • The annual percentage change in a CPI is used to count inflation.

  • CPI can be calculated as:

UpdatedcostBaseperiodcost×100

Primary Reasons for Inflation in India:

Reasons for Inflation in India

Reasons for Inflation in India

Reasons for Inflation in India

1. Increased Public expenditure:

  • From 18.6 % of GDP in 1961, public expenditure has been increased up to 28 % in 2012 - 13, Government of India has spent around 40 % for non-development activities such as defense, law etc.
Image of expenditure in India

Image of expenditure in India

expenditure in India by government

2. Difficulty in financing

  • It means difficulty in financing of budget in the sense of borrowing money from bank or print more currency.

3. Unreliable agricultural growth

  • Agriculture is the main field of India. If crops are fails then prices frequently increase as well as general price levels also increase.

4. Poor rise in industrial production

5. Storage of necessary raw materials

State of Inflation in India

  • Inflation rate in both food and core has decreased up to April 2016 in India it riches to 5.4 % compared to 11.5 % in November 2013.
  • Basic question to check whether inflation in India?

1. Is the fall in CPI inflation is enough or not?

  • Inflation outcome is reached to 5.2% which is better than assumed guidance of 8 % in January 2015. 5.7% in January 2016 which was assumed at 6%.
  • RBI has assumed CPI Inflation at 5.3 % for 2017 and 4 % for 2018.
graph of CPI inflation in India

graph of CPI inflation in India

CPI inflation in India

2. Is inflation decline sustaining?

  • Sustaining of Inflation means the decline marked by RBI is meeting or not?
  • Currently government is focusing on education and health sectors, for that many initiatives are introduced such as “Make in India”, “Digital India”, “Skill India” etc.
  • So for reaching at decline, government have to work on oil and food prices for stability.

Reasons behind divergence between WPI and CPI

table of divergence between WPI and CPI

table of divergence between WPI and CPI

divergence between WPI and CPI

- Published on: June 1, 2016