Inflation

by, Saurabh Shukla (PGDSM-MIT)

The Inflation :
In Jan 2007 , WPI rose to 6.6% , After all the effort made by RBI did provide results in terms of bringing down inflation to 16 month low . Since last year December RBI has maintained a grip on the CRR to tackle creeping inflation which could have otherwise resulted in hyper inflation.


Some of the Key reasons :
1) The main contributor to inflation in India was prices of crude oil , Every commodity’s price get affected by crude oil price directly .
2) High liquidity in market was another key factor which encouraged consumers to spend more and result too much money chasing few goods .
3) From last couple of years lower harvest is also contributing to rising prices of food items which hit poor hard.


What can still contribute to inflation:
1) Stock Market boom : Sensex is doing fairly good and domestic and international investors will pump more money into the stock market
2) The growing confidence on India is leading to huge FDI’s , Corporate houses are very focussed on expanding their business in India and Asia
3) Crude prices are still very unstable and it is very much possible that they again start fluctuating
4) Increasing employment because of booming IT , Retail , Aviation sectors which is supplying more disposable income day by day.

So it is evident that forces will push inflation to go up again and central bank and government has to come up with concrete and long term solution to curb inflation and provide shield to common man.

Future impacts and remedies :

It will be very important for RBI to maintain the status quo in terms of its policies , Lowering the interest rates or decreasing CRR at this point of time can again give a boost to inflation.

• Inflation plays an instrumental role in Indian politics and government making , In 1998 a coalition led by the Bharatiya Janata Party (BJP) was defeated in a Delhi state election after a six-fold rise in onion prices. Given current scenario if UPA government can maintain low inflation then it will convet into a big votebank for them in coming elections.
• In februry 2007 once wheat prices rose by 12% , Indian government banned wheat export to meet the domestic demand , if inflation is under control then again the wheat export can be started.
  Manufacturing goods contribute 64% of WPI so government will also try to make sure that prices of manfactured goods remain at a stable level.
• Low inflation might send economy again into cycle of high spending and hence high borrowing.
  Downward inflation will be helpful for exporters , now they can purchase cheap goods in domestic market and sell it in international market , whereas importers might face problems because they will not be getting as much profit as they used to get earlier.
• Contrary to higher inflation where organizations tend to save cost by cutting on employees wages and firing workforce , in Low inflation scenario employment growth will be fast as it will not be very expensive for firms to recruit new resources.
  
  Overall reduced inflation has given some relief to the midle class and lower class population of India , specially in terms of food items and goods for daily use. This will be very helpful for retired people with fixed incomes because their money buys a little less each month
  
  
  
  References:
  
  1) www.economictimes.com
  2) www.rediff.com