The Indian Economy: Dealing with Inflation

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Case Details:

Case Code : ECON020
Case Length : 12 Pages
Period : 2006-2007
Pub Date : 2007
Teaching Note :Not Available
Organization : -
Industry : -
Countries : India

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This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.

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What is Causing Inflation?

Inflation is the rise in prices which occurs when the demand for goods and services exceeds their available supply. In simpler terms, inflation is a situation where too much money chases too few goods (Refer Exhibit I to know more about inflation).

In India, the wholesale price index (WPI), which was the main measure of the inflation rate consisted of three main components - primary articles, which included food articles, constituting 22% of the index; fuel, constituting 14% of the index; and manufactured goods, which accounted for the remaining 64% of the index (Refer Exhibit II for the weightages of different commodities in the WPI).

For purposes of analysis and to measure more accurately the price levels for different sections of society and as well for different regions, the RBI also kept track of consumer price indices10 (Refer Exhibit III for the rates of inflation based on different indices between 2001 and 2006).

The average annual GDP growth in the 2000s was about 6% and during the second quarter (July-September) of fiscal 2006-2007, the growth rate was as high as 9.2%. All this growth was bound to lead to higher demand for goods. However, the growth in the supply of goods, especially food articles such as wheat and pulses, did not keep pace with the growth in demand. As a result, the prices of food articles increased. According to Subir Gokarn, Executive Director and Chief Economist, CRISIL, "The inflationary pressures have been particularly acute this time due to supply side constraints [of food articles] which are a combination of temporary and structural factors."11

Excerpts >>

10] "India Tries to Allay Fears as Inflation Hits 6.73%,", February 16, 2007.

11]  Shalini S. Dagar, "Why the Inflation Rate is Rising?" p 18, Business Today, March 11, 2007.


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