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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What is Causing Inflation?
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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). |
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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).
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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 >>
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