Business Assessment of Rising Inflation in India

8/11/2019 Business Assessment of Rising Inflation in India

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1 Business Analysis II Group Assignment

BUSINESS ANALYSIS - II

GROUP ASSIGNMENT

BY

DEEPAK SINGH (36452)

SAMEER KUDHALE (36467)

SANJEEV MHASAWADE (36468)

SAURABH R. DESHPANDE (36470)

SUYOG MOTGHARE (36476)

EXE. MBAII

DIV - B


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QWhat is the bigger problem in India ? Growth or Inflation ? Justify

your answer.

A

Out of the two, inflation is a bigger problem in India as compared to lack

of growth. India, in spite of being Asias third largest economy, is still

stuck at growth less than 5% while inflation is rising at a faster pace

(around 10%).

India has demonstrated remarkable reliance in the past with respect to

growth. Even during global financial crisis, when the world was

recording very low growth, India grew at a reasonable rate. There is a

underlying dynamism in Indias economic growth.

On the other hand, India is chronically supply-constrained. This increases

inflation which is also a bigger problem for the poor. The biggest

problem of high inflation is that it reduces the purchasing power of

money. Investments are damaged as returns on deposits are lower.

Purchase of non-financial assets like real estate and gold is encouraged

due to high inflation, thus contributing to the widening of Indias current

account deficit.

Figure 1 - Impact of Inflation on Economy

High Inflation

Lesser

PurchasingPower

Lesser Savings

Lesser

Demand

LesserProduction

Shrinking ofEconomy


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Major reasons for Indias sustained high inflation are as follows

o Supply Side Bottleneck, Limited Infrastructure & Inadequate

Manufacturing Growth

o Weak Public Distribution System

o

Deregulation of Energy Prices

o Persistent Double Digit Food Inflation

o Unbalanced Economic Growth

o Increase in Spending Due to Govt. Schemes

o Rising Import Prices

o Indias Ever Growing Population

It is a debate whether Indian government should takes steps to reduce

inflation or the RBI should adapt easy monetary stance, risking inflation

rise but making an effort to curb growth. However, inflation being the

bigger devil, steps need to be taken to control inflation in India.

Supply in India is constant due to lack of investment while demand is

ever increasing due to population growth. To control inflation, this huge

gap needs to be filled. To achieve this, capacity of present production

units need to be increased or new ones need to be build.

Infrastructure should be build and utilized efficiently to bring down

prices. Lesser dependence on foreign liquidity and higher productivity is

also the key to lowering inflation.

Population should be made more literate and educated rather than feeding

them on food security programs which ultimately add to Indias fiscal

deficit.

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QWhat is the IIP ? How does it help to understand growth levels in

India ?

A

Index of Industrial Production (IIP) is one of the Prime indicators of the

economic development for the measurement of trend in the behaviour of

Industrial Production over a period of time.

Index of Industrial Production (IIP) is an index which details out the

growth of various sectors in an economy.

The period of time that is used for measurement is called the base year.


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Index of Industrial Production (IIP) is an abstract number, the magnitude

of which represents the status of production in the industrial sector for a

given period of time as compared to a reference period of time.

Currently base year of India for IIP is 2004-05. Indian IIP particularly

focuses on Manufacturing, Mining and Electricity with the biggest weight

given to Manufacturing sector i.e. 75%. The all India IIP is compiled and

published monthly by Central Statistics Office (CSO) with the time lag of

six weeks from the reference month.

Its important for the Government and RBI to frame their respective

policies adequately and also as its being released monthly and has up to

date report of the performance of different Industries, Government can

take required measures on time .So that the policies eventually turn out

helping the Industrial growth. IIP also has a significant impact on the

stock market as continuous poor IIP could lead to lower stock valuation

because of which foreign investors could pull out their money in the

market and which results into weakening of Rupee.

Recent revision of IIP released by CSO with 2004-05 as the base year

comprises 682 items. This index shall give a better picture of growth in

various sectors of the economy, because it is broader and includes

technologically advanced goods such as cell phones and iPods. The

previous base year (199394) was not usable as the list contained an array

of outdated items such as typewriters and tape recorders.

Weighted arithmetic mean of quantity relatives with weights being

allotted to various items in proportion to value added by manufacture in

the base year by using Laspeyres' formula :

I = summation (Wi*Ri) / summation (Wi)

where

I is the index of industrial production

Ri is the production relative of the ith item for the month in question

Wi is the weight allotted to it.

IIP is compiled using data received from 16 source agencies viz.

Department of Industrial Policy & Promotion (DIPP); Indian Bureau of

Mines; Central Electricity Authority; Joint Plant Committee; Ministry of

Petroleum & Natural Gas; Office of Textile Commissioner; Department

of Chemicals & Petrochemicals; Directorate of Sugar; Department of


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Fertilizers; Directorate of Vanaspati, Vegetable Oils & Fats; Tea Board;

Office of Jute Commissioner; Office of Coal Controller; Railway Board;

Office of Salt Commissioner and Coffee Board.

India is big in mining sector and has to encourage with different

beneficiary policies. Mining sector helps for manufacturing as well as

electricity generation sector.

Indian market should be made more aggressive on the Indian made

product in the consumer durable sector, more and more manufacturing

should be encourage with quality product output. Indian consumer should

be attracted more towards Indian products which will help in

strengthening the GDP of the country.

More focus should have to be given on Petroleum and Natural gas

resources, the import should have to bring down to margin and grow

Rupee strength.

Investment revival in India should be given more focus which will give

upturn in manufacturing sector.

India would need policy framework that would encourage the capital

goods sector, which at moment is falling drastically and contractions.

In India we observe the Industrial production higher in few months like in

October November as it is big festive season and a boom of purchase in

Indian market.

Currently the scenario showing saturation in manufacturing sector, India

has to rely more on agriculture and service sector.

Finance minister has always to make a note of IIP and has to address in

the budget the positive beneficiary steps towards industries to bail out

them from falling situation. At moment we see in India more capital is

wasted on the unwanted and unnecessary bills passed by standing

government just for vote bank purpose keeping aside the Indian economicgrowth and GDP growth.

So IIP does not merely an index for measuring the industrial growth but

impact our economy significantly.

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QWhy is it the case that WPI inflation is far lesser than CPI inflation in

India ?

A

A consumer price index (CPI)measures changes in the price level of

a market basket of consumer goods and services purchased by

households. The CPI is a statistical estimate constructed using the prices

of a sample of representative items whose prices are collected

periodically. Sub-indexes are computed for different categories and sub-

categories of goods and services, being combined to produce the overall

index with weights reflecting their shares in the total of the consumer

expenditures covered by the index. The annual percentage change in a

CPI is used as a measure of inflation. A CPI can be used to index (i.e.,

adjust for the effect of inflation) the real value of wages, salaries,

pensions, for regulating prices and for deflating monetary magnitudes to

show changes in real values.

However for calculation of Wholesale Price Index (WPI), a set of 435

commodities and their price changes are used for the calculation. The

selected commodities are supposed to represent various consumers

belonging to difference financial backgrounds and are supposed to give a

comprehensive WPI value for the economy.

WPI is calculated on a base year and WPI for the base year is assumed to

be 100. To show the calculation, lets assume the base year to be 1970.

The data of wholesale prices of all the 435 commodities in the base year

and the time for which WPI is to be calculated is gathered.

WPI inflation is calculated using formula:

(WPI of end of yearWPI of beginning of year)/WPI of beginning of

year x 100

The divergence in the food inflation data in the two indices is largely due

to:

o CPI does include data from PDS (Public Distribution System)

shops. In WPI, when we take cereals, only the market price is

reflected, while in CPI cereals prices are calculated taking into

account the weighted average price between the market price and


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public distribution system price. The PDS price is constant so it

tends to pull down the CPI food inflation.

o CPI is calculated on prices at the retail level whereas WPI is done

using prices at the mandi level. I.e. WPI accounts for changes in

general price level of goods at wholesale level, it fails to

communicate actual burden borne by the end consumer.

o The Wholesale Price Index focuses (WPI) on the price of goods

traded between corporations (wholesalers or producers).

o As data used in CPI was collected by the government from shops

where the prices of food products were artificially controlled to

paint a better picture for consumer inflation. If the price data taken

is actually from shops where the prices are controlled, which does

not accurately reflect the rise in food prices.

o Commodity compositions as well as weightage used causes

difference in WPI and CPI. For example, high weightage of food

prices in calculation of CPI. In the WPI, food articles have a

14.33% weight. In the CPI (Rural+Urban), the food index has a

47% weight. 47% weight in CPI makes WPI very less as compared

to WPI.

o The widening gap between prices at wholesale level and retail level

can be because of supply chain issues which impede the process of

smooth distribution of goods. Post-production hurdles at several

levels including storage, packaging, marketing and infrastructure is

a major fuel to retail prices.

Thus to summarize, the computation of CPI takes into account price

changes and the actual inflation that affects the end consumer. CPI is thus

a reflection of changes in the retail prices of specified goods and services

over a time period which is traded by particular consumer group. But due

to incorrect weight of food articles, soaring prices of fuel and

measurement of indexes at different level with distinct methodologies and

introduction of (supply chain) additional cost burden WPI inflation is far

lesser than CPI inflation in India.

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QWhy did the RBI Governor not raise rates on 1stApril 2014 policy

review even when the inflation continues to be a concern ?

A

The RBI has kept the policy repo rate under the liquidity adjustment

facility (LAF) unchanged at 8.0 per cent and the cash reserve ratio (CRR)

of scheduled banks unchanged at 4.0 per cent on the basis of an

assessment of the current and evolving macroeconomic situation.

In its assessment, RBI said that outlook for global growth continues to

remain moderate with an uneven recovery across industrial countries

while pointing out that activity in major emerging market economies

barring China has decelerated on account of weak domestic demand even

though there has been some improvement in export performance.

The central bank's policy is firmly focused on curbing inflation - The

Bank's policy stance will be firmly focussed on keeping the economy on

a disinflationary glide path that is intended to hit 8 percent CPI inflation

by January 2015 and 6 percent by January 2016. The Consumer Price

Index (CPI) inflation eased to 8.1 per cent in February while the

Wholesale Price Index (WPI) slowed to a 9-month low of 4.68 per cent.

The RBI Governor Raghuram Rajan has said that if inflation continues

along the intended glide path, further policy tightening in the near term is

not anticipated at this moment.

It is appropriate to hold the policy rate while allowing the rate increases

undertaken during September 2013-January 2014 to work their way

through the economy.

Risks to the central forecast of 8 percent CPI inflation by January 2015

stem from a less-than-normal monsoon predicted due to possible El Nino

effects. However, food production will decline because of this issomething that cannot be taken for granted. There is a lot of uncertainty.

If foodprices do increase, itll need to be evaluated if it is a temporary or

a permanent phenomenon and then accordingly take a call on the policy.

Retail inflation measured by the consumer price index (CPI) moderated

for the third month in succession in February 2014, driven lower by the

sharp disinflation in food prices, although prices of fruits, milk and

products have started to firm up. Excluding food and fuel, however, retail

inflation remained sticky at around 8 per cent. This suggests that somedemand pressures are still at play.


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Rajan has said that RBI will wait for some more data before taking any

policy action. While there has been a significant fall in vegetable prices at

both wholesale and retail level, current inflation is still too high.

He stated that the RBI will not react to any spike in inflation that is

temporary in nature.

Rajan may also want to wait for a glimpse of the next government's

economic policies as well as the outlook for monsoon season rains that

begin in June before making a policy move.

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QIf you were the Finance Minister of the new Government, what would

be the chief three policies you would try to announce in the budget in June

2014 ?

A

In the economy of a developing country like India, the role of the Finance

Minister is a crucial one. This is even more crucial in the case of the

country which has chosen path of planned development, just like Indian.

However it equally becomes difficult when Government is not formed by

a single party unanimously. However as a part of commitment towardsreforming Indian economy following are the policies which I might try to

announce in the budget in June 2014:

Revising tax structure by utilizing black money invested in other

countries :

If I ever get the opportunity to become Finance Minister of this country, I

will first try to bring back all black money residing outside of the country.

It is black money which is one of the key reasons of increase in inflationand to the rise in prices, and this makes financial control almost

impossible. One more primary reason of targeting black money is that

no tax is paid on this money. Thus for heavy amounts of black money,

government receives no benefit. Government receives no money which

can be used for common mansalaried people and business community

of the society. Due to huge amount of presence of black money, if I could

bring back this black money, it would help me lessen burden on the tax

structure of the society. With a more reasonable and fair tax - structure,the temptation to evade taxes, would no longer be there.


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Handling Growth and Inflation in a long term is extremely crucial as it

directly affects dayto-day living. Since black money is the money on

which tax has not been paid, I will see to it that that evasion is reduced to

a minimum. With this end in view, tax structure will be rationalized. The

taxation rate will be brought down so as to provide relief to the salaried

people as well as to the business community. With a more reasonable tax

- structure, the temptation to evade taxes, would no longer be there.

Those who still avoid payment of direct taxes, plugged, so that tax-

evaders are not able to escape the law. All anti-social elements of the

society who run a kind of parallel economy, would also be severely dealt

with Laws in this respect would also be made more stringent, and the

concerned Government officials would be given more power to deal with

such offenders. In this way, the inflation rate would be brought down, and

relief provided to the people, groaning under the burden of rising prices

and increasing taxation.

Lower subsidies :

It is always said that inflation is a tax on whole society while subsidies is

tax on the subset of society. This statement makes a lot of sense in

reality even when needs and consumption patterns of individuals vary

based on their financial capabilities.

Subsidies provided on different types of commodities are till now seen as

governments contribution towards welfare of the society. But in the past,

government has been spending a lot on subsidies which has drastically

increased governments expenditure. These subsidies for imported

expensive goods such as petrol, diesel contributes to the large

Government expenditure thus increasing governments need of money.

However subsidies on the consumable commodities do not really

contribute to the Gross Domestic Productivity (GDP) of the country.

They just act as Social Welfare expenditure which puts huge burden on

the Indian Economy. So I will take some measures to reduce subsidies if I

become Finance Minister of this country. This reduction in subsidies can

be implemented based on two criterias :

o Category of commodities

o Financial capabilities of consumers consuming commodity

Category of commodities is extremely important when deciding on the

subsidies. For example, I would prefer giving out subsidies for cooking


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fuel over Motor fuel. Financial capabilities of consumers consuming

commodity can also be one of the factors. For example, removing

subsidies on diesel may have a severe impact on society and inflation

because the fact that most of the commercial vehicles which are used in

the movement of goods run on diesel. On the contrary, the impact of

removing subsidies may be lesser on petrol as it is being used in mostly

personal cars segment.

Improvements in credit facilities through bank networking :

In order to increase growth in the country inflation needs to be control as

inflation never adds up to the Gross Domestic Productivity (GDP) within

the country. But whenever topic of GDP comes into picture, it is usually

associated with multiple factors. One of those factors can be investments.

For any large scale or small scale industry/businesses to increase its

production, needs money to invest. This money is needed for numerous

reasons starting from purchasing raw materials to strengthening

distribution channels. In short in order to improve GDP, availability or

supply of money is required for business to grow and increase their

production. In order to achieve this, from governments standpoint, I will

see to it that credit facilities are liberalized. Banking services will be

extended to the rural areas i.e. improving bank network. With this end in

view, banks will be encouraged to open their braches even in remote

villages. Indian farmer is poor, and owning to his poverty and illiteracy

he has always been exploited by the local money lenders.

Instructions will be used to the banks (through the Reserve Bank of India)

that the needy farmers be given loans on easy and liberal terms. This will

enable them to purchase good quality seeds, fertilizers, tractors, etc.

Agriculture would thus be modernized and this would lead to increase

production. Construction of tube-wells would also be encouraged and

villages would be rapidly electrified, so that agriculture production is no

longer at the mercy of rains.

While I will continue to encourage large scale industries, the growth of

small industries would also be encouraged. They would also be provided

with soft loans by the nationalized banks, and if need be more banks

would be nationalized. Technicians, live T.V and Radio mechanics,

Internet, professional people like Doctors and other self-employed

people, would also be given financial help by the banks.


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All these measures, I hope, would go a long way toward revamping the

Indian economy. Still, if considered necessary, I will not hesitate to

accept foreign aid or to take loans from International Financial

Institutions like the I.M.F Funds would also be raised through borrowings

from the public. However, I am hopeful that such measures would not be

necessary. To summarize, it is extremely difficult to implement policies

considering Indias political, current economic situation.However,

reduction in fiscal deficit, better credit facilities, inflation reduction

targeting policies by revision of tax structure, reduction in non-planned

expenditure and lowering the subsidies can be couple of policies that I

would focus on primarily if I become Finance Minister of India.

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Documents

Business Assessment of Rising Inflation in India