Challenges of Inflationary Policy in India - Wikipedia the Free

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Challenges of Inflationary Policy In

IndiaFrom Wikipedia, the free encyclopedia

Inflation happens to be a key determinant in the functioning of any economy.India is a country with a mixed economy model that comprises of both capitalismand socialism hence the challenges faced are vital for its growth model. Therecent rise in inflation has been found to consist of several political andeconomic crisis with Dr Manmohan Singh the Prime minister often being underthe ambit of it.

Contesting on the challenges faced, several economists have questioned themethod of measuring inflation to be faulty. The present day process being usedin India has been The Wholesale Price Index while several other developedcountries adopt the Consumer price index to calculate inflation.

Contents

1 Measurement Challenge

1.1 Wholesale Price Index1.2 Consumer Price Index

2 Issues2.1 The Optimal Inflation Rate

2.2 Money Supply and Inflation

2.3 Global Trade

3 References

Measurement ChallengeThere are two basis system of measuring inflation present today. While Indiaadopts the prior method which is considered to be lesser advanced. Thedemographics and structures of India don't permit it to adopt the second basissystem of measuring inflation.

Wholesale Price Index

It first came in 1902 and being replaced by 1970 with the Consumer Price Index

globally. Around 435 commodities data are being tracked through it thatcaptures the movement of commodities hence measuring the inflation for the

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more than in nature. Secondly, there often arises a problem when the qualityimprovements in the product are in need to be captured out, hence it affects theprice index. The consumer preference for a cheaper goods affects theconsumption basket at costs, for the increased expenditure on the cheaper goodstakes time for the increased weight and measuring inflation. TheBoskin_Commission has measured 1.1 per cent of the increased inflation in USAevery-annum. The commission points out for the developed countriescomprehensive study on inflation to be fairly low. The Reserve Bank of Indiaclearly mentions for the future underlining rate of inflation as a priorphenomenon that the current inflation rate for an effective monetary policy inIndia.

Money Supply and Inflation

[3]The Quantitative Easing by the central banks with the effect of an increased

money supply in an economy often helps to increase or moderate inflationarytargets. There happens to be a puzzle formation between low-rate of inflation anda high growth of money supply. When the current rate of inflation is low, a highworth of money supply warrants the tightening of liquidity and an increasedinterest rate for a moderate aggregate demand and the avoidance of anypotential problems. Further, in case of a low output a tightened monetary policywould affect the production in a much more severe manner. The supply shockshave known to play a dominant role in the regard of monetary policy. The

bumper harvest in 1998-99 with a buffer yield in wheat, oilseeds, sugarcane, andpulses had led to an early supply condition further driving their prices fromwhat were they in the last year. The increased import competition since 1991with the trade liberation in place have widely contributed to the reducedmanufacturing competition with a cheaper agricultural raw materials and thefabric industry. These cost-saving driven technologies have often helped to drivea low-inflation rate. The normal growth cycles accompanied with theinternational price pressures has several times being characterized by domesticuncertainties.

Global Trade

Inflation in India generally occurs as a consequence of global tradedcommodities and the several efforts made by The Reserve Bank of India toweaken rupee against dollar. This has been regarded as the root cause ofinflation crisis rather than the domestic inflation. When the US dollar hasshrieked by a margin of 30%, RBI had made a massive injection of dollar in theeconomy make it highly liquid and this further triggered off inflation innon-traded goods. The RBI picture clearly portrays for subsidizing exports with aweak dollar-exchange rate.All these account for a dangerous inflationary policies

being followed by the central bank of the country.[4]

Further, on account ofcheap products being imported in the country which are made on a high




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technological and capital intensive techniques happen to either increase theprice of domestic raw materials in the global market or are they forced to sell ata cheaper price, hence fetching heavy losses.

References

^ http://www.rediff.com/money/2007/jun/07infla.htm1.

^ http://www.mydigitalfc.com/knowledge/making-cpi-changeover-6862.

^ "Central Banking In New Millennium- Andrew Crockett" (http://rbidocs.rbi.org.in

/rdocs/Speeches/PDFs/8431.pdf) . http://rbidocs.rbi.org.in/rdocs/Speeches

/PDFs/8431.pdf.

3.

^ http://www.mayin.org/ajayshah/MEDIA/2008/inflation_2008.html4.

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