GLOSSARY
Headline Inflation: A measure of the total inflation within an economy and is affected by areas of the market which may experience sudden inflationary spikes such as food or energy.
Headline Inflation: A measure of the total inflation within an economy and is affected by areas of the market which may experience sudden inflationary spikes such as food or energy.
Core Inflation: Also called underlying inflation, which excludes factors such as food and energy costs.
Exchange rate: INR/USD means amount of Indian rupees per U.S dollar
Appreciation of rupee: Rupee getting stronger i.e. less rupees is needed to get 1 dollar.
Depreciation of rupee: Rupee getting weaker i.e. more of rupees is needed to get 1 dollar.
* Inflation chart, Growth Chart, and population chart has been taken from the website www.tradingeconomics.com
Growth of Indian Economy has been quite a story in itself, growing faster and more sustainably then most of the other economies in the world. USP of Indian Economy is the population of India which allows it to be a self-sustaining nation. However recent trend has not been quite favorable i.e. Indian economy has been witnessing slowing growth, population increasing at an exponential rate and an increasing inflation, worsening the standard of living in the country.
| Parameter | Growth Rate |
| G.D.P | 5.3% |
| Inflation | 8% |
| Population | 4.7% |
Again a graphical representation of these would help us better understand the state of the economy.
As can be seen since the starting of the year 2012 Indian economy is facing slowing growth and increasing inflation (economics name it “Stagflation”).
Now to get a better insight into the causes of this scenario we can look into the data of population growth. Before saying anything further it would be better to look at the population growth graph of India:
According to last census Indian population grew at a rate of 4.7% to get to 1210 million people.
So this certainly means that there is enough willingness of the people to buy more goods but maybe it is the constant increase in prices which is hammering the growth in demand. However it would be wrong to say that demand has been decreasing, because looking at the demographics India has enough demand generation within the economy. But it would not be wrong to mention that this demand however is for staple goods i.e. “Roti, Kapda, Makaan”. Here is another figure which would prove this point:
India industrial production growth had slipped into negative and now getting just to around zero percent. It’s important to note here that this means Indian Industrial Production is approximately at the level at which it was in August-October 2011.
Now the GDP rising at around 6% annually and Industrial production not rising at all suggests that this growth in GDP has practically been achieved from Agriculture and Tertiary sectors.
The demand for agriculture products and basic services has what kept GDP from falling further.
Now shifting our focus to inflation figures, it has been increasing at very rapid rate even though the economy is experiencing a slowing growth.
From the starting of the year inflation has been increasing almost at the rate of 7% which is undoubtedly high even for a growing economy like India. Recent policy action of RBI of choosing to tame inflation instead of fueling slowing growth hints how big this problem really is.
It is important to see here that this inflation is probably not caused by an increase in demand (the general theory that if demand increases price will also be increased by the producers) but because of pressures on the supply side of the economy.
Now what do we mean by pressures on supply side? It simply means that there has been an increase in the input cost for suppliers (manufacturers) of the goods namely natural resources and inputs which are inevitable for the production process to complete. Out of everything “ Crude Oil “ is the most talked about resource and correctly so, being the most essential input to any production process.
Crude oil prices have dipped from around 115$ to 90$ in about a year which suggests that there should be a decrease in the input costs of the suppliers, however since India depends largely on Crude Oil imports and because of the rupee depreciation being more than the percentage fall in oil prices it has been a major reason behind the current rise in inflation rate.
It is also important to know that Headline Inflation (the total inflation considering also Food items) is at 7.5% whereas Core inflation which does not consider food items is just below 5% i.e. 4.96%. As earlier mentioned this again supports the point that demand for staple goods like food and basic services has been increasing because of the increasing population. Therefore, Headline inflation has been increasing because of both supply side as well as demand side pressures. A good action here would be to easing of the supply side pressures of the Staple Goods producers like farmers, transport services, etc. This would help lowering the inflation rate prevailing in the economy.
It is also important to understand here that because the income of common man is getting consumed in purchasing now more costlier staple goods or basic necessities of life hence the demand for other Industrial products is decreasing which is consequently reducing the IIP(India Industrial Production)
very well written!!
ReplyDeleteThankyou :)
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