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INFLATION IN INDIA - Complete Analysis
Chapter Index 1. What is Inflation?
2. Index
3. Price Index
4. Measurement of Inflation
5. Year-on-Year Inflation
6. Weighted Indices
a. Wholesale Price Index (WPI)
b. Consumer Price Index for Industrial Workers (CPI – IW)
c. Consumer Price Index for Urban Non – Manual Employees (CPI – UNME)
d. Consumer Price Index for Agriculture Labourers (CPI – AL)
e. Consumer Price Index for Rural Labourers (CPI – RL)
f. CPI (Rural)
g. CPI (Urban)
h. CPI (Combined)
7. Types of Inflation
a. Based on Rate of Rise in Prices
b. Based on volatility
c. Based on Causes
● Factors Affecting Demand ● Factors Affecting Supply
8. Effects Of Inflation
a. Redistribution of Income of Wealth
b. Effects on Production and Consumption
c. Other Effects
9. Measures to control Inflation
a. Monetary Measures
b. Fiscal Measures
c. Trade Measures
d. Administrative Measures
10. Associated Terms
a. Deflation
b. Reflation
c. Disinflation
d. Stagflation
e. Base Effect
f. Phillips Curve
g. Producer Price Index
h. Inflation Targeting
11. Economic Survey 2018-19 on Inflation
12. Previous Year UPSC Questions
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What is Inflation ?
According to Economic Survey of 2008-09 inflations is “an upward movement in the general prices of
goods and services and is estimated as the percentage rate of change in a price index over the reference time
period”. Index
An Index number may be described as a specialized average designed to measure the relative change in
the level of a phenomenon from time to time.
Price Index Price index is a specialized average that measures the changes in prices over a period of
time. It can be of two types
General Price Index (GPI) Consumer Price Index (CPI)
General Price Index measures the changes in
average prices of goods and services.
Consumer Price Index measures the average change
in the prices paid by ultimate consumers for a
particular basket of goods and services over a
period of time.
A base year is selected and its index is assumed as
100 and on this basis, the price index for further
period is calculated.
CPI actually measures the increase in prices, a
consumer will have to pay for the designated
commodity basket (which may be revised every
four-five years to factor in changes in consumption
pattern)
Construction of Price Index
Price index is calculated by measuring the rise in the price of the current year over price of base year.
Price Index = (Current year’s price / Base year’s Price) x 100
= P1/P0 X 100
Example:
Take 2004-05 as base year.
Price of rice in 2004-05, Rs 2/kg
Price of rice in 2005-06, Rs 3/kg
Price of rice in 2006-07, Rs 3.50/kg
Price Index for 2005-06= Price of rice in 2005-06/Price of rice in 2004-05 x 100
= 3/2 x 100
= 150
Price index for 2006-07= Price of rice in 2006-07/Price of rice in 2004-05 x 100
= 3.50/2 x 100
= 175
Measurement of Inflation ● Inflation is measured with the help of Wholesale or Consumer Price Index in India.
● The percentage of rise in the price index of a particular period from previous period price index is
the rate of inflation.
● Inflation = (current period price index – last period price index) / last period price index x 100
● Example- Inflation= 175-150/ 150 x 100
= 25/150 x 100
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= 16.6%
● Inflation is calculated on the basis of weighted index numbers.
● Note: Base year is used only to calculate the index number. The inflation is calculated as a
percentage of rise in index number over last year.
Year-on-Year Inflation ● Year-on-year inflation means rate of change of inflation over the corresponding period (week or
month or quarter in relation to the frequency of the data) of the previous year.
● For example, the inflation on the second week of January 2010 is computed by calculating the rise in
index number over index number of January 2009.
Weighted Indices In India various weighted price indexes are calculated. They are
1. Wholesale Price Index (WPI)
2. Consumer Price Index for Industrial Workers (CPI – IW)
3. Consumer Price Index for Urban Non – Manual Employees (CPI – UNME)
4. Consumer Price Index for Agriculture Labourers (CPI – AL)
5. Consumer Price Index for Rural Labourers (CPI – RL)
● Among the above indices until October 2009, only the WPI was used to calculate inflation and
made public through the newspapers. The other index numbers are published as index numbers
and not as inflation. But now the inflation is also calculated based on new CPI indices. So, these
two are called the headline inflation.
● The weights at WPI are assigned on the basis of value of production of respective commodity
groups for WPI. For other indices, the weights are assigned on the basis of consumer expenditure
survey.
What is the reason for assigning weights ?
Weights are assigned to arrive at a realistic inflation rate.
Wholesale Price Index (WPI)
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● This index measures the change in the price of commodities supplied to wholesale market.
● It is based on the value of production adjusted for net imports.
● The price for manufacture products us taken at ex-factory price and for minerals at ex-mines and for
agricultural products at mandi price. Ex-factory and ex-mines price means prices exclusive of
transport and other charges like insurance.
● Indirect taxes are excluded from the price.
● The Authority responsible for Compilation and Release: Office of the Economic Advisor,
Department for Promotion of Industry and Internal Trade
WPI gets revised Base Year, New Food Index
● The government revised the wholesale price index (WPI) by shifting to a new base year to 2011-12
from 2004-05 and added a new WPI food index to capture the rate of inflation in food items.
● Apart from a new base year, the revision also includes change in the basket of commodities and
assigning of new weights.
● Under the revamped data series, the number of items have gone up to 697 from 676.The data now
has 199 new items and 146 items have been deleted and has quotations from 8,331 sources
compared with 5,482 in the old series.
● Seasonality of fruits and vegetables has been updated to account for more months as these are now
available for longer duration.
● The Government has also set up a technical review committee, which will ensure that the product
mix keeps pace with changing structure of the economy.
Old Consumer Price Indices Before February 2011, India had four consumer price indices viz. Consumer price Index for Industrial
Workers (CPI-IW), Consumer Price Index for Urban Non–Manual Employees (CPI–UNME), Consumer
Price Index for Agriculture Labourers (CPI–AL) and Consumer Price Index for Rural Labourers (CPI – RL).
(i) CPI for Industrial Worker - CPI (IW) This index measures the change in the price of commodity
basket consumed by the industrial workers.
Product groups and weightage of CPI (IW)
S.No Groups Weights
1 Food 46.19
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2 Pan,Supari, Tobacco & Intoxicants 2.27
3 Fuel and Light 6.43
4 Housing 15.47
5 Clothing, Bedding & Footwear 6.58
6 Miscellaneous (Medical care, education, transports & communications,
recreation & amusement personal care & effects, laundry, domestic
services etc
23.26
Authority for Compilation & Release: Labour Bureau, Shimla, Ministry of Labour.
Use: Used for wage indexation in Government and organized sector.
(ii) CPI for Urban Non-Manual Employees (CPI – UNME) This index measures the change in the
price of commodity basket consumed by the non-manual employees like office goers. CPI-UNME earlier
compiled by the Central Statistical Organization as an independent index has since been discontinued and is
currently linked to the CPI-IW.
Authority for Compilation & Release: CSO - Central Statistical Organisation, Ministry of Statistics and
Programme Implementation.
Use:
● Used for determining dearness allowances of employees ● Used under the Income Tax Act to determine the capital gains ● Used by CSO for deflating selected service sectors contribution to GDP
(iii), (iv) CPI for Rural Labourers and Agricultural Labourers (CPI-AL) and (CPI-RL)
Consumer Price Index for Rural labourers measures the change in the price of commodity basket
consumed by rural labourers like agriculture labourers, labourers of village and cottage industries etc.
Consumer Price Index for Agricultural Labourers (CPI-AL) is a subset of Consumer Price Index for Rural
Labourers (CPI-RL). It is basically used for revising minimum wages for agricultural labour in different
States.
Authority for Compilation & Release of both indices: Labour Bureau, Shimla, Ministry of Labour.
New Consumer Price Indices ● The above consumer price indices cover only a segment of the population like Agriculture Labour,
Industrial worker etc., and do not give a nationwide picture.
● Therefore, three new indices are introduced with base year of 2010 (January – December) which
cover all segments of the population on all India basis. They are as follows:
○ CPI (Rural)
○ CPI (Urban)
○ CPI (Combined)
● These indices are published for all India as well as State / Union Territory level. These indices
are released with a one-month time lag.
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● The CPI (Combined) is computed by combining Rural and Urban index. From January 2012,
these new indices are released.
● The weightage for the new CPI series was derived on the basis of average monthly consumer
expenditure of an urban/rural household obtained from the Consumer Expenditure Survey data
(2004-05) 61st Round of the National Sample Survey (NSS).
● The CSO has revised the base year of the Consumer Price Index from 2010=100 to 2012=100 and
the revised index numbers were released on 12 February 2015.
● Consumer Food Price Indices (CFPI) for three categories- rural, urban, and combined are
calculated separately on an all India basis with effect from May 2014.
No Groups Rural Urban Combined
1 Food and beverages 54.18 36.29 45.86
2 Pan, tobacco and intoxicants 3.26 1.36 2.38
3 Clothing and footwear 7.36 5.57 0.95
4 Housing - 21.67 6.53
5 Fuel and light 7.94 5.58 6.84
6 Miscellaneous 27.26 29.53 28.32
7 Total 100.00 100.00 100.00
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Difference between WPI and CPI is as follows
Basis For
Comparison
Wholesale Price Index (WPI) Consumer Price Index (CPI)
Meaning WPI, amounts to the average change in
prices of commodities at wholesale level
CPI, indicates the average change in the prices of
commodities, at the retail level.
Published by Office of Economic Advisor (Ministry
of Commerce & Industry)
Central Statistics Office (Ministry of Statistics and
Programme Implementation)
Measures
prices of
Goods only Goods and Services both
Measurement
of Inflation
First & subsequent wholesale stages of
transaction
Final stage of transaction
Prices paid
by
Manufacturers and wholesalers Consumers
How many
items covered
697 (Primary, fuel & power and
manufactured products)
448(Rural Basket)
460 (Urban Basket)
What type of
items covered
Manufacturing inputs and intermediate
goods like minerals, machinery basic
metals etc.
Education, communication, transportation,
recreation, apparel, foods and beverages, housing
and medical care
Base year 2011-12 2012
Weightage for
food products
Lesser weightage (less than ~ 22 %) Greater weightage (~ 45.9 %)
Time lag Lower time lag, data is available
relatively quicker.
Greater time lag
Used by Only a few countries including India 157 countries
Data released
on
Primary articles, fuel and power
(Weekly basis) & overall (monthly basis
since 2012)
Monthly basis
Types of Inflation
Inflation can be classified on the basis of rate of rise in prices and on the basis of causes.
Different Inflation Based on Rate of Rise in Prices
1. Creeping
Inflation
Price rise at a very slow rate (less than 3%) like that of a snail or creeper is called
Creeping inflation. It is regarded safe and essential for economic growth.
2. Walking Or
Trotting Inflation
● Price rise moderately at the rate of 3 to 7% (or) less than 10% is called
Walking or trotting inflation.
● It is a warning signal to the government to be prepared to control inflation.
● If the inflation crosses this range, it will have serious implications on the
economy and individuals.
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3. Running
Inflation
Running inflation means prices rise rapidly like the running of a horse at a rate of
10-20%. It affects the economy adversely.
4. Hyperinflation
(or) Runway (or)
Galloping
Inflation
The price rise at very fast at double or triple digit rate from 20 to 100% or more is
called Hyperinflation (or) Runaway (or) galloping inflation. Such a situation brings
total collapse of the monetary system because of the continuous fall in the
purchasing power of money.
Different Inflation Based on Volatility
1. Headline
Inflation
Discussed in class
1. Core Inflation Core inflation is a measure of inflation that excludes certain items that face
volatile price movements because these shocks can diverge from the overall trend of
inflation and give a false measure of inflation.
Different Inflation Based on Causes
1. Demand Pull Inflation Demand pull inflation arises due to higher demand for goods and services
over the available supply. Higher demand for goods and services arises
due to increase in income of the people, increase in money supply and
change in the taste and preference of people etc. In other words, demand
pull inflation takes place when increase in production lags behind the
increase in money supply.
2. Cost Push Inflation Price rise due to increased input costs like raw material, wages, profit
margin etc. is called Cost push inflation. Both demand pull inflation and
cost push inflation are affected by the forces of demand and supply.
Factors Affecting Demand
1. Increase in Money
Supply
Increase in money supply leads to price rise. More money available with people
induces people to purchase more goods and services. It means there is an
increase in demand. So, prices move upward.
2. Increase in
Disposable Income
The increase in disposable income leads to higher spending on the part of
households. It hikes the level of price.
3. Cheap Monetary
Policy
Cheap monetary policy means loan availability at very low interest rate and
at easy terms. It leads to more investment by investors with loaned money. It
pushes up the demand for capital goods and rise in the price of the same.
4. Increase in Public
Expenditure
Increase in government expenditure over its income, leads to deficit budget.
Increase in government spending increases the demand for consumption and
capital goods and services. It increases the price of both goods and services.
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5. Repayment of
Public Debt
The repayment of public debt borrowed by government to public leaves people
with more money. It induces people to spend more. It ultimately leads to an
increase in the price of goods and services.
Factors Affecting Supply
1. Shortage of Factors
of production
The shortage in the factors of production viz., land, labour, and capital increases
the cost of production. For example, shortage in the labour leads to higher
wages. It increases the cost of production and price of goods and services.
2. Industrial Disputes Industrial disputes lead to strike or lay off. It affects the production and supply
of goods. It results in increased prices.
3. Natural Calamities Natural calamities like earthquake, landslide and tsunami, affect production and
supply of goods and services. The end result is price rise.
4. Artificial Scarcities Artificial scarcities created by activities like hoarding and speculative trading
in commodities in the commodities futures market, resulting in price hike.
5. Increase in Exports Increase in exports of a particular commodity leads to shortage of goods in the
domestic market. It pushes up prices.
6. International
Factors
International factors like oil price hike, shortage in production of certain
commodities leads to higher import prices.
Effects Of Inflation
Inflation has an impact on all the economic units. It has favorable impact on some and unfavorable impact
on others. The effects are discussed under three different heads:
1. Redistribution of Income of Wealth It redistributes income from one hand to another. It leads to loss
to some group of people and gain to another group of people.
a) Debtors vs
Creditors
In the case of debtor and creditor, debtor is gainer and creditor is the loser.
b) Producers vs
Consumers
In inflationary situation, the producers stand to gain and consumers stand to lose.
The producer’s profit will increase as a result of inflation. The purchasing power
of money held by consumer declines. So, they have to pay more money to
purchase the same amount of goods and services what they bought before inflation.
c) Flexible Income
Group vs Fixed
Income Group
The flexible income groups like sellers, self employed, and employees of private
concerns whose salary is adjusted according to inflation do not get affected, but
fixed income groups like daily wage earners lose as the purchasing power of their
income diminishes.
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d) Debentures or
Bond Holders and
Savers Vs Equity
Holders
The Debentures or Bond holders and Savers receive fixed periodical income from
their financial assets. The purchasing power of their assets remains intact only if
the interest rate is more than the rate of inflation.
The security holder’s income depends on the profit of the company. In inflationary
situation, the companies earn more profit. So, the equity holders also earn more
income.
2. Effects on Production and Consumption
● The inflation may lead to fall in the demand for goods and services.
● It may curtail the amount of production.
● Inflation also leads to reallocation of resources.
● Sometimes, only few goods may experience price rise. In that case, the investment from other
sectors may shift to these sectors.
● In packaged items, in order to maintain the same price per package, the producers reduce the
quantity or quality or both instead of raising the price. It means, less production and consumption.
3. Other Effects
a) Balance of Payment
(BOP)
High price reduces the amount of exports and increases imports from other
countries where goods are available at a cheaper rate. It results in
unfavourable balance of payments.
b) Exchange Rate High import and low export means high demand for foreign currencies
compared to domestic currency. This depreciates domestic currency.
c) Social and Political Higher rate of inflation leads to social and political tension. The political
parties and organized group of people call for strikes, hartals and stage
dharnas.
d) Fiscal impact Government deficit increased due to higher subsidies given to poor citizens
Measures to control Inflation The control of inflation needs a multi-pronged strategy. All the strategies need cooperation and harmony
among them.
1. Monetary Measures
a) Credit Control It is performed by the Reserve Bank of India.
b) Demonetization of Currency Demonetization of currency means declaring that hereafter currencies
of particular denominations are invalid. It suddenly reduces the
money to the extent of money kept in those particular denominations.
It is resorted to only in extreme cases.
2. Fiscal Measures
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a) Reduction In
Unnecessary
Expenditure
Reduction of unnecessary government expenditure means less demand from
government side. It brings down the price level.
b) Increase in Direct
Taxes
Increase in direct taxes like income tax reduces the disposable income available
with people. It means low demand from households. Less demand leads to lower
price.
c) Decrease in
Indirect Taxes
Decrease in indirect taxes like excise duty, sales tax brings the prices down.
d) Surplus Budget Surplus budget means less expenditure than receipts. It reduces the money
supply and government demand for goods and services. The price level is
brought down due to this.
3. Trade Measures
Trade measures refer to export and import of goods and services. In case of shortage of goods in the
domestic market the supply can be increased through import of goods from foreign countries at low or nil
import duty. The restriction in the form of import licenses has to be eased to increase import. The higher
supply helps to bring down the price.
4. Administrative Measures
a) Rational Wage
Policy
Rational wage policy helps to keep the cost of production under control.
The cost control means price control.
b) Price Control Direct price control also helps in inflation control. Price can be controlled by
fixing maximum price limits through administered price system and subsidy
from the government.
c) Rationing Rationing of goods in short supply keeps the demand under control so that
price comes under control.
Different Associated Terms
1. Deflation Deflation is opposite to that of inflation. The persistent and appreciable fall in
the general level of prices is called deflation. The rate of change of price index is
negative. The effects cause and measures are also in the opposite direction.
2. Reflation Reflation means deliberate action of government to increase the rate of inflation
to stimulate the economy. It is usually done to redeem the economy from
deflationary situation.
3. Disinflation The rate of inflation at a slower rate is called disinflation. For example, if the
inflation of last month was 6% and rate of inflation in the current month is 5% it is
termed as disinflation.
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4. Stagflation Stagflation refers to the situation of coexistence of stagnation and inflation in the
economy. Stagnation means low National Income growth and high
unemployment. Stagflation is the contrary to Phillips curve.
The figure depicts the various rates of price changes in the economy.
● From the month of April to the end of May, the economy is experiencing negative rate of price
range. It is called deflation. ● From the end of May to the middle of July, the price rate is recovering from negative zone. It is
called reflation. ● From the mid of July to the end of August, the price rate is moving upward in the positive territory. It
is called Inflation. ● From September to the middle of October, the rate of price change is declining but still in the
positive territory. It is called disinflation.
4. Base Effect & Base Year
Base effect refers to the phenomenon of current year index being influenced by, very low or high
previous year index.
Case 1 Case 2
Price index on January, 2017 = 110
Price index on January, 2018 = 120
Rate of inflation on January, 2018 = 120-
110/110*100 = 9.09 %
Price index on March, 2018 = 180
Price index on March, 2019 = 190
Rate of inflation in March, 2019 = 190 –
180/180*100 = 5.55%
In both the cases the index number increased by 10, but the rate of inflation is different. The rate of
inflation is low in second case compared to first case. This is because of the difference in previous year
index.
Base Year
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Base Year is the year on the “basis” on which we compute inflation of an economy, i.e., percentage change
in prices.
Criteria for deciding a particular Financial Year as Base Year:
• Year with less monsoon deficit. • Year with no major natural calamity, drought or famine. • That year should not have inflation at alarming rates. • Unstable years in terms of economic activity are not considered as base year. • There should not be much gap between base year chosen and current year.
5. Phillips Curve
● Phillips curve shows the relationship between the rate of inflation and rate of unemployment. ● It shows that the relationship is negative. That is at a high rate of inflation the unemployment rate is
low as shown in figure below.
6. Producer Price Index :
● PPI measures price changes from the perspective of producers (whereas CPI measures Price
changes from consumers/buyers perspective).
● PPI measures the average change in prices that the producer receives for his goods/services sold
in the domestic market/exports and thus excludes the effect of indirect taxes on inflation.
● PPI takes into account both goods and services. (unlike WPI).
● There is a bias of double/multiple counting inherent under WPI which can be avoided through by
using PPI.
● GOI in 2014 appointed B.N.Goldar Committee to examine whether PPI should replace WPI or not
and suggest a methodology.
● The Committee majorly recommended that :
○ To shift from WPI to PPI on experimental basis to measure inflation.
○ Data from “Supply Use Tables” to be used to compute experimental PPI.
○ Base year for experimental PPI should be 2011-12.
○ To include services price in the PPI basket.
○ To include major export and import items while calculating experimental PPI.
● A number of advanced economies and emerging economies have already switched to using PPI
instead of WPI.
● IMF has also recommended the use of PPI instead of WPI for measuring inflation.
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7. Housing Price Index
● The Housing Price Indices (HPIs) are a broad measure of movement of residential property
prices observed within a geographic boundary.
● The first official housing price index for the country named ‘NHB RESIDEX’ was launched in
July, 2007 by the National Housing Bank (NHB).
● Overtime, the base year has been revised to FY 2012-13 to ensure capturing the latest information
and accurately reflect the current economic situation in the country.
● Currently, National Housing Bank is publishing NHB RESIDEX for 50 cities on quarterly basis
with FY 2012-13 as base year. Among 50 cities covered are 18 State/UT capitals and 37 Smart
Cities.
8. Inflation Targeting
Urjit Patel Committee was appointed by RBI in 2013 :
1. To revise & strengthen Monetary Policy Framework, and
2. To recommend an appropriate nominal anchor for the conduct of monetary policy
The Committee (in its report in 2014) recommended for focusing on only one objective, i.e., Inflation
Targeting.
Why Inflation Targeting is needed in India –
As per the report, it is required because:
● Real interest rates have remained negative during most of the post global crisis period.
● External competitiveness is getting eroded due to continuous higher levels of inflation.
● Due to inflation, there has been a large import of Gold due to its increasing demand and it has
resulted in widening of the Current Account Deficit.
● Continuous weakening of exchange rate has occurred due to persisting high inflation.
● Rise in inequality in the Indian economy due to increased rates of inflation.
CPI or WPI as the nominal anchor for inflation targeting -
Committee recommended to adopt CPI (Rural + Urban) [instead of WPI (minus food & fuel) based
inflation targeting] in order to anchor Monetary Policy. The reasons were that:
● WPI ignores the effect of service sector which contributes almost 60 % to the overall GDP and
● CPI is based on retail prices which may depicts a broader picture of the effect of inflation.
Numerical Target of CPI based inflation –
Committee recommended inflation target of 4 % (+/- 2 %).
Based on the recommendations, RBI in 2015 signed an agreement with the Government of India, agreeing
on the following points –
● Flexible inflation targeting as the official goal of RBI.
● Flexible Inflation target to be set by GOI once every 05 years in consultation with RBI.
● CPI (rural + urban) to be used as a measure of nominal anchor for policy decisions.
Thus from 2015 onwards, above agreed points are being implemented.
Some other concepts discussed in the class
1) Misery Index
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2) Engel’s Law
3) GDP Deflator
4) GSP Deflator vs CPI
Recent Trends In Inflation based on Economic Survey 2018-19
● Headline inflation based on the Consumer Price Index – Combined (CPI-C) has been declining
continuously for the last five years.
● Food inflation based on Consumer Food Price Index (CFPI) declined to a low of 0.1% during the
2018-19.
● Wholesale Price Index (WPI) stood at 4.3 % during 2018-19.
● Headline CPI-C inflation has remained below 4.0% for two consecutive years.The decline in
inflation in the FY 2018-19 was mainly due to low food inflation.
● Food inflation based on Wholesale Price Index too declined over the last two financial years.
● Food Inflation based on Consumer Food Price Index (CFPI) has been declining since 2014-15.
● Decline in Food inflation is mainly due to deflation in the prices of pulses, vegetables and sugar.
● CPI-C based core inflation has remained above 4% since the start of a new series of CPI-C.
Recent Efforts by the Government to Control Inflation
(i) General Measures
● Advisories to State Governments to take strict action against hoarding & black marketing by
enforcement of Essential Commodities Act, 1955 & the Prevention of Black-marketing and
Maintenance of Supplies of Essential Commodities Act, 1980.
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● Higher Minimum Support Price (MSP) for pulses and other crops to enhance production.
● Regular review meetings on prices and availability of key commodities and recommend
appropriate policy intervention.
● Government has set up Price Stabilization Fund (PSF) for procurement of agri-horticultural
commodities for its release during lean period to improve availability and moderate their prices.
(ii) Specific measures
● To control the rise in onion prices, onions were released at reasonable prices from the stock
procured under PSF.
● Pulses from the buffer are utilized for strategic market intervention for price management and
meeting institutional requirements for Mid Day Meal Scheme, Integrated Child Development
Scheme, etc.
● Withdrawal of prohibition on export on all varieties of edible oils, except mustard oil.
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Previous Year Questions - UPSC IAS Prelims
1. With reference to inflation in India, which of the following statements is correct? (2015)
(a) Controlling the inflation in India is the responsibility of the Government of India only
(b) The Reserve Bank of India has no role in controlling the inflation
(c) Decreased money circulation helps in controlling the inflation
(d) Increased money circulation helps in controlling the inflation
2. Which of the following brings out the ‘Consumer Price Index Number for Industrial Workers’? (2015)
(a) The Reserve Bank of India
(b) The Department of Economic Affairs
(c) The Labour Bureau
(d) The Department of Personnel and Training
3. Consider the following statements: (2013)
1. Inflation benefits the debtors.
2. Inflation benefits the bond-holders.
Which of the statements given above is /are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2
4. A rise in the general level of prices may be caused by (2013)
1. an increase in the money supply
2. a decrease in the aggregate level of output
3. an increase in the effective demand
Select the correct answer using the codes given below:
(a) 1 only
(b) 1 and 2 only
(c) 2 and 3 only
(d) 1, 2 and 3
5. Which one of the following is likely to be the most inflationary in its effect? (2013)
(a) Repayment of public debt
(b) Borrowing from the public to finance a budget deficit
(c) Borrowing from banks to finance a budget deficit
(d) Creating new money to finance a budget deficit
6. A rapid increase in the rate of inflation is sometimes attributed to the base effect. What is base effect?
(2011)
(a) It is the impact of drastic deficiency in supply due to the impact of crops
(b) It is the impact of the surge in demand due to rapid economic growth
(c) It is the impact of the price levels of previous year on the calculation of inflation rate.
(d) None of the statements (a), (b) and (c) given above is correct in this context.
7. Economic growth is usually coupled with (2011)
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(a) Deflation
(b) Inflation
(c) Stagflation
(d) Hyperinflation
8. India has experienced persistent and high food inflation in the recent past. What could be the reasons?
(2011)
1. Due to a gradual switchover to the cultivation of commercial crops, the area under cultivation of food
grains has steadily decreased in the last five years by about 30%.
2. As a consequence of increasing incomes, the consumption patterns of the people have undergone a
significant change.
3. The food supply chain has structural constraints.
Which of the statements given above are correct?
a) 1 & 2 only
b) 2 & 3 only
c) 1 and 3 only
d) 1, 2 and 3
9. With reference to India, consider the following statements: (2010)
1. The Wholesale Price Index (WPI) in India is available on a monthly basis only.
2. As compared to Consumer Price Index for industrial workers [CPI(IW)], the WPI gives less weight to
food articles.
Which of the statements given above is / are correct?
a) 1 only b) 2 only c) Both 1 & 2 d) Neither 1 nor 2
10. Which of the following statements is an appropriate description of deflation? (2010)
a) It is a sudden fall in the value of a currency against other currencies
b) It is a persistent recession in both the financial and real sectors of economy
c) It is a persistent fall in the general price level of goods and services.
d) It is a fall in the rate of inflation over a period of time.
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Answers with Explanation
1. (c) Decreased money circulation helps in controlling the inflation
● RBI and government both play a role in controlling inflation, often termed as "inflation targeting" by
the RBI. Hence, a and b are incorrect.
● Increased money circulation leads to increased inflation as demand increases.
● RBI increases bank rates and SLR etc. to reduce money supply in the market which tames demand
and hence, inflation.
2. (c) The Labour Bureau
● CPI(IW) is released by Labour Bureau.
3. (a) 1 only
● For debtors, "real" interest rate goes down with inflation. Thus it benefits them.
● On the other hand, with inflation the yield of bonds goes down, thus a negative effect for bond-
holders.
4. (d) 1, 2 and 3
● It a direct application based question.
● 1st statement is correct as increase in money supply will cause inflation.
● 2nd and 3rd statement are obviously correct as they represent supply and demand side of products.
5. (d) Creating new money to finance a budget deficit
● B and C option will lead to a decrease in the money supply in the market.
● Between A and D, D will have more inflationary effect than A, as it will lead to an increase in total
money supply in the market.
6. (c) It is the impact of the price levels of previous year on the calculation of inflation rate.
● The Base effect refers to the tendency of a small change from a low initial amount to the current
amount which is translated into a large percentage and appears as large.
● It is usually used in the context of inflation.
● It indicates the change in the inflation rate in the current period with respect to the base period.
7. (b) Inflation
● Inflation and economic growth are parallel lines and can never meet.
● Inflation reduces the value of money and makes it difficult for the common people.
● Inflation and economic growth are incompatible because the former affects all sectors as indicated by
CPI or Consumer Price Index.
8. (b) 2 & 3 only
● Notwithstanding some moderation, food price inflation has remained persistently elevated for over a
year now, reflecting in part the structural demand- supply mismatches in several commodities.
● The trend of food inflation was pointing at not only structural demand-supply mismatches in
commodities comprises the essential consumption basket but also at changing consumption patterns.
9. (b) 2 only
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● After the Abhijit Sen committee’s proposals in 2004-05, the government had approved the proposal
to release or wholesale price based inflation data on a monthly basis, instead of every week. The base
year was changed to 2004-05 from 1993-94.
● However data on primary and fuel items was continued to release on a weekly basis. Consumer Price
Index food group has a weight of 39.1% as compared to the combined weight of 24.4% (food articles
and Manufactured food products) in Wholesale Price Index food basket.
10. (c) It is a persistent fall in the general price level of goods and services.
● Deflation is a decrease in the prices of goods and services.
● It occurs when the annual inflation rate falls below 0% which is a negative inflation rate.
● This is different from Disinflation which is a slow-down in the inflation rate.
● This is a situation when inflation declines to lower levels but prices continue to rise.