Presentation on managing inflation

PRESENTATION

ON

UNION BUDGET AND MANAGING INFLATION

By: Shivani Kakria

Meghna Mahajan Anshita Kashyap

Khushboo Chauhan

Sandeep kaur

Meaning

Inflation means a persistent increase in the level of consumers prices or a persistent decline in thepurchasing power of money, caused by an increase in available currency and credit beyond the proportion of available goods and services.

INTRODUCTION TO BUDGET 2011-2012

Budget has tried to bring transparency in all the sectors of economy .

Along with this the our finance minister has thrown light on inflation rate of our country

Budget aimed at achieving fast paced recovery with the GDP which was 8.5% in 2010-2011 while breaching the 9% mark in FY2012.

Hyper inflation

Extremely high inflation

Moderate inflation

Low Inflation

TYPES OF INFLATION

Causes of inflation

DEMAND PULL INFLATION

COST PUSH INFLATION

DEMAND PULL AND COST PUSH INFLATION

Demand Pull : Increase in the aggregate demand for goods and services

Cost Push : a. an increase in wages b. an increase in the profit margin

DEMAND SIDE FACTORS

1. Rise in Public expenditure - expenditure incurred by

govt. - Aggregate demand is

greater than aggregate supply

-India’s PE IN 2011-2012:-12,57,729cr which is increased by 13.4% to estimated PE in 2010-2011.

CAUSES

2. Deficit financing

- Expenditure is more than Income. - India’s deficit financing in 2011- 4.6% of GDP Which is less than as compared to last

year 5.5% - The fiscal deficit situation had become manageable in the current fiscal year due to

the successful 3G spectrum auction, divestment and strong GDP growth leading to buoyant tax revenues.

INCREASE IN MONEY SUPPLY

Irving fisher’s quantity of money

explains- “Increase in money

supply with proportionate

increase in output lead to rise in PRICE

and fall in money VALUE”

BLACK MARKET & CORRUPTION

It is unearned income by public servants . Excess demand lead to inflation Acc. To Transparency International for corruption . India ranks 74

OTHER FACTORS

Growth in population Growth in private

expenditure Increase in Export Money reduction in

direct taxes

SUPPLY SIDE FACTORS CAUSING INFLATION Industrial disputes

Natural calamities

Artificial scarcity

Increase in export

Impact high oil price (Petrol prices increased by 23.14%)

Fuel and power(increased by 9.48%)

Fluctuating agricultural growth.

Food inflation(9.52%).

Item 1994-95 to 2004-05

2005 2006 2007 2008 2009 2010 January

Average 2006-09

1. All commodities

5.90 4.74 4.82 4.82 9.12 2.01 8.54 5.19

2. Non-food commodities

6.02 5.37 4.72 4.54 9.55 -1.76 4.53 4.27

3. Food articles

5.91 3.94 6.83 7.02 6.64 12.32 17.41 8.20

4. Food products

5.33 1.58 2.55 3.43 9.80 13.79 22.55 7.39

5. Food commodities (3 and 4)

5.64 2.97 5.09 5.60 7.87 12.90 19.42 7.86

Food grains

5.54 3.83 9.71 6.27 6.37 14.14 17.89 9.12

Item 1994-95 to

2004-05

2005 2006 2007 2008 2009 2010

January

Average

2006-09

 Cereals 5.57 3.68 6.63 6.97 7.20 12.96 13.69 8.44

 Pulses 5.46 5.04 32.05 2.14 1.30 21.81 45.62 14.33

 Rice 5.00 4.01 2.13 6.05 8.97 15.96 12.02 8.28

 Wheat 5.93 1.08 12.99 6.77 5.06 6.83 14.86 7.91

 Oilseeds 5.89 -6.11 -3.96 26.58 17.46 0.92 10.05 10.25

 Fruits and

vegetables

7.47 7.51 2.24 6.49 5.94 11.77 8.33 6.61

 Dairy

products

5.20 0.11 4.20 6.08 8.38 6.12 12.87 6.19

 Milk group 5.57 0.73 4.48 8.17 7.87 8.93 13.99 7.36

 Egg, fish

and meat

6.46 9.46 6.72 6.38 3.75 14.44 30.71 7.82

 Edible oils 4.85 -7.19 1.23 13.11 12.52 -6.59 -1.17 5.07

 Sugar 4.06 15.09 4.83 -14.69 5.62 36.34 58.94 8.02

 Growth in

food output

(%/a year)

2.39 0.55 5.87 4.10 5.39 1.60 -02 AE 4.24

EFFECTS OF INFLATION

Effects of inflation

Inflationary noise Effect on economic growth Effect on consumption and

economic welfare

EFFECTS OF INFLATION

Negative Effects

Positive Effects

NEGATIVE EFFECTS

Decrease in real value of money

Discourage investment and savings

May lead to shortage of goods due to HOARDING

Rise in poverty Less return to investors Illusions of making profits

by the businessmen Rising prices of imports due

to currency debasement Fixed income recipients will

be hurt

POSITIVE EFFECTS

It will benefit the business cartels

Inflation Currency Devaluation Better Margins for Exporters

“Economists favor a low steady rate of inflation, low (as opposed to zero or negative) because they relate inflation directly with growth of economy.”

- Pranab Mukherjee

METHODS TO MEASURE INFLATION.

Consumer Price Index (CPI)

Wholesale Price Index (WPI)

Current CPI/WPI – Last Calculated CPI/WPI

Last Calculated CPI/WPI

InflationRate

=

150 - 140 140

InflationRate = 100

100

=

7.12%

TYPES OF MEASURES TO CONTROL INFLATION

MONETARY MEASURES

FISCAL MEASURES

OTHER MEASURES

MONETARY MEASURES

Most significant way to control inflation is to reduce the liquidity in the economy.

Tools of controlling liquidity are: Cash Reserve Ratio (CRR) Bank Rate Repo Rate Reverse Repo Rate Statutory Liquidity Ratio (SLR)

0

1

2

3

4

5

6

7

SEPT 16,2010 NOV 2nd 2010 JAN 25,2011

CRR

REPO RATE

REVERSE REPO RATE

BANK RATE

2005

2006

2007

2008

2009

2010

Mar

2010

May

2010

July

2010

Aug

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

Inflation CRRRepo RateReverse Repo Rate

Source: International Monetary Fund- World Economic Outlook, www.finmin.nic.in

INFLATION vis-à-vis Economic Rates

FISCAL MEASURES

A) REDUCTION IN UNNECESSARY EXPENDITURE

B) INCREASE IN TAXES:

C) INCREASE IN SAVING

D) SURPLUS BUDGETS

E) PUBLIC DEBT

Tax Exemption 2010 2011

Direct tax exemption 160000 180000

Excise duty 10% 10%

Basic customs duty (for specific agriculture machinery)

5% 2.5%

Customs duty(micro irrigation equipment)

10% 5%

Service tax increased by Rs1000 per day on hotel Accomodation.

Service tax on air travelling increased by Rs50 on general level.

Rs 250 on economic class

10% flat on higher class.

TO INVESTOR

RELIEF TO THE COMMON MAN :• Reduction in excise duty on petrol and diesel.

• Decrease in transportation costs that are intrinsically built into the price of every product that we use.

•In health area include a hike in the deduction limit for health insurance. An increase in the limit will help in widening the base and increasing the penetration of health insurance among the masses.

EFFECT OF INFLATION ON DIFFERENT SECTORS IN BUDGET 2011:

AVIATION SECTOR : Due to the introduction of service tax on domestic and international tickets.Other challenge for this sector is rising fuel prices and shortage of manpower.

HOSPITALITY :Due to the introduction of service tax on hotel accomodation .

TEXTILE INDUSTRY :mandatory excise on branded garments which will give the negative effect.

HEALTH : This area includes health checkups and private hospitals become expensive.

THANK YOU