Inflation Control in India

• If the government of a country prints money in excess, then the prices increase to keep up with this increase in currency that leads to inflation.
• An increase in production costs and labor costs, have a direct impact on prices of the final product, also resulting in inflation.
• When countries borrow money, they need to cope with the interest burden. This interest burden causes inflation.
• High tax rates on consumer products can also result in inflation.
• High demands can pull inflation, wherein the economy demands more number of goods and services as compared to what is produced.
• Costs push inflation or supply shock inflation, wherein the non availability of a commodity leads to increase in prices.

Inflation rate calculation in India

1. Inflation in India is calculated as per Wholesale Price Index

2. 435 commodities are used for the WPI based inflation calculation and base year for the WPI calculation is 1993-94

3. WPI is available at the end of every week (generally Saturdays), for a period of one year ended that day

4. There's a time lag of 2 weeks

5. After several years of rapid growth, 2009 proves to be a testing year for India.

Inflation 2009 in India

Inflation continues posing a threat. Inflation was 12% in early August ‘08. Inflation has been caused by rapid growth [demand pull factors] but, also due to the cost push inflation factors [rising oil prices]. Hopefully, a fall in oil prices and higher interest rates will lead to reduction in inflation without causing much of a slowdown.

Economic Growth. After reaching a growth of 9.8% in 2007-08, growth is expected to slow down to 7%. It may not be a bad thing since it will avoid inflationary pressures building further. However, the global credit crunch might reduce growth much more.

Global Recession and the Indian Economy. It appears that Japan, Europe, and the US are entering into recession. The falling house prices and crisis in the financial system could lead to a sharp downturn, with the worst still to come.

Many believe that India's growth is not so much dependent on growth in the West. But the Indian stock markets have been affected by the global crisis. India's service sector and manufacturing sector will be adversely impacted by the global downturn.

Challenges for Indian Economy in 2009

1. Getting inflation under control
2. Spreading the growth benefits more equitably.
3. Completing investment projects that are essential for the long term development of economy.
4. Dealing with global financial uncertainty that will make the capital flows and exports more difficult.

Sensex in 2009

After falling in year 2008, the Sensex can offer one of the best returns for global stock markets. India's strong economic growth would buck the global trend for lower growth.

Indian Rupee 2009

The Indian Rupee has had a weak year. The Rupee had fallen from 39 Rupee to 1$ in January 2008, to 44 Rupee in month of September. Real interest rates in India are still negative. However, if the Indian inflation rate is reduced, and the government does not go all out for growth, the Rupee may possibly rebound, at least against the dollar, that will face more difficulties in 2009

RBI Plans Interest Rate Hike

In order to keep a check on the high inflation rate, the Reserve Bank of India (RBI) is planning to increase the rate of interest. Recently the inflation rate touched 7.41% in March 29, the highest in the last three years. The prices of some essential commodities like fruits, vegetables and pulses are rising constantly and the UPA government has failed to check prices. Government says that it doesn't have any magic stick in order to stop inflation.

However the government is planning to take hard measures to curb inflation. The government is planning to ban the export of cement and steel which are the main causes of rising prices. It's also planning to lower the excise duty on steel from 14% to 8%.

The prices of vegetables have grown by 16% in the past 1 year whereas the prices of cereals have risen by 6.6%. The measures taken by RBI and the government are expected to curb inflation that has broken the backbone of the common man.