Inflation Report_Final 27.03.2014

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Inflation Research Methodology

Transcript of Inflation Report_Final 27.03.2014

A STUDY ON INFLATION

Jamnalal Bajaj Institute of Management StudiesA STUDY ON INFLATION- Research Methodology ProjectProject Submitted By:115 - Jinkal R Vyas116 - Darshan Wadke117 - Siddharth Ramachandran118 - Denny Oommen119 - Amala Selvaraj120 - Kanwar Simar Singh121 - Gauri Lad

A Research Methodology ProjectGuide: Prof. Butani

Acknowledgements

We would take this opportunity to thank all the Economists, Bankers, Treasurers who took time out of their busy schedule to answer our questionnaire and share their invaluable insights on the current inflation and make the study fruitful. Also a sincere thanks to all who has answered the questionnaire and helped us through the fructification of this projectQuestions will always remain unanswered unless we are curious! Therefore we would like to extend our sincere thanks to Prof. Butani who gave us the opportunity to study this subject and has also guided us through the development of this project.

INDEXTopicsPage No.

Introduction

Inflation : The Economic Curse4

Research5

Defining the Research Problem

Formulation of Questionnaire and Pilot Study 7

Sampling Technique and Sample size8

Hypothesis tested9

Data Analysis and Interpretation

Section A: The CPI and WPI15

Section B: Food Articles20

Section C: Fuel and Electricity23

Section D: Services27

Recomendations

El Nino39

Conclusion40

Annexures

Annexure 1 : CPI V/s WPI10

Annexure 2 : Urjit Patel Committee Recommendations12

Annexure 3 : Questionairre35

ReferencesGlossary of Terms Used14

Bibliography30

Literature review32

Interview Extract34

Introduction : The Economic CurseThe term inflation is from the Latin term inflare, meaning to blow up or inflate, and it was first used in a monetary sense to describe an increase in the amount of money. In 1838 the concept of inflation was first used. Inflation can stifle economic growth and cause a rise in prevailing interest rates.

The challenges in developing economy are many, especially when in context of themonetary policywith theCentral Bank, theinflationand price stabilityphenomenon. There has been a universal argument these days when monetary policy is determined to be a key element in depicting and controlling inflation. The Central Bank works on the objective to control and have a stable price for commodities. A good environment of price stability happens to create saving mobilization and a sustained economic growth. The former Governor of RBIC. Rangarajanpoints out that there is a long-term trade-off betweenoutputandinflation. He adds on that short-term trade-off happens to only introduce uncertainty about the price level in future. There is an agreement that the central banks have aimed to introduce the target of price stability while an argument supports it for what that means in practice.

Central banks strive to achieve a low and stable inflation rate in order to sustain a high level of growth and maximize social welfare. In the last decade we experienced a period of high growth and low inflation until the global financial crisis in 2008. The crisis adversely impacted the Indian economy given our increasing integration with the global economy. The Government and the Reserve Bank of India (RBI) took several policy measures to minimize the spillover of global crisis on our economy. In the process growth bounced back but inflation also increased. More recently while growth has moderated, inflation still remains above our comfort levels. In the post-global crisis period since 2008-09 inflation has emerged as a major public policy concern. A disturbing feature of the current episode of inflation is that it has been accompanied by high food inflation, which hurts most the poor and the low-income strata of our society.Inflation management is one of the hardest tasks an economic policymaker has to undertake. It appears, at first sight, that one can rely entirely on commonsense to carry out this task. But that will be a cardinal mistake. While inflation policy does require judgment and intuition, it is essential that these be backed up with statistical information and an understanding of economic theory.

This paper tries to bring together the formal analytics that underlie inflation policy. It surveys some of the standard ideas and also questions some of these and, in the process, tries to push further outwards the frontiers of our understanding.

Defining the Research ProblemInflation is the gravest economic concern which has gripped India into its jagged tentacles. India has been plagued by the disease of inflation since the 1950s but it has started showing its prominently harmful symptoms and ill effects since 1991, post liberalization. Kick started by the fiscal crisis of 1991, marked by deficits in government finances and devaluation of the rupee, a whopping inflation of 13.66 per cent took its toll on the Indian economy.

For reasons of completeness it may be mentioned that independent Indias highest inflation occurred in September 1974, when inflation reached 33.3%. Arguably our worst inflationary episode was from November 1973 to December 1974, when inflation never dropped below 20% and was above 30% for four consecutive months starting June 1974.

What is the best inflation measure in India? What inflation measure is most relevant for monetary policy making in India? Questions of timeliness, weights in the price index, accuracy of food price measurement, and inclusion of services prices are relevant to the choice of measure. Though monetary policy in India is not explicitly charged with delivering low and stable inflation, it still needs to choose a measure of inflation as a reference. In this context, a major problem identified by the Reserve Bank of India (RBI) is the measurement of inflation in India:

Research Problem : To study whether the recommendations of the Urjit Patel Committee report are seen as a realistic estimate To study the three main components of CPI (Food, Fuel and Services) To study the impact of inflation on spending

The research survey considers several parameters and areas that are affected by the switch from Wholesale Price Index (WPI) to Consumer Price Index (CPI). Few of the key considerations that are made while conducting the survey are: CPI and its impact on the GDPThe GDP, is one ofmany economic indicatorsinvestors can use to gauge the growth rate and strength of an economy. The CPI plays a role in the determination of the real GDP; therefore, manipulation of the CPI could imply manipulation of the GDP because the CPI is used to deflate some of the nominal GDP components for the effects of inflation. CPI and GDP have an inverse relationship, so a lower CPI - and its inverse effect on GDP - could suggest to investors that the economy is stronger and healthier than it really is. Should WPI be ruled out completelyAccording to the Wholesale Price Index,inflation picked up in the month of Augustto 6.1 per cent from 5.8 per cent in July. On the other hand, the (newer) Consumer Price Index indicates that inflation slowed in the same month, moderating from 9.6 per cent to 9.5 per cent.Why the divergence? And which of these disparate measures should policy makers be looking at?Indian policy makers currently pay most attention to wholesale prices thats what decisions are based on and linked to. But perhaps that seems a bit odd, given it is consumer price inflation that affects the Indian public. So the question that is left unanswered is should WPI be ruled out completely? Through this survey we have tried to touch this area to. Facts of Urjit Patel Committee report impact inflationThe Urjit Patel committee report, which has recommended that the RBI should be a flexible inflation-addressing central bank that targets the CPI at 4 per cent, is considered a welcome step towards making it a modern central bank. Through this survey we have tried to understand what common man with his limited knowledge on the subject understand and has a takeaway from it. End user impact due to shift from WPI to CPI considering consumables like food grain, fuel and electricity and services.CPI would try to bring in facts of how consumer is affected due to his spending in several areas like food grain, electricity, services. It tries to capture the actual impact of inflation considering end users. In this survey we felt it was important to understand what the end users Consumers had to say about it. Is spending impacted due to increase in inflationIt is said that CPI reflects spending patterns of the population of the country. It is based on the expenditures of almost all residents of the country, including professionals, the self-employed, the poor, the unemployed, and retired people, as well as urban wage earners and clerical workers. Having said that, does the shift from WPI to CPI or an increase in inflation really stop the consumer from spending is one of the areas that we tried to touch upon in the survey.While it is true that we do not fully understand inflation and, to that extent it remains a threat, what is comforting is that this exercise of data collection and theoretical research have given us deep insights into this troubling phenomenon. And even though we do not fully understand its origins, we have understood its impact on the economy. It is therefore important to do fundamental analytical research on inflation where the backdrop is an emerging market economy such as India. That is the spirit in which the present paper is written. As such, it begins with a brief description of the inflationary experience of India with some comparative descriptions from other nations.

Research Methodology: Formulation of Questionnaire and Pilot StudyThe su