Presentation on managing inflation
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PRESENTATION
ON
UNION BUDGET AND MANAGING INFLATION
By: Shivani Kakria
Meghna Mahajan Anshita Kashyap
Khushboo Chauhan
Sandeep kaur
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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.
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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.
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Hyper inflation
Extremely high inflation
Moderate inflation
Low Inflation
TYPES OF INFLATION
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Causes of inflation
DEMAND PULL INFLATION
COST PUSH INFLATION
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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
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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.
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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.
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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”
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BLACK MARKET & CORRUPTION
It is unearned income by public servants . Excess demand lead to inflation Acc. To Transparency International for corruption . India ranks 74
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OTHER FACTORS
Growth in population Growth in private
expenditure Increase in Export Money reduction in
direct taxes
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SUPPLY SIDE FACTORS CAUSING INFLATION Industrial disputes
Natural calamities
Artificial scarcity
Increase in export
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Impact high oil price (Petrol prices increased by 23.14%)
Fuel and power(increased by 9.48%)
Fluctuating agricultural growth.
Food inflation(9.52%).
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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
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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
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EFFECTS OF INFLATION
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Effects of inflation
Inflationary noise Effect on economic growth Effect on consumption and
economic welfare
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EFFECTS OF INFLATION
Negative Effects
Positive Effects
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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
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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
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METHODS TO MEASURE INFLATION.
Consumer Price Index (CPI)
Wholesale Price Index (WPI)
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Current CPI/WPI – Last Calculated CPI/WPI
Last Calculated CPI/WPI
InflationRate
=
150 - 140 140
InflationRate = 100
100
=
7.12%
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TYPES OF MEASURES TO CONTROL INFLATION
MONETARY MEASURES
FISCAL MEASURES
OTHER MEASURES
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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)
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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
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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
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FISCAL MEASURES
A) REDUCTION IN UNNECESSARY EXPENDITURE
B) INCREASE IN TAXES:
C) INCREASE IN SAVING
D) SURPLUS BUDGETS
E) PUBLIC DEBT
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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%
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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.
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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.
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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.
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THANK YOU