Inflation Inflation, in economics, persistent and relatively large increase in the general price level of goods and services.

Its opposite is deflation, a process of generally declining prices. Inflation results from an increase in the amount of circulating currency beyond the needs of trade; an oversupply of currency is created, and, in accordance with the law of supply and demand, the value of money decreases. Deflation is brought about by the opposite condition. In the past, inflation was often due to a large influx of bullion, such as took place in Europe after the discovery of America and at the end of the 19th cent. when new supplies of gold were found and exploited in South Africa. In modern times wars are the most common cause of inflation, as government borrowing, the increase in the money supply, and a diminished supply of consumer goods increase demand relative to supply and thereby cause rising prices. Inflation stimulates business and helps wages to rise, but the increase in wages usually fails to match the increase in prices; hence, real wages diminish. Stockholders make gainsoften illusoryfrom increased business profits, but bondholders lose because their fixed percentage return has less buying power. Borrowers also gain from inflation, since the future value of money is reduced. Deflation, which historically has occurred in the downward movement of the business cycle, lowers prices and increases unemployment through the depression of business. Persistent deflation in Japan, beginning in the early 1990s, has resulted in a drop in consumption, record unemployment, and general economic stagnation. An unusually steep and sudden rise in prices, sometimes called hyperinflation, may result in the eventual breakdown of an entire nation's monetary system. The most notable example is Germany (1923), where prices rose 2,500% in one month. In simple language, inflation means rising prices and it shows the increase in cost of living. In economics, inflation is explained as rise in the general level of prices of goods and services in an economy over a period of time. With the rise in price levels a unit of currency will buy fewer goods and services. As a result, the purchasing power of money will be reduced with inflation. In other words the real value of money will be lost day by day along with inflation. Inflation is measured by the Rate of Inflation or Inflation Rate which is the percentage change in a general price index calculated as an annualized figure.

A low inflation rate is beneficial to a country and zero or negative inflation is considered as bad. Also, a high inflation is harmful to an economy and it affects an economy in many ways.

High inflation distorts consumer behavior. Because of the fear of price increases, people tend to purchase their requirements in advance as much as possible. This can destabilize markets creating unnecessary shortages. High inflation redistributes the income of people. The fixed income earners and those lacking bargaining power will become relatively worse off as their purchasing power falls. Trade unions may demand for higher wages at times of high inflation. If the claims are accepted by the employers, it may give rise to a wage-price spiral which may aggravate the inflation problem. During a high inflation period, wide fluctuations in the inflation rate make it difficult for business organizations to predict the future and accurately calculate prices and returns from investments. Therefore, it can undermine business confidence. When inflation in a country is more than that in a competitive country, the exports from former country will be less attractive compared to the other country. This means there will be less sales for that countrys goods both at home and abroad and that will create a larger trade deficit. At the same time, high inflation in a country weakens its competitive position in the international

Inflation and unemployment go hand in hand. For every country, maintaining a low unemployment rate is the main objective. It is usually believed that inflation and unemployment are inversely proportional. There are many economists, who hold the opinion that low rate of unemployment together with low inflation rate may be a source of concern. Both low inflation rate and low unemployment rate, may be hypothetical. In real practice, this rarely happens. If a particular country, has full employment , it can be said to have minimum rate of unemployment. If a nation maintains a minimum rate of unemployment in a condition when inflation rate is stable, it is said to follow the natural rate of unemployment. In other words, the natural rate of unemployment is the minimum rate of unemployment, which can be sustained.

BETWEEN INFLATION AND GROWTH FOR INDIA

This finance minister had to resolve the dilemma that confronts Indian economic managers often between inflation and growth. Many asked for the stimulus to be rolled back since the Indian economy is again on the upswing. Inflation and inflationary pressures had been ignored for years, despite high deficits to maintain the growth impetus.

Inflation was not a result of the stimulus package of expenditures and tax cuts. Much of this stimulus was by way of expenditures (like the National Rural Employment Guarantee Act, Bharat Nirman, Sarva Shiksha Abhiyan and so on) budgeted in earlier years. In 2008-09, the total stimulus was 2.7 per cent of the gross domestic product (with the farm debt waiver) and 1.8 per cent in 2009-10. Excise and other tax deductions were 0.2 and 0.4 per cent respectively. There was little stimulus expenditure to resist the global meltdown. The Indian economy was resilient enough to withstand the external economic collapse.

Withdrawing the huge stimulus packages in the United States of America and the West (even in China) means the withdrawal of large government funds from the system, when the West is not sure that a double dip, or another recession, was not on the way. In India, the expenditures on the NREGA, other social and infrastructure expenditures and the Pay Commission outflows were from an earlier year and built purchasing power and resistance to recession, but were not incurred for that purpose.

This budget has been acclaimed as balanced, transparent, workmanlike, unspectacular, responsible, and a big picture budget. The finance minister attributes inflation to the monsoon failure. He does not mention the large government deficits over many years, the talking up by the minister for agriculture, food and civil supplies, of the prices of sugar, wheat and milk while

not using the government wheat stocks to bring prices down, and allowing large import stocks of pulses and sugar to lie uncleared at the docks.

The precursor to this budget was the (largely West Bengalcentric) railways budget of Rs 94,765 crore with a surplus at Rs 3,173 crore versus the annual capital expenditure plan of Rs 41,426 crore that the optimistic but clueless Mamata Banerjee expects to be funded by borrowings and internal resources. It grossly overestimates revenues on present traffic trends. The one bright feature is her apparent wish to bring the private sector into many public-private partnership projects, though there are no specifics.

In the context Pranab Mukherjees budget deserves all the accolades it is being given. But it has two serious disabilities. This government, while talking of the aam admi, ignores the food inflation that is hurting this large constituency. It hikes petrol and diesel prices, and these increases will further affect food prices. The implementation of the Kirit Parikh recommendations to free petroleum product prices in line with international prices will further add to the woes of all consumers, not just car owners. Secondly, the budget woos the middle classes with substantial income tax savings. Perhaps they could have been postponed and the petrol and diesel prices left untouched till the monsoon, when supplies improve.

Apart from this major flaw, this is a budget about which there is little to criticize. It does not indulge in the fudges of the earlier years which the minister alluded to when he said that he did not have above or below the line items in calculating the deficit, since all items were taken up front.

The minimum tax on book profits of companies will go up from 15 to 18 per cent. An additional one rupee on excise duty on petrol and diesel will add to government revenues without

reducing oil company losses, and will lead to consumer prices going up by about Rs 2 per litre. Tobacco products will attract more tax. Large cars, SUVs and MUVs will cost more. Excise duty will lose two out of the four per cent reduction in last years stimulus.

Against this there are many incentives: 60 per cent of tax payers, the middle classes, will pay much less tax, since income slabs have been revised upwards; surcharge on tax on domestic companies is to come down; research and development expenditures in laboratories will get additional weighted deduction. For a change, social science research expenditures will attract similar exemptions.

Energy, and particularly renewable energy, gets special attention. This is the first budget to recognize climate change and its mitigation by making an attempt to incentivize solar and wind energy as well as cycle-rickshaws, and by imposing a firsttime tax on coal, the major carbon emitter. It signals intent by setting up committees to report on method and feasibility. For example, it proposes to strengthen and institutionalize the mechanism for maintaining financial stability by setting up an apex-level financial stability and development council;

a high level council will monitor implementation of schemes for micro, small and medium enterprises being proposed by a prime ministerial task force; a budget of Rs 2,400 crore is provided for this; a Financial Sector Legislative Reforms Commission will rewrite and clean up the financial sector laws to bring them in line with the requirements of the sector; many recommendations of the Administrative Reforms Commission are being studied for implementation; the deputy chairman of the Planning Commission is to head a development and security coordination committee; a technology advisory group is to propose the use of information technology in tax administration.

The best news, and what the stock market has run up for, is the reduction in the fiscal deficit to 5.5 per cent in 2010-11 from 6.9 and 7.8 per cent in the two previous years, but with no hidden numbers below the line. Debt as a proportion of GDP is targeted to fall to 68 per cent by 2015-16. The GDP (by imputing inflation at 8.5 per cent) is to grow by a nominal 14 per cent. Disinvestment generated Rs 25,000 crore in 2009-10 and is to generate Rs 40,000 crore this year.

Revenue of around Rs 35,000 crore from 3G telecommunication auctions is not accounted. (So one again wonders at the urgent need to so soon raise petrol and diesel prices). A beginning was made before the budget to get to nutrient-based pricing for fertilizers which will improve the nutrient balance in agriculture, reduce the subsidy and in due course allow direct subsidies to farmers.

The social sector schemes take 37 per cent of the budget. Infrastructure will take 46 per cent of the total plan allocations. The finance minister mentions $29 billion of foreign direct investment inflows in 2009-10 but has nothing to say about the volatile foreign institutional investment inflows from Mauritius and other places which are exempted from paying short-term capital gains taxes, the insidious flows through participatory notes, the effect of such volatile FII flows on the rupee value and in stoking inflation, and the huge swings in stock prices..

In conclusion almost all the sectors expenses are increased prices of the goods and services have been raised thus can be said as India is on an upswing