THE REASONS FOR COST PUSH INFLATIONARY TREND IN INDIA :

Inflation Control in India Economic factors causing inflation:

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 labour 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.

India's inflation rate shows signs of creeping up despite ending marginally lower at 2.11 per cent in the week ended June 29, 2002. This is a welcome development but a caveat is in order. Creeping inflation is a sign that the manufacturing sector is stirring to life. This momentum needs to be stepped up with more investment and hopefully, demand boosting public spending. This time round, the rise in inflation has been spurred by a sharp increase in the prices of petrol and high-speed diesel oil rather than those of manufactured goods. Now the caveat. Fuel prices have contributed significantly to cost-push inflation. The share of raw materials in total manufacturing costs has gone up from around a stable 60 per cent for the greater part of the 1990s to 65-66 per cent in the last two years, thanks mainly to fuel costs. With a 14.2 per cent weighting in the WPI index, the contribution of fuel costs to inflation was 58.4 per cent in 2000-01. Even in 2001-02, a relatively low inflation year, it contributed 48.1 per cent. The fuel cost in manufacturing products must remain low if inflation is to act as a stimulus to investment and not act as a drag on cost efficiency, especially of exportable. Cost efficiency indeed is crucial at this stage of recovery in the economy. The latest corporate results show that bottom lines have improved, thanks to cost control despite a moderate growth in sales income. The Confederation of Indian Industry has also expressed its optimism on the recovery in the economy but warned of slow reforms dampening this process. But the danger is likely to come more from cost-push inflation. This time round, inflation may also be more in the nature of an imported one through rising crude oil prices. But at least for some time, food grains stocks, comfortable foreign reserves and excess inventories of manufactured goods may act to check inflation. Much depends on how the Organisation of Petroleum Exporting Countries price crude oil which is now trading around $26 per barrel up from $22 per barrel last year. Both China and India, the successful growth economies in recent years, will be badly affected if crude oil prices go up. Any increase beyond the $25 per barrel level will slice half a percentage point off the growth rate of developing countries in the next six months. It is therefore dreadful to think of the implications of $ 26.50 per barrel price of crude oil for the Indian economy. It is a small consolation that the share of Opec countries of the world oil market has fallen to 39 per cent lately as India depends on them for all its crude oil requirements. All of this adds to the real dangers of cost-push inflation.

Demand-pull inflation refers to the idea that the economy actual demands more goods and services than available. This shortage of supply enables sellers to raise prices until an equilibrium is put in place between supply and demand. The cost-push theory , also known as "supply shock inflation", suggests that shortages or shocks to the available supply of a certain good or product will cause a ripple effect through the economy by raising prices through the supply chain from the producer to the consumer. You can readily see this in oil markets. When OPEC reduces oil supply, prices are artificially driven up and result in higher prices at the pump. Money supply plays a large role in inflationary pressure as well. Monetarist economists believe that if the Federal Reserve does not control the money supply adequately, it may actually grow at a rate faster than that of the potential output in the economy, or real GDP. The belief is that this will drive up prices and hence, inflation. Low interest rates correspond with a high levels of money supply and allow for more investment in big business and new ideas which eventually leads to unsustainable levels of inflation as cheap money is available. The credit crisis of 2007 is a very good example of this at work. Inflation can artificially be created through a circular increase in wage earners demands and then the subsequent increase in producer costs which will drive up the prices of their goods and services. This will then translate back into higher prices for the wage earners or consumers. As demands go higher from each side, inflation will continue to rise.

Also known as Supply-shock Inflation, Cost Push Inflation is an economic phenomena where there is an escalation in the normal level of prices, owing to increases in input costs. In fact, a condition where there is a continuous rise in the general price levels due to increasing output costs, gives

birth to what is called the Cost Push Inflation. Cost Push Inflation takes place when no alternative is available to control the increase in the prices of significant goods and services on large scales.
Causes responsible for the rise of Cost Push Inflation:

Cost Push Inflation develops when the high cost of inputs lead to a fall in aggregate supply. But the demand for the good is consistent. This leads to a situation where the demand for the final good exceeds the supply . This in turn causes a rise in the general price level.

Following 3 factors may be considered as reasons for the emergence of Cost Push Inflation:

Imported Inflation: This condition arises when import of products either in the raw or finished state becomes more costly, owing to the depreciation of currency. Enhancements of corporate taxes Escalation in the wages

Escalation in the cost of labor caused by wage increases, becomes greater than the increase in productivity in labor-intensive industries. This leads to the emergence of Cost Push Inflation in such industrial sectors.

Inflation in India
Inflation is caused due to several economic factors:

When the government of a country print money in excess, prices increase to keep up with the increase in currency, leading to inflation. Increase in production and labor costs, have a direct impact on the price of the final product, resulting in inflation. When countries borrow money, they have to cope with the interest burden. This interest burden results in inflation. High taxes on consumer products, can also lead to inflation. Demands pull inflation, wherein the economy demands more goods and services than what is produced. Cost push inflation or supply shock inflation, wherein non availability of a commodity would lead to increase in prices.

Problems The problems due to inflation would be:

When the balance between supply and demand goes out of control, consumers could change their buying habits, forcing manufacturers to cut down production. The mortgage crisis of 2007 in USA could best illustrate the ill effects of inflation. Housing prices increases substantially from 2002 onwards, resulting in a dramatic decrease in demand.

Inflation can create major problems in the economy. Price increase can worsen the poverty affecting low income household, Inflation creates economic uncertainty and is a dampener to the investment climate slowing growth and finally it reduce savings and thereby consumption. The producers would not be able to control the cost of raw material and labor and hence the price of the final product. This could result in less profit or in some extreme case no profit, forcing them out of business.

Manufacturers would not have an incentive to invest in new equipment and new technology. Uncertainty would force people to withdraw money from the bank and convert it into product with long lasting value like gold, artifacts.

Inflation in India Economy India after independence has had a more stable record with respect to inflation than most other developing countries. Since 1950, the inflation in Indian economy has been in single digits for most of the years Between 1950-1960 The inflation on an average was at 2.00% Between 1960-1970 The inflation on an average was at 7.2% Between 1970-1980 The inflation on an average was at 8.5%. Inflation At Present Inflation in India a menace a few years ago is at a 30 year low. The inflation ended at a low of 0.61% in the week ended May 9, 2009 this after reaching a 16 year high of 12.91 % in August 2008, bringing in a sigh of relief to policymakers.