Inflation in India
In addition to domestic factors, inflation in India fluctuates depending on international oil prices. If international oil prices increase, inflation also increases. For example, due to the reduction in international oil prices currently below $50 a barrel, inflation has also come down to 8.7%. In the recent past, inflation in India was around 13% due to very high international oil prices, which were close to $150 a barrel. India has abundant oil resources, but the demand far exceeds the supply.
After the liberalization of the economy in 1991, many foreign oil companies like Shell, Cairn Energy, etc. they began to explore for oil in India. Apart from multinational oil companies, national oil companies like ONGC (Oil and Natural Gas Corporation Limited) and OIL (Petroleum India Limited) are helping the nation to bridge the gap between oil demand and supply. India depends on imported oil mainly from the Gulf countries to the extent of 70% of its needs, thus paying for a large amount of foreign exchange resources.
Whenever the Gulf region is in political turmoil, the Indian government is in trouble. For example, due to the gulf war in 1991, the prices of all basic products increased, such as onions, vegetables, cereals, etc., since truckers depend on oil to transport the products to the market from the production centers. Therefore, geopolitical factors play a major role in increasing prices in India.
Inflation is defined as the general increase in price levels. In India it is measured based on the total sales price index, WPI. There are many other methods to measure inflation based on 1. The Consumer Price Index (CPI) for agricultural workers, 2. CPI for industrial workers, 3. CPI for rural population, 4. CPI for urban population. Here, the CPI denotes the consumer price index.
Inflation is of two types, namely demand inflation and cost inflation.
In economics there is an important curve that represents the relationship between inflation and unemployment and it is known as the Philips curve. According to Philips, there is an inverse relationship between these variables. If inflation is high, unemployment would be lower and vice versa.
Many experts were of the opinion that both supply side and demand side factors are also responsible for India’s recent 13% inflation. During July and August 2008, inflation in India reached an all-time high of almost 13%. Decrease in the supply of food grains, increase in demand due to an increase in the income of the active population, etc. are some of the reasons for the increase in inflation in recent months. Hoarding of some essential items in anticipation of future price increases by some merchants was also cited as one of the reasons for the price increase.
Some scientists opined that some areas are inaccessible even though they contain energy resources. Therefore, such resources are not economically viable as the cost of production exceeds their value.
The central government took various administrative, monetary, and fiscal measures to contain inflation. For example, the Reserve Bank of India adjusted the Cash Reserve Ratio and Legal Liquidity Ratio, Repo Rate, Reverse Repurchase Rate, etc. Customs duties on various basic products were also adjusted to increase the supply of certain products in the domestic market.
In the long run, the government must decrease its dependence on imported oil and increase the supply of grain and other essential items. The public distribution system should be simplified so that the target people only benefit from it. The public distribution system is intended to improve the purchasing power of people living below the poverty line.
