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Inflation And Its Effect

Stability of price is an indispensable condition for promoting economic growth and development of a country. It creates not only a favorable environment for boosting public confidence but also an aura for development activity. Price stability suggests an absence of abnormal and irregular movements in the general price level, inflationary or deflationary. If there is a sustained rise in prices over a long period, a redistribution of national income and wealth takes place to the advantage of the rich and to the disadvantage of the poor, which ultimately determine the demand pattern. Therefore, whenever the price changes, they will influence the level of production. An investor cannot estimate the profitability of investment, which he would like to invest in a state of uncertainty. This will discourage the investor and he may not undertake his investment program hampering the economic growth of the economy.

One of the main objectives of economic planning in India has been to improve economic growth in an atmosphere of price stability. Despite this objective, price fluctuation has assumed an alarming proportion and prices have been increasing since the beginning of the second five year plan. In this connection, C. Rangaranjan pointed out ‘over a long period, growth cannot be brought with the aid of higher inflation rate. On the other hand, it is the price stability which provides a better environment in which growth can occur and social justice can be ensured’.

Inflation has been a crucial macroeconomic problem for most countries of the world. With the increase in inflation, there has been an explosion of interest in the topic not only among the economists but quite naturally among ordinary citizens and their political leaders. It will be thought inspiring here to ask questions like: What is inflation? How do we measure inflation? What are the implications of inflation?

Inflation is generally defined as a sustained increase in the general price level. This does not suggest that all prices are increasing; some price may even be falling; the general trend must be upward. The rise in prices must also be continuing. For example, the sudden increase in crude oil prices in 1973 resulted in a significant rise in the general price level. Inflation may be anticipated and unanticipated. Anticipated inflation refers to price increases, which are expected. If people expect inflation to occur at a 5 percent rate and prices increase at that rate, the inflation is anticipated inflation. On the other hand, unanticipated inflation refers to price increases, which are not expected or larger than expected. For example, people expected no inflation and inflation occurred. This inflation is unanticipated inflation.

There are two common measures of inflation:

The Wholesale Price Index (WPI) and the Consumer Price Index (CPI) or Cost of Living Index.

Of this, the WPI is the important measure that is most often used and is released weekly. In the recent past the WPI was being constructed with 1980-81 as the base year. The base year has been changed. Presently, the WPI is being constructed with 1993-94 as the base, with 435 items in the basket. These are divided in three groups, viz.,i) Manufactures, ii) Primary produces and iii) Fuel and energy each with a weight of 63.75, 22.0 and 14.25 repetitively. The components of manufactured products group are Food (18%), Textiles (20%), Chemicals products, basic Metals and Alloys (13%), Machinery and machine tools (11%), and others including Cement, Paper, Rubber and Plastic and Autos (25%). Primary articles consist of unprocessed crops of food items and fibers plus livestock. The fuel group comprises mineral oil, electricity and coal. Higher weightage has been given to manufacture products while that of the primary articles has been reduced.

The implications of these changes are as follows:

With the weightage on manufacture sector going up at the cost of primary food items, the global manufacturing prices will reflect even more acutely in changes in the inflation rate in India. The wild fluctuations in food prices due to climatic conditions and regional shortages will show up less in the new WPI basket because the weightage of primary commodities is down. Fuel and energy consumption in the economy is on the rise and the fluctuations in the international oil prices will have a greater impact on WPI in the future. Contemporary inflation data is available in the weekly statistical Supplement and monthly RBI bulletin.

Inflation can be measured on the basis of point-to-point or average changes. The changes can be over a week, over the financial year or a year-on-year basis. According to economic survey 2000-01, the annual rate of inflation in terms of WPI has shown an increasing trend during 2000-01 due to pressure from energy prices. The inflation rate, as on January 27, 2001, was around 8.2 percent on point to point basis and 6.6 percent on the basis of 52 weeks. This was mainly caused by the fuel, power, light and lubricants groups. Inflation rate in terms of the Consumer Price Index for Industrial workers decelerated continuously during the year to reach a low of 2.7 percent in November 2000.

The survey also points out that the economy is currently at a difficult situation. Irregular rainfall for the second successive year has hampered agricultural growth prospects for 2000-01. Industrial growth has slowed down and investor sentiments are subdued. The circumstances have become more difficult due to high international oil prices and the perceived slow down of the American economy. The effect of dislocation due to Gujarat earthquake may also be substantive. There is need to take urgent measures for instilling confidence in the economy and improving the growth momentum.

The Directorate of Economics & Statistics, Government of Manipur collects on the regular basis, the retail prices of essential commodities and cost of services to consumers from selected centers in urban and rural areas. The movements in these prices are reflected in the WPI numbers as well as CPI numbers of different sub-sets of the population such as Urban Non-Manual Employers, Industrial workers, Agricultural laborers, etc. Farm Harvest Price Index Number (FHPI) of principal crops of Manipur was also constructed with 1961-62 as the base year. A survey called ‘Middle Class Family Living’ was conducted in the State by the Central Statistical organization (CSO). The survey covered 59 centers including Imphal in 1982-83. The CSO released the new series of Consumer Price Index for Urban Non-Manual with effect from November 1987.

The month wise CPI Number for Urban Non-Manual employees (Imphal) rose from 321 in January to 384 in December 1999 registering a percentage growth of 8.4 percent. The CPI numbers for agricultural laborers recorded a percentage growth of 7.58 percent from January 1999 to December 1999. While CPI number for rural laborers registered a 7.2 percent in December 1999, the FHPI increased by 15.1% in December 1999. According to Price Statistics of Manipur, 1999, DE & S, the average Wholesale Price of some selected commodities prevalent at Imphal exhibits an increasing trend since 1994. The selected commodities are milled rice (fine), milled rice (medium), milled rice (course), sugar (open market), maida (FAQ), salt (iodized), milk (1st class), mustard oil (imported), moong dal, arahar dal, gram dal, potato (imported) and onion.

The economic blockade on the two national highways in Manipur has impinged upon the developmental activity of the state. Although no study has so far been made in this regard in Manipur, economic hardship is felt among the people in the State. The economic blockade undoubtedly distorted the fundamental feature of an economic system in which there is interdependence among its constituent parts. Artificial shortage of essential commodities is being created and prices are soaring in the State. In this context, mention may be made of Nobel Laureate Amartya Sen. According to Sen, the famine of 1943 in Bengal occurred not because of natural calamities but because of the failure of the State in distributing to the masses. Sen also pointed out that serious famines do not occur in independent, democratic countries with a fair press.

It is also reported that more than 50,000 hectares of paddy fields have dried up in the five districts of Manipur because of drought. The adverse weather condition in the State is going to affect the crop prospect particularly food grains. Therefore, production of food grain is expected to decline in the State in the near future and excess demand for food grain will be created leading to inflation. However, the expected decline is not going to pose any serious problems because the State has enough stock of food grains. According to Director, Food & Civil Supply, the State has a stock of food grains particularly rice to the tune of 8740 metric tonnes. The position was recorded after the food grains for other districts had been lifted.

It has also been reported that all the rice stocked in both the Food and Civil Supply (FCS) and Food Corporation of India (FCI) godowns are of grade A quality. Therefore, the stock of food grains will be adequate safeguard against speculative uptrend in prices. However, it may also be noted that the State is not going to experience deprivation amidst plenty. The strange paradox of overflowing grain silos on the one hand and large mass of the hungry seems to be experienced by the country. While in India more than 320 million people languish in poverty, the stock of food grain swelled to 45 million tonnes of buffer food stock. Therefore, what is required for the State of Manipur is that the government should facilitate proper distribution of surplus food stock to bridge the gap between haves and have-nots.

People living in the State are also totally deprived of the benefit of administered prices for commodities like petroleum product, etc. The question is- what is administered price? Administered prices are normally set on the basis of cost plus a stipulated margin of profit. Many of these administered prices are for commodities produced in the public sector. In India, a large portion of the market forces is controlled and regulated by government action. The government administers the price level of a number of important commodities. These commodities include petroleum product like LPG, Kerosene, Deisel and Petrol, etc. The main objective of administered price is to fix and maintain the prices of essential raw materials so as to avoid cost and price escalation, this has special signification during a period of shortages and rising prices. However, a person of Manipur does not obtain the benefit of administered prices.

Wherever economic blockade is there in Manipur, 2.3 million people of the State are deprived of the consumption of such essential commodities. Transportation activity is grinding to a standstill due to unavailability of fuel. This has serious repercussions in the market. The supply of other essential commodities has been fallen short of the rising demand. It is pathetic to note that petty businessmen, who took loan from moneylenders, suffer most leading to a position of indebtedness. Government employees are also not getting their salary in time. Under such circumstances, one can say that the general equilibrium of the economy has gone awry. Who will get the benefit from the blockade? The business community will get the benefit. Big farmers and traders who indulge in hoarding and middlemen conflict with the interest of the society. Therefore, the productive classes and traders will gain at the cost of fixed income earners and salaried class impoverishing the working classes and enriching speculators, black marketers and businessmen.

Thus, inflation affects different groups of people unequally. While the big producers and the businessmen can gain a lot from inflation, the common people particularly the fixed income earners suffer enormously as a result of inflation. However, the most pernicious effect of inflation is that it hampers economic growth. Inflation reduces the real value of money capital overtime. Therefore, it reduces the will to save and invest. Hence, it arrests the economic progress of the society, which is so essential for the common good of the people.

*The article is written by Thiyam Bharat

(The writer is based in Imphal, Manipur)

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