INFLATION

DEFINITION

 Inflation relates to the continuous increase in the prices of the products and
services that results in the persistent fall in the purchasing power of money
in the hands of the people. In other words, we can say that the implicit value
of the money falls.
 When the cost of living of the consumers keeps on rising over the years the
purchasing power also increases and here the inflation hits hard because now
with the same amount of money consumers will purchase a less quantity of
goods.
 It is generally measured by government statistics such as consumer price
index and wholesale price index.
 Inflation effects those goods and services that are required by the consumers
on day to day basis leading to increase in the prices due to which
consumption drops and people refer to spend on what they need avoiding
bonus purchases that drives a lot of industries. Industries are adversely
affected because the revenues and profit margins are reduced as there cost of
production increases.
 The inflation rate for month of June is 5% and July is 4.17% year on year
basis as it is compared with same month in the previous year.

CAUSES OF INFLATION

1. Money Supply:-

Whenever the central bank puts more money in the market economy to
inject liquidity by lowering down the interest rates this increases the
purchasing power of money and consumers demand for more goods and
services leading to rise in prices causing inflation.
2. The National Debt

The reason is that the country’s debt increases, the government has two
options:
 They can either raise the taxes which will cause the businesses to
increase their cost in order to neutralize the corporate tax rate
 To print more money to pay off the debt that will increase the money
supply in the economy which will lead to depreciate the value of
money
The government would preferably choose the second option.

3. Current Monsoon Prediction

If farmers expect good monsoon in a year there will be better harvesting of
crops the farmers will increase the prices and as these agricultural products
serve as raw material for many industries so there will be increase in the
prices of final goods and services shifting the burden on the consumers.

4. Minimum Support Price

It is the price that the government promises to pay the farmers for their crops
if they are unable to meet their price expectations and government purchases
their goods at the quoted price so as to safeguard the interest of consumers.
So as there was a hike in MSP which was 1.5 times of the cost of production
and as these serve as inputs for industries the burden is shifted on to the
consumers through increase in prices of goods and services leading to
inflation.

TYPES OF INFLATION

ON THE BASIS OF RATES

1. Creeping Inflation
The inflation rate is between 2% - 3% and if this rate is maintained it would
be boost for the economy as it will be helpful for economic development and
growth.
When there is equilibrium in market due to demand and supply forces, this
balanced condition occurs when there is increase in government expenditure
leading to increase in demand for goods and services. To meet the demand
expectations of the consumers the producers increase their supply due to
 which there is better utilization of production capacity which will ultimately
attract investments and supply also increases.
Employment increases and simultaneously the wages increase ultimately
leading to growth in country.

Examples are:-
Russia 2.5%
Spain 2.2%

2. Walking Inflation: - when the rate of rise in inflation is of medium range by

3% – 6%. It is unpredictable and maintains consumer’s faith in the economy.
It is easy to control such rate of inflation by taking up effective money
control strategies and controlling the interest rates otherwise it is harmful if
it goes on increasing.

Examples are:-
India 4.17%
Pakistan 5.83%
Nepal 4.10%

3. Running Inflation: - when the sustained rise in prices and inflation is over
7% - 10%. It is normally two digit inflation. This gives the warning signal
indicating that there is a need to control it. There is regular increase in
demand for goods and services over the period of time affecting the
purchasing power.

Examples are:-
Ukraine 8.9%
Uruguay 8.4%
Ghana 10%

4. Chronic Inflation: - The rate in this type of inflation is 11%-30%. It is a

phenomenon which refers to the rise in the prices of for a prolonged period
of time. This type of inflation has a tendency to be permanent and erodes
away potential long term investments.

When people start anticipating this type of situation they start buying goods from
the market to avoid purchasing of goods at a higher price. It is called chronic
because if an inflation rate continues to grow for a longer period of time without
any downturns leads to galloping inflation.
 Examples are
Argentina 29.5% (2017)
Uzbekistan 14.40%

5. Galloping Inflation: - it occurs when there is tremendous monthly increase in

the prices and inflation rate is over by dual and triple digits 30% to 999%. At
this stage there is no limit to price rise and price rise goes out of control.
Money becomes worthless bringing hardships to people. There is complete
collapse of the currency and economic life is disrupted.
Examples are:-
North korea55%
Sudan 63.9%

6. Hyper Inflation: - The rate is 1000% or more, it is devastating for the

economy it can lead to total collapse of the value of currency along with
economic crisis and rise in external debt and fall in purchasing power of
money. It can be caused due to printing too much money to finance the debt
wars and political instabilities.
Examples are:-
Venezuela - the inflation rate is expected to hit 1 million % by 2018

ON THE BASIS OF COMPONENTS

1. Core Inflation
It is the change in costs of goods and services but does not include items from food
and energy sectors because their prices are too volatile. Food and energy sectors
are necessary staples and with any increase in the prices the demand is not to be
affected due to which there will be no accuracy for calculating inflation. It is often
used to calculate consumer price index. It represents the most accurate picture of
underlying trends of inflation. The demand for these food and energy items is
inelastic.
The core inflation is critical because inflation is when there is continuous rise in
prices of goods and services that a consumer requires on the daily basis.

2. Headline Inflation
The percentage by which prices rise over a period of time without making any
major adjustments is headline inflation is called headline inflation. It is the good
indicator of the inflation as it does not show the amount by which the value of the
currency is reduced. This is because the headline inflation includes change in
prices to things like food and energy which are volatile. It is the raw inflation
figure which is released monthly reported through consumer price index.

3. Wage Push Inflation

When the employees push for an increase in wages which are not justifiable
either on grounds of employee productivity or increase in the cost of living
An unwarranted wage increase leads to increase in cost of production and
the burden of which is passed on to the consumers in form of high prices of
goods and services.

4. Profit Push Inflation

It generally happens when there are few producers or single producer
producing the goods for the entire market. When these firms increase their
profit margins and they charge high prices for their goods and services.

ON THE BASIS OF MARKET FORCES

1. Demand Pull Inflation

This type of inflation occurs when there is increase in wages and salaries of
consumers they demand for more goods and services which causes the shift
in the demand curve while the supply remaining fixed and there is a new
equilibrium which shows increase in price of goods and services as well as
increase in the quantity demanded.
The shift in demand curve can also be due to monetary factors such as
increase in money supply and the real factors that are decrease in taxes,
 increase in government expenditure, increase in consumption expenditure,
and increase in exports.

2. Cost Push Inflation

This type of inflation occurs when the price of inputs such as raw materials
increase due to which the cost of production also increases and the burden is
shifted on the consumers through increase in the final goods and services
while the demand curve remains constant the supply curves shift and there is
a equilibrium showing increase in price level and less quantity supplied.

DEFLATION

It refers to the continuous decrease in the prices of goods and services due to which
the rate falls below 1%. It happens when the money supply of the economy is
fixed; the purchasing power and the currency are high.

The concept of deflation spiral:-

The overall price of the goods and services decrease and people in the economy
start to think that the prices will go more lower so they hoard the cash that declines
the money supply, they delay their consumption. Businesses does not want to
lower their prices of goods making them unprofitable as the production gets
reduced and they are unable to meet their costs so the employers start laying off the
workers due to which unemployment increases effecting the wages and salaries of
people and they limit their expenses, oversupply of goods and services and again
the prices are reduced for goods and services making a spiral.

Banks combat to lower the interest rates as they want more money to be circulated
in the economy so people lend more and if they default in paying cash the value of
real debt increases for the borrower, a little rate of inflation can be boost for the
economy in this situation.

DISINFLATION
It refers to the temporary slowing down of the pace of inflation. In other words,
inflation increases at the diminishing rate. This can be due to
 1. Weak economic growth
2. Fall in the cost of production
3. Imports have become cheaper
For example:- May June July
5% 1% 6% 0.5% 6.5%
In terms of percentage, as we can see there is difference of 1% between the month
of May and June and then a difference of 0.5% between month of June and July so
inflation exists in the economy and is increasing but at the diminishing rate.

Difference between deflation and disinflation is that in the former there is

continuous decrease in the prices of goods and services due to which the rate also
falls below 1% but in the latter the inflation is increasing but at the diminishing
rate.

How inflation is calculated?

There are two methods to calculate inflation

1. Consumer Price Index
2. Wholesale Price Index

CONSUMER PRICE INDEX

It refers to the weighted average of the prices of a basket of consumer goods and
services at the retail level. It is an economic indicator and is generally used to
measure inflation and gives idea to the government, businesses and citizens about
the price changes in the economy so that they can take informed decisions.
It is calculated on the monthly basis and the data is released on 12 th of every month
at 5.30 p.m and if there is a holiday it is released next working day.
 It is calculated by It is calculated by Central Statistics Office under Ministry
of Statistics and Programme Implementation
 It is calculated differently for urban and rural, the combined rate is taken as
the inflation rate for the month
 There are 448 items in rural and 460 items in urban that are in the basket of
goods and services and are included in index to calculate CPI for the month
The basket remains fixed means that the goods and services and their quantities
remain unchanged whereas the price is the variable factor in order to allocate the
price changes over the years. It allows to calculate the basket at any point of time.
It is calculated by making changes in the prices for each item in the basket and
averaging them.
CALCULATION OF CPI
The formula used to calculate the Index is as follows:

Cost of Market Basket in Given Year

CPI = _______________________________ X 100

Cost of Market Basket in Base Year

The formula for calculating the rate is:-

The current rate for the month – the rate in the same month of prev. year X100

The rate in the same month of previous year

COMPONENTS OF CPI

Items Weights
Food and beverages 45.86%
Miscellaneous such as
(Education, transport, healthcare etc) 28.32%
Housing 10.07%
Clothing and Footwear 06.84%
Fuel and Light 06.53%

Total 100

http://www.mospi.nic.in/sites/default/files/press_release/CPI_PR_12july18th.pdf

http://www.mospi.gov.in/sites/default/files/press_release/CPI_PR_13aug18m.pdf
NSSO and CES

NSSO stands for National Sample Survey Office that conducts large scale sample
surveys on households, food and non food items consumption in urban and rural
areas. It collects the data through a questionairecomputes and reports household
level of consumption of different food items.
CES stands for Consumer Expenditure Survey they collect the data from NSSO
and analyzes the same on the basis of buying habits of consumers and patterns to
determine the inflation rate.
DIVISION OF COMPONENTS OF CPI ON BASIS OF URBAN AND
RURAL

180
CPI – Rural & Urban
160
140
120
100
80
60 Rural
40 Urban
20
0
SOURCE-
http://www.mospi.gov.in/sites/default/files/press_release/CPI_PR_13aug18m.pdf

As we can see that housing index for rural is 0%, this is because in rural areas there
are generally self dwelling houses and people spend less on their housing
maintenance and there is more expenditure on other items of necessity and also
there is no migration from urban to rural areas.

WHOLESALE PRICE INDEX

 It is the weighted average change in prices of the goods traded at the

wholesale level. Wholesale stage is the stage where the goods and services
are sold in bulk and traded between the organizations.
 It is released on 14th of every month and the rate of WPI for month of June is
5.77% and July is 5.09%.
 It is calculated by Department of Industrial Policy and Promotion under the
Ministry of Commerce and Industry
 There are 692 items in the basket of goods that are included in index to
calculate WPI for the month.

COMPONENTS OF WPI

Items Weight

Manufactured Products 64.23%

( textiles, food, paper, chemicals etc.)
Primary Articles 22.62%
Food such as cereals, pulses etc
Non food – fibres, oil seeds etc
Mineral- crude oil, petroleum etc

Fuel & Power 13.15%

(oil, electricity and coal)
http://eaindustry.nic.in/cmonthly.pdf
WPI FOOD INDEX

A new index has been reconstructed and it is compiled to capture the inflation rate
for seasonal fruits and vegetables as they are now available throughout the year.

A high level Technical Review Committee has been set up for the first time to
carry out dynamic review process in order to keep pace with the changing structure
of the economy

CPI v/s WPI

CPI is better than WPI to calculate the inflation rate as CPI basket of items
includes both goods and services and as the service sector contributes 60% to the
GDP of India so it was necessary to include this part for calculating the inflation
rate while WPI only includes goods in the basket for measuring of inflation rate

Therefore in 2014, the government decided to shift the base year to 2011-12 as
there were no fluctuations in this year

Recent news provides that from next fiscal year 2019-20 the base year will be
shifted to 2017-18 so as to see the impacts of GST and Demonetisation on the
economy as these were the major changes during the period and the change will
provide better accuracy to calculate the growth and development of the country.
 7
6
5
4
3 WPI
2 CPI
1
0
Jul-17

May-18
Apr-18

Jun-18
Sep-17

Nov-17

Mar-18
Dec-17
Aug-17

Feb-18
Jan-18
Oct-17

SOURCE-https://dbie.rbi.org.in/DBIE/dbie.rbi?site=home

INFLATION TARGETING

After the calculation of Inflation rates, Government has to monitor the rate of
inflation in the country. To monitor inflation rates Government of India and RBI
signed the Monetary Policy Framework Agreement on 20th February 2015. The
main objective of this agreement was to bring price stability in the economy while
keeping in mind the objective of growth. Just like in Impossible Trinity
government aims to reduce the inflation rates and increase the GDP of the country.
Initially a fixed target of 6% was set for inflation which was till January 2016.
After this a more flexible target was adopted that was 4% with a band of +2% and -
2%.
It would be considered as failure on the part of RBI if inflation goes below 2% or
more than 6%.
FORMATION OF MPC

Before the formation of MPC the decision of increase or decrease in interest rates
in the country was taken by the RBI Governor with the help of a Technical
Advisory Committee but the decision of Governor was final.
The then RBI Governor Dr.Raghuram Rajan wanted this decision to be more
unbiased, debated and scientific. So he proposed the concept of Monetary Policy
Committee.

MONETARY POLICY COMMITTEE

Monetary Policy Committee came into implementation after Sh. Urijit Patel took
over as the new RBI Governor.
First MPC meeting was held on 4th October 2016. The first policy under MPC was
announced when inflation came down from 6.08% in July 2016 to 5% in August
2017.

The Monetary Policy Committee was constituted by the central government under
Section 45ZB. It determines the policy interest rates required to achieve the
inflation target.
The Reserve Bank’s Monetary Policy Department assists the MPC in formulating
the monetary policy. Analytical work of the RBI and views of the key stakeholders
in the economy contribute to the process for arriving at the decision on the policy
repo rate.
The Financial Market Committee (FMC) meets daily to review the liquidity
conditions as to ensure that the operating target of monetary policy is kept close to
the policy repo rate.
In May 2016, the Reserve Bank of India (RBI) Act, 1934 was amended to provide
a statutory basis for the implementation of the flexible inflation targeting
framework.

The amended RBI Act provides for the inflation target to be set by the Government
of India, in consultation with the RBI once in every five years. The government of
India has notified in the official Gazette 4% Consumer Price Index inflation as the
target for the period from August 5, 2016 to March 31, 2021 with upper tolerance
limit of 6% and lower tolerance limit of 2%.
REPO RATES ALONG WITH CPI INFLATION

SOURCE- https://dbie.rbi.org.in/DBIE/dbie.rbi?site=home

In 2016 Inflation was high because of the bad monsoon and drought. There was a
huge increase in the prices of fruits and vegetables.
When the prices stabilized repo rate was also decreased to 6.25%.
Inflation started decreasing during November 2016 because of Demonetization as
the supply of money in the economy was very limited. When money started
flowing in the economy GST was introduced which was implemented on 1st July
2018.
Unsure of the GST rates producers started clearing off their stocks. Huge discounts
were provided in the month of June 2017. This concept of clearing the stocks is
also known as destocking.
Result of destocking was inflation rate reached 1.46% in JUNE 2017.
But there was no change in repo rates even when inflation dropped below the
lower band rate that was 2%. This was to study the impact of demonetization and
GST in the economy.

After GST was implemented repo rates was decreased because initially the GST
rates were very high and people were not able to afford goods and services.
Inflation was back between its target bands of 4% (+-2%).
Repo rates were hiked in June 2018 MPC meeting by 0.25% with inflation
reaching near 5% and again in the 12th MPC meeting on 1st August 2018.
Repo rates were increased in June 2018 after 4 years. Earlier it was increased on
28th January 2014 to 8%.

STANCE OF MPC

ACCOMODATIVE STANCE-
When RBI wants to expand the economy by increasing the flow of money in the
economy. It reduces interest rates.

NEUTRAL STANCE-
When RBI can both increase and decrease interest rates according to the band
targets, it is called neutral stance.
Stance of 12th MPC meeting was neutral.

PHILLIP’S CURVE
It is a single equation model developed by William Phillips.
He started analyzing the relationship between unemployment rates and inflation
rates in a country.

SHORT RUN PHILLIP’S CURVE

He discovered there exists a negative relationship between unemployment rates
and inflation rates. If unemployment rates decrease, inflation rates start increasing
in the economy.

When Government wants to infuse money in the economy to decrease

unemployment rate, it increases its expenditure which leads to development of
infrastructure. It leads to more employment opportunities for people resulting in
more wages and salary. This increases purchasing power of people and they
demand more goods and services which leads to increase in inflation rates in the
economy.
TYPES OF UNEMPLOYMENT

1) FRICTIONAL UNEMPLOYMENT
It is a type of unemployment which occurs when an employee shifts from one job
to another. When there are better job opportunities in the economy and people
shift, the tenure for which they remain unemployed is frictional unemployment.

2) DISGUISED UNEMPLOYMENT
When more than required number of people is employed for a particular work. For
example to manufacture a car 12 workers are required and 15 are employed for the
task. The contribution of extra 3 is NIL. This is known as disguised
unemployment. It is more prevalent in agricultural sector.
3) TECHNOLOGICAL UNEMPLOYMENT
When due to advanced technological innovations producers shift from labor
intensive techniques to capital intensive techniques. This leads to laying off
workers. It is also known as Structural unemployment.

4) OPEN UNEMPLOYMENT
When there are not enough job opportunities available in the economy for its
citizens.

These are certain types of unemployment that always exist in every economy.

LONG RUN PHILLIP’S CURVE

In the long run Phillip’s curve unemployment rate remains fixed. It changes during
short run or for a certain period of time but in the long run gets back to a certain
level.

Here we can see at point A is the rate of unemployment that is 8%.

Government infuses money unemployment reduces to point B that is 3% and
inflation also rises to 2%. But in the long run due to inflation people start
demanding more wages from the employers. Employers also lay off certain
employees and due to existence of various types of unemployment again the
unemployment rate gets back to 8%.
Again government infuses money and the process is repeated but the inflation gets
back to 8% in the long run.
This point A is also known as NAIRU (Non Accelerating Inflation Rate of
Unemployment).
And the unemployment that always exists in an economy is known as Natural Rate
of Unemployment.
Unemployment rate in India is 3.52%

STAGFLATION
The concept of stagflation contradicts the Phillip’s Curve because in certain cases
both the unemployment rates and inflation rates are high in the economy. For
example in late 1960s USA faced oil crises which led o high inflation as well as
high unemployment in the country.

JAPAN – DEFLATION

Japan is the country which is highly dependent on cash and there are only 20% of
the cashless payments that takes place. The rate of deflation in the country is 0.7%.
The population in Japan is 12.7 crores and more than 35% of the population is
above 65 years of age and the life expectancy rate in Japan is 85 years.

The reasons due to which the country fell into deflation is

1. Population Ageing as people spend less on the bonus purchases and save for
their medical and health expenditure and for the uncertainties of future
2. Economic downturns in the stock markets
 3. People are unable to pace with the technological advancements over the
world
4. Major central banks have also attributed to deflation due to their insufficient
methods to increase money supply in economy

The banks and government adopted various economic measures they purchased
various assets and initiated negative interest rates of -0.10% on the deposits.

The President of Japan, Shinzo Abe came with new concept of Abenomics.
Abenomics is the remedial measure to remove the deflation of the country. It is the
set of aggressive policies to pull out Japan from long deflationary slump. There are
three pillars of Abenomics namely:-

1. Monetary Easing – it is also called as unorthodox monetary policy in which

the Central Bank purchases government securities or other securities from
the market in order to lower down the interest rates and increase the money
supply.

2. Fiscal Stimulus – a fiscal package is fixed for government expenditure for

economic recovery measures in order to focus on infrastructural base of the
country including construction of bridges, tunnels, and earthquake resistant
roads.
A fiscal package of 10.3 trillion yen is efficiently and effectively allocated
in which 3.8 trillion yen is for disaster management and construction as
Japan is the country which is prone to natural calamities, 3.4 trillion yen is
for regional expenditure and 3.1 trillion yen is for stimulating private
investments. This will cover the absolute necessities to bailout from
uncertain events.
3. Structural Reforms – Keeping in mind the long term potential investment
reform for the country. Steps were taken in various fields such as :-
 Taxation – the corporate tax rates were reduced from 38.1% to 20 –
30% in recent years
 Labour - labourers and workers were trained through training
sessions in order to increase their efficiency
 Agriculture – new techniques and procedures along with advanced
machineries and tools were adopted for effective utilization of
resources
 Trade - The country has entered into Trans-specific partnerships
with other nations so as to develop free trade agreements among the
nations
  Finance and Banking – the banks have initiated negative interest
rates and the rate is -0.10% in which they want people to deposit
their money in the banks and they will charge interest on the
deposits so as to inject liquidity and increase money supply in the
economy. They want people to spend the money so that it can be
circulated.

In 2017, GDP grew 4% but there is still lack of wage growth and labour shortages
in the country. These all policies will help to renew the competitiveness of the
country and contribute to economic development.

ZIMBABWE

1800 –1899: Formation of British South India Company

Queen Victoria granted a royal charter to make British South Africa Company
having rights to annex and administer the land and establishing settlements within
the boundaries of Rhodesia. The brutality against the black was increasing day by
day. A lady names Mbuya Nehanda called grandmother of Rhodesia started her
revolt against the company.

1900 – 1969: Land Apportionment Act

During this time World War 1 lead to death of 300000 civilians deaths and in the
year 1922 the company came to an end. In 1930, Land Apportionment Act came
restricting the black access to land and forcing many into wage labour. Black
opposition to the colonial rule was growing. Two nationalist groups were formed
namely ZAPU (Zimbabwe African People Union) and ZANU (Zimbabwe African
National Union)

1972 – 1980: Entry of Mugabe

Guerrilla war began and intensified against the white rules. Robert Mugabe was
elected as the Prime Minister of the country in the year 1980.

1982 – 1987: International Recognition

Mugabe changed the constitution and became the President. He also accused and
removed the minister in his cabinet. During this time he earned international
recognition for education and health initiatives. Nation steadily grew its exports of
manufactured and agricultural products. Zimbabwe became famous for its tobacco
production

1992 – 1996: Downfall of Agricultural Sector

His political momentum faded as he was accused to brutality and bribery. His
management of the country’s farming sector was a turning point that contributed to
economic crisis
His policy to amend the act administering land was a downfall. In 1992, he
amended the act to “Land Acquisition Act” forcing white landowners to give up
their property and redistribute it. He threatened to those who objected it. This
effected the agricultural sector as black were not aware of the techniques and
processes of production.

1997 – 1999: Funding of Congo War

To fund the Congo war his policy to print more money lead to increase in money
supply and he also increased the wages and salaries of the military officials.
Increased bank lending lead the economy to sharp fall in output.
World bank and IMF suspended their funds to the country over differences in
government policies

2000 – 2008: State of Hyperinflation

 There was mass unemployment in the country along with cash crisis.
 There was collapse of commercial agriculture and poor wealth condition
leading to shortage of food.
 Violent seizure of 4500 commercial white owned farms
 IMF expelled Zimbabwe due to unpaid funds
 Discovery of Marrange Diamond Field which was invaded by illegal miners
with the aid of Chinese expertise
 Chlorea epidemic over the country and national emergency as health care
system collapsed
 Inflation rate rose to 1000%

2009 – 2015: Currency collapsed

The country relied on US dollars and adopted it as their leading currency while
they scrapped its own currency. Government introduced bond notes and dollar
backed quasi currency to ease liquidity crisis. The country identified low level of
production and insignificant Foreign Direct Investments. There were large
international finance arrears
2016 – 2017: Economic Reforms
It was the end of 37 years of Mugabe’s rule over the country. Mugabe used to bribe
for votes and there was no transparency in voting system as the cast ballots
included the names of people who have died and are under age. More than 7000
postal votes of the members of police and military officials were being forced to
mark their ballots under the watchlist of their commanding officers.

Emmerson Mnangagwe is the new president of the country and his policies are
positive
 Promised to respect property rights and maintain stable predictable business
environment
 Ensuring delivery of 1.5 million homes in next 5 years addressing to house
shortages
 Forcing mineral producers to process part of their output in country and
create jobs
 In May2018, Zimbabwe had credit arrears of 1.7 billion dollars to African
Development Bank and World Bank

Total bank debts of 14.5 billion dollars in budget of 2018 which can be cleared
through
 Seeking bridge financing where the government can borrow from bilateral
arrangements to cover arrears
 Take relief under IMF and World Bank under heavily indebted poor country
initiative
After this process the country can be in a stronger position to attract capital inflows
from international institutions who showed growing interest in country’s potential.

VENEZUELA
So in a country with world’s highest oil reserves a citizen has to pay $150 for 1
dozen eggs.
A country so rich in natural resources is having the inflation rate in thousands and
according to the IMF report it’ll reach 1 million percent by this year end. The
question is how?
In countries where such valuable natural resources are available in abundance,
dependency on that particular natural resource increases. The whole economy
revolves around that particular resource.
In Venezuela the economy was dependent on revenues that were being generated
from the export of oil.
Oil was discovered in Venezuela in 1912. Before 1912 Venezuela was an
agriculture based economy.
After the discovery of oil, the government only focused on extraction and export of
oil. They ignored all the other sectors and infrastructural development.

Avg Crude Oil Prices in U.S. DOLLARS

120

100

80

60

40

20

0
1974

1988
1990

2004

2018
1968
1970
1972

1976
1978
1980
1982
1984
1986

1992
1994
1996
1998
2000
2002

2006
2008
2010
2012
2014
2016

Avg Crude Oil Prices in…

Venezuela enjoyed its golden years till 1970s as their exports were increasing with
the crude oil prices in the market. But due to the lack of infrastructural
development their imports also increased. Before 1979 there was a huge
appreciation in their currency that is Venezuelan Bolivar due to their heavy
exports. But when crude oil prices increased after 1979, their exports were highly
affected. More than 95% of their revenues from exports were from crude oil.
Their currency started depreciating as imports increased and exports declined.
Inflation started flourishing during these years in the economy. The condition
worsened due to corruption and political instability which led to huge protests and
hence Hugo Chavez was elected as the president in 1999.
He was known as the Father of Socialist Revolution in Venezuela.
He took various measures to control inflation in the economy. Crawling band
exchange policy was used by him to control inflation. Crawling band exchange
policy is basically fixing the rate of exchange in respect to a foreign currency. The
inflation fell from 23.6% in 1999 to 12.1% in 2001. The political instability in the
country was on the rise and labor strikes added to the misery of the country in 2002
and 2003. The price of consumption goods was controlled by the government
which ruined domestic industry as they were not able to recover production costs
and led to Capital flight in other sectors also. As a result unemployment reached
18% in 2003. Inflation rate reached 31.1% in 2003 as compared to 12.1% in 2001.
Average rate of crude oil prices in 2012 reached $109.45 which led to rise in their
reserves but heavy dependency on imports didn’t help the economy recover. . In
2013 Hugo Chavez died and Nicolas Maduro was who was then Vice-President
was elected as Venezuela’s President. In 2014 oil prices fell again and Maduro
started cutting on public spending also introduced wage reforms but those were not
enough to revive the economy.
Venezuela can also be related to a concept “dutch disease”. In this a country is
heavily dependent on revenues from a single natural resource and no other
infrastructural development takes place in the country.

FACTS ABOUT VENEZUELA

1) CURRENT GDP- 482.40 BILLION USD
2) FOREIGN RESERVES IN JUNE 2018- 84577 MILLION USD
3) CURRENT INFLATION RATE- 13864.6%
4) LAST OFFICIAL INFLATION RATE 180.9% IN 2015

IMPACT OF INFLATION ON CAPITAL MARKET

The impact of inflation on capital markets can be seen through examples.
HERITAGE FOODS
Heritage Foods Limited is one of the largest private sector dairy enterprises in
South India.
It is listed on NSE.

SOURCE-https://www.moneycontrol.com/stock-
charts/heritagefoods/charts/HFI#HFI

Impact of release of CPI inflation data on 12th July 2018 can be seen on its share
price which dropped by almost 5.4% in the next few days.

KRBL
KRBL is a basmati rice manufacturing company. It is listed on both BSE and NSE.
Impact of increase in Minimum Support Price can be seen on its stock prices.
Its stock prices went up by 3.5%.
SOURCE-https://www.moneycontrol.com/stock-
charts/krbl/charts/KRB01#KRB01