INFLATION

4. Nature of the Inflation
Supply Shock (Cost-Push):
 Agricultural production in India has not grown in
proportion to the growth in Population, thus creating a
supply shortage.
 India has seen a rise in prices of Raw Materials and
wage rates and a shortage of Natural resources This
has caused the Price level (cost of goods) to increase.
 Food prices rose 10.49% in April with the price of
vegetables surging ahead at more than 60%.
 Fuel and electricity inflation rose to 11.03% in April
compared with 10.41% in the previous month.

5. Causes of Inflation in India
Rise in Food Prices:
In May food prices rose an annual 10.74% compared to
8.25% in the year-ago period.
 Nature of the Agricultural Industry:
For e.g. this year Karnataka, Maharashtra and Andhra
Pradesh have had poor rains, which is crucial for the
cultivation of pulses. Prices of Pulses contribute 0.72% of
India’s Inflation.
 Supply Bottle Necks:
Inflation is often attributed to supply bottlenecks such as in
food distribution, where an estimated one third of fresh
produce is wasted.

6. Rise in fuel prices:
Rise in petrol prices significantly effects the CPI of the
country and rise in diesel prices effects inflation as a whole.
Oil is our No.1 Purchase (Import), with a 31% commodity
share for 2010-2011 (Economic Times, 7 July 2012).
Therefore, it has a strong bearing on our trade deficit.

7. Trade deficit and the Depreciation of the rupee:
Because of the steady decline of the rupee, import costs are
rising. This creates the need for subsidies. Increasing
subsidies adversely affects India’s fiscal deficit and makes it
harder to tackle inflation.
Political Instability:
The Coalition government struggles to push forward with
reforms in the face of a strong opposition, much to the
frustration of investors who abandon the idea of investing
in India. Lack of Investment, means lack of growth, further
fuelling the supply shortage and rise in prices.

8. Inflation over the Past Year
Wholesale Price Index (WPI) for the past one year

10. Measures in terms of Price Index
 Personal Consumptions Price Index Consumer Price
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Index
Personal Consumptions Price Index : Average increase in
prices for all domestic personal consumption.
The PCE rises about 1/3% less than the CPI, a trend that
dates back to 1992. This may be due to the failure of CPI
to take into account substitution.
Consumer Price Index : Measures prices of a selection of
goods and services purchased by a “typical consumer”
Formula for calculating Inflation Rate:
(CPI2 – CPI1) __________ * 100. CPI1
E.g. For USA, inflation rate = (211.080 –
202.416)/202.416 = 4.28 %

11. Other Widely Used Price Indices
 Cost of Living Indices
 Producer price indices
 Commodity Price Indices
 Core Price indices
Other Widely Used Price Indices
 1. GDP Deflator
 2. Regional Inflation
 3. Historical Inflatio

12. Q2
Inflation : Structural or Monetary
Causes?

13. Structural or Monetary?
 Monetary Inflation: Sustained increase in the money
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supply of a country.
Structural Inflation: Strongly influenced by Govt’s
monetary policy and economic structure.
Inflation in India is more structural than monetary.
India’s economy is dotted by structural imbalances in
various sectors.
Major sectors contributing to inflation are
Agriculture, Manufacturing,services and Fuel.
Bottleneck in supply side ,slump in production,decline
in agriculture growth are all major causes for inflation
in india.

14. • The graph shows a very high correlation between
repo rate and growth in WPI and IIP.
• As per the graph, the constant rise in rates has
been adversely affecting the industry as the cost
of borrowing has increased, investments have
dried up and profit margins have taken a hit.

15. In the case of food inflation, as the repo rate is
increasing, the growth rate also is increasing.
• Major Contributor to food Inflation is protein rich
foods like milk, pulses, eggs, fish etc.

16.  With the change in purchasing power, the trend of food
consumption has shifted from carbohydrate rich foods to
protein rich foods.
 In the case of pulses,the problem is compounded by the fact
that India is the single biggest consumer and only a handful
of other countries produce in quantities that India
demands.

17. Can Organized retailing in India
reduce the Inflation?
Q3

18. India: Goldmine for retail investors
ACCORDING TO THE A T KEANEY GLOBAL RETAIL
DEVELOPMENT INDEX REPORT 2011 / 2012,
INDIA IS HAS A GREAT OPPORTUNITY FOR ORGANIZED
RETAILING BECAUSE:
• VAST POPULATION OF APPROX 1.2 BILLION WITH FAST
LABOR FORCE GROWTH.
• RAPID URBANIZATION
• HIGH SAVINGS AND INVESTMENT RATES GIVING MORE
PURCHASING POWER TO CONSUMERS
• ACCELERATED RETAIL GROWTH OF 15 TO 20 PERCENT .
• LOW ORGANIZED RETAIL PENETRATION OF ABOUT 5%
TO 6 % INDICATING ROOM FOR GROWTH.
• CHANGES IN FOREIGN DIRECT INVESTMENT (FDI)
REGULATIONS FAVOURING VARIOUS INTERNATIONAL
RETAILERS' ENTRY AND EXPANSION PLANS.

19. Impact of FDI : Structural/Institutional
 Inclusion of 51% foreign direct investment in multi-brand retail

Attract global supermarkets, such as Walmart, Tesco and
Carrefour (Min FDI - $100 million (Rs 450 crore)
Impact
Urban Retail
Market
Rural Retail
Market
Local Small
Retailer
Supply Chain
Localized
• Increased
Competitiveness
• Product
Differentiation
• Price Wars
• Increased Penetration
• Harder to
of Markets
Compete
• Backward and Forward • Sales Based on
Linkages to Kirana
-Convenience
Shops, Local Farmers,
-Competitive
Local Stores in Villages
Pricing
• Harder to
Compete
• Impetus to
innovate
• Brand War
eminent
Job Creation
/ Offset
• Training
Institutes & other
ancillaries
• Employment for
Middle / Upper
Class
• Offset : Medium
Size Retailer
• Agriculture best
practices
• Transportation &
Administrative Jobs
• Offset : Local
Supermarket store will
face severe competition
• Direct
competitio
n –impact
eminent
• Survival of
the fittest
Warehousing
/ PDS
• Inclusion of multi brand stores will lead to localizing the supply chain & pds
system will be impacted parallelly, adding best practices for supply chain
• Indirect
competition –
minimal
impact
Local Big
Retailer

20. IMPACT of FDI : Inflation Rate
Offset of
Existing
Distributors
SIMPLISTIC VIEW OF IMPACT OF INFLATION
Increased
Competition
Source : India Retail Report 2011
Organized
Supply Chain
Middle
Man Cut
Out
Job Creation
Investment by
Multi Brand
Outlets
Reduced
Waste
Increased
Disposable
Income
Increased
Income Of
Farmers
Increased
Consumption
Inflation
Decrease