International Journal of Scientific & Engineering Research, Volume 4, Issue 7, July-2013

ISSN 2229-5518

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Inflation Impact on Indian Economy &

Agriculture
Savneet Kaur
Abstract Inflation is the rise in the prices of goods and services and affects all the major sectors in an economy. Inflation also reflects
erosion in the purchasing power of money a loss of real value in the internal medium of exchange and unit of account in the economy. In
a country like Indian where a majority of population is working in agriculture sector, the effect of inflation increases manifold. This paper
aims to put light on the impact of inflation on Indian agriculture and then give some suggestions for the improvement of the economy.
Index Terms Food inflation, Inflation, Indian economy, Indian agriculture, monetary policy, macro & micro economics, RBI policy.

An Introduction:
Inflation is a rise in the general level of prices of goods and
services in an economy over a period of time. When the
general price level rises, each unit of currency buys fewer
goods and services. Consequently, inflation also reflects
erosion in the purchasing power of money a loss of real
value in the internal medium of exchange and unit of
account in the economy.

On March 19, 2010, the Reserve Bank of India raised its

benchmark reverse repurchase rate to 3.5% percent, after
this rate touched record lows of 3.25%. The repurchase rate
was raised to 5% from 4.75% as well, in an attempt to curb
Indian inflation.

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The Indian method for calculating inflation, the Wholesale

Price Index, is different from the rest of world. Each week,
the wholesale price of a set of 435 goods is calculated by the
Indian government. Since these are wholesale prices, the
actual prices paid by consumers are far higher.

In times of rising inflation, this also means that the cost of

living increases are much higher for the populace. Due to
increasing prices, people have to spend more to maintain
the standard of living. So, inflation is eating up the savings
of an average man.

With most of Indias vast population living close to or

below the poverty line, inflation acts as a Poor Mans Tax.
This effect is amplified when food prices rise, since food
represents more than half of the expenditure of this group.

Recent History and Present Status:

Indias 2009-10 Economic Survey Report suggested a high
double-digit increase in food inflation, with signs of
inflation spreading to various other sectors as well. The
Deputy Governor of the Reserve Bank of India, however,
expressed his optimism in March 2010 about an imminent
easing of Indian wholesale price index-based inflation, on
the back of falling oil and food prices.

For 2009, Indian inflation stood at 11.49%. This rate reflects

the general increase in prices, taking into account the
purchasing power of the common man. According to the
Economic Survey Report for 2009-10, economic growth
decelerated to 6.7% in 2008-09, from 9% in 2007-08. The
economy is expected to grow by 8.7% in 2010-11, with a
return to a growth rate of 9% in 2011-12.
In its Annual Monetary Policy Statement, RBI had said the
firming up of global commodity prices poses upside risks
to inflation. The central banks industrial outlook survey
shows companies are increasingly regaining their pricing
power in many sectors, and as the recovery gains
momentum, the demand pressures are expected to
accentuate.

Changes in Metal/Mineral Prices

Steel prices rose by over 9 per cent in the past year. Barring
cement, prices of most industrial commodities have gone
up sharply. While in some cases, such as nickel, prices have
more than doubled; crude oil has surged about 75 per cent
over the past year on rising demand from emerging
economies such as China and India. Bullion is also on a
high, with gold getting more expensive by the day. This
fact hasnt escaped the attention of the Reserve Bank of
India.

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International Journal of Scientific & Engineering Research, Volume 4, Issue 7, July-2013

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increase in food inflation, currently standing at a staggering

16.12%. Inflation has spread to other sectors as well. It is
not one cause, but a sum of many events that has led to
this:
In 2008, the Finance Minister waived loans up to
sixty thousand crores. A benevolent gesture, but as
a result of having more money in hand, demand
for commodities went up which resulted in high
prices (law of demand).

We have not been witnessing very good monsoons

in the last few years. If the crop yield isnt good,
then the demand clearly exceeds supply resulting
in higher prices.

The global economy, as a whole, is in a state of

imbalance. With major nations in the world
experiencing an economic setback, the import
expenses are rising too.

The ever rising costs of petroleum and

crude oil have a direct impact on transportation
charges.

Commodities that grew dearer:

Commodity

30-Apr-09

30-Apr-10

(%) Change

Copper
($/tonne)

4515.00

7430.00

64.56

Zinc ($/tonne) 1408.00

2285.00

62.29

Aluminium
($/tonne)

1430.50

2255.00

57.64

Nickel
($/tonne)

11505.00

26300.00

128.60

Lead
($/tonne)

1355.00

2230.00

64.58

Gold ($/oz)

888.20

1179.20

32.76

MCX Rubber
10200.00
(100 kgs)
Crude
($/barrel)
Steel
/tonne)*

49.10
(Rs

46500.00

Cement (Rs /
245 - 275
50 kg)

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16429.00

61.07

85.99

75.13

42500.00

9.41

255-285

4.00

As many people live below or close to poverty line in India,

the poor pay a heavy price. With the increasing wholesale
and retail margins, the farmers do not benefit from the rise
in prices that consumers in rural and urban areas are forced
to pay.

Higher international metal prices have a direct bearing on

domestic prices, which is reflected in higher raw material
prices. Since most of these metals are used as a raw material
or as a bi-product in the industrial sector and if the prices in
the international market from where we import them are
higher, it would increase the cost of production which
automatically leads to high price of final product. Also, the
domestic economy is showed initial symptoms of
overheating as is seen in higher investment and higher
industrial production, which triggers demand-pull
inflationary forces.
The rise in the cost of raw material for steel making "is
having a cascading effect on the input cost of products such
as two wheelers, said Ravi Sood, Chief Financial Officer,
Hero Honda Motors, India's largest two-wheeler maker.
Hike in prices of crude oil effects every industry in general
since they are used everywhere.

Food Inflation and the Agriculture Sector:

Food industry is most badly hit by inflation. Indias
Economic Survey Report, 2009-2010, reveals a double digit

For quite a while now, India has witnessed a debate on the

sustainability of our much applauded growth rate in times
when inflation seems unstoppable. However, the reality is
that inflation has been deeply affecting our agriculture
sector, and the nature of this problem is worth
investigating.
Firstly, we must put forward a basic and important
question- why is it that the agriculture sector is more
susceptible to the pressures of inflation and not other areas
such as industry? To this question, we see an obvious
answer emerge there is excessive demand for food. Some
people are even holding the governments NREGA
programme responsible for the rise in the food prices. But it
is obviously not the case since it implies that inflation is
caused by the poor mans food expenditure.
Also, in the statement that there is excessive demand for
food, the supply side of the situation is being ignored
altogether. In this connection, some attention must be paid
to Sergio Rebelos (1991) insights into the area of growth
economics. Rebelo and many other experts point out that
the most important barrier to steady growth comes from
the law of diminishing returns. This law states that in any
production process, extra doses of a variety of resources

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combined with a fixed quantum of a given resource leads to

a rise in output at ever decreasing rates. Or it can be said
that the rate of growth of output must fall in the presence of
a fixed resource even if all other resources were to increase
at constant rates.
The relevance of this law can be seen quite plainly when it
comes to the agricultural sector. Here, land is the fixed non
augmentable resource, while seeds, water, fertilizers etc are
the variable resources. According to the law of diminishing
returns, equal extra doses of the variable resources will
yield less than equal extra quantities of an agricultural
produce, say rice. In other words, to keep the output of rice
at a constant rate, the variable resources must be increased
not in equal doses, but in ever increasing amounts. To put
this in more technical terms, a given rate of growth of
agricultural output calls for a larger rate of input
consumption in that sector. This is true as long as the size of
land remains constant and the technology used in its
productivity remains unchanged. However, it cannot be
ignored that if productivity rises due to technological
improvements, the constraints imposed by the law of
diminishing returns could get postponed and in the
process, an equal rate of growth of outputs and inputs in
agriculture may be observed.

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maximum returns from their capital investment. Since

manufacture yields a constant rate of return, from each unit
of capital and agriculture yields even smaller units, the
capital owner will agree to employ extra capital in
agriculture only if the price of the agricultural product rises
relative to the price of manufactured goods as capital use
increases in the agriculture sector.
Therefore as long as the law of diminishing returns is in
force and technical progress in agriculture is stagnant, there
will be natural tendency for agricultural prices to rise
relative to that of manufacture, quite independent of the
demand forces. Also, this relative price movement must
persist forever, unless agriculture witnesses some
technological improvements. Moreover, for sustainable
growth, capital employment in agriculture must increase at
a higher rate than the rate of growth of the agricultural
produce.
It is evident so far that the conclusions do not depend solely
on the demand forces. If demand is brought in it and it
grows at a rate higher than the rate of growth of
agricultural output, the price of agricultural products will
rise at an even higher rate than what is indicated by the
supply considerations alone. Hence, Indian policy planners
are giving attention only to the problems related to demand
and are completely ignoring the supply based argument
which is fundamental.

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Therefore in the absence of technological improvements, a

steady growth in agriculture can be extracted from a fixed
plot of land only if the growth rate of capital use is higher
than the growth rate of the input.
However, once the inputs such as fertilizers, pesticides, etc
are captured under the term capital, the word capital itself
assumes yet another dimension. The purchase of capital
amounts to the expenditure of money. On the other hand,
money can be spent on non agricultural activities also, such
as on industry where the extra inputs do not lead to a
diminishing extra produce.
Lets take the production of televisions for example. The
inputs that go into the production of a TV such as plastic,
wires etc are qualitatively different from the inputs
required by agriculture. However, we are aware that as
opposed to agriculture, the extra doses of these inputs do
not lead to a diminishing extra produce. Hence, in a way,
the law of diminishing returns does not work for
manufacturing in the same way as it does for agriculture.
However, it must be understood that the law does not
disappear altogether. It takes the form of an overall
capacity constraint.
In the case of agriculture, equal extra amounts of capital
produce diminishing extra quantities of the agricultural
product. If markets are free, the owners of capital will seek

Returning back to supply yet again, if the required excess in

the capital growth is not maintained, the desired growth
rate of agriculture also cannot be achieved. In India, land
policy has reduced the size of the individual plots to such
an extent that employment of increasing quantities of
capital has turned quite impossible.
The arguments above rely on the assumption of free
markets where capital is allowed to move in the direction of
the highest returns. In practice though, markets are not
quite free. Also, endless fragmentation has made it
technically impossible for large capital to move into
agriculture. Hence, in the end it is only small capital that
gets attracted to the agriculture sector especially in those
parts of the country where land holdings are rather small.
This, in turn, leads to far smaller agricultural growth in
comparison to industry. Under these circumstances, even if
the law of diminishing returns was to be ignored, food
prices are expected to skyrocket and this has actually been
observed.
The problem can be addressed perhaps by opting for large
scale agriculture, although that wouldnt be an easy task.
On the other hand, attempting to restrain food inflation by

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International Journal of Scientific & Engineering Research, Volume 4, Issue 7, July-2013

ISSN 2229-5518

repeated increases in the rate of interest charged for

borrowing capital is not reasonable either. Since it is
physically not possible to employ capital in agriculture,
industry continues to be its only feasible destination.

Macro and Micro economic Factors:

Microeconomic distortions causing an increase in land

prices accompanied by various macroeconomic factors such
as surging capital inflows in the real estate and housing
sector are very much responsible for the rising cost of
production in the economy. Apart from agriculture and
manufacturing, service sector which contributes the highest
(54 per cent for 2009-2010) also bears dire consequences of
galloping prices of land.

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Conclusion:

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It is evident from the data we have seen that inflation rose

steadily till January 2010, after which a certain decline in
the same has been witnessed.

To combat inflation, India needs to remove infrastructural

bottlenecks in order to have sustained growth. These also
include import duties etc. which are levied on industrial
purchases.
More industrial subsidies should be introduced to check the
prices of industrial intermediary products.
If in future inflation is not curbed, it will not only deprive
the common man of basic amenities but along with it, also
deprive the Indian economy of its growth of all the sectors.
Since demand-side pressures are strengthening because of
increased cash in hand, monetary policy would have to be
active and vigilant in order to keep inflation in check.

BIBLIOGRAPHY:

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KPM Sundram & Rudra Dutt, Indian Economy,

S.Chand & Co. Ltd., New delhi, 2004.
KN Prasad, Indian Economy: before & since the
reform, Atlantic Publishers & Distributors Pvt.
Ltd., New Delhi, 2003.
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INFLATION IN INDIA
http://www.economywatch.com -- EFFECTS OF
INFLATION
http://www.economywatch.com
-INDIAN
INFLATION
http://www.business-standard.com INFLATION
CLOUDS GATHER OVER INDIAN ECONOMY
http://www.icmrindia.org

THE
INDIAN
ECONOMY: DEALING WITH INFLATION
http://www.broowaha.com/articles/11356/growthvs-inflation-in-agriculture-industry-india
INFLATION AND AGRICULTURE IN INDIA
M.H. AHSSAN.