why in news?

• Industrial growth slowed in February to 0.1%, driven by an across the board slowdown, especially in key sectors such as manufacturing, mining, capital goods, and infrastructure, according to official

Background:

• retail inflation quickened to 2.86% from 2.57%, driven in large part by the food and fuel sectors.
• Growth in the Index of Industrial Production (IIP) slowed from 1.44%.
• Within the Index, the mining and quarrying sector saw growth slowing to 2% from 3.92% over the same period.
• The manufacturing sector saw a contraction of 0.31% from 1.05%.

what is inflation:

• Inflation is the percentage change in the values of the Wholesale Price Index (WPI) on a year-on year basis.
• It effectively measures the change in the prices of a basket of goods and services in a Inflation occurs due to an imbalance between demand and supply of money, changes in production and distribution cost or increase in taxes on products.
• When economy experiences inflation, the value of currency reduces.
• India used WPI as the measure for inflation but new CPI (Combined) is declared as the new standard for measuring inflation (April 2014).

Adverse impacts of inflation:

• Inflation causes decrease in the real value of money and other monetary items over time.
• Inflation causes uncertainty over future and this may discourage investment and savings.
• High inflation may lead to shortages of goods if consumers begin hording out of concern that prices will increase in the future.

Favourable impacts of Inflation:

• Inflation ensures that the central banks adjust the interest
• Inflation encourages non-monetary

Why industrial growth declines?

• An industry which experiences negative growth, or remains stagnant due to decline in demand of one or more of its products for varied This includes and is not limited to, a declining economy, downgrade or upgrade of a product, and changes in technology.

What are the effects of inflation?

• Income redistribution: One risk of higher inflation is that it has a regressive effect on lower- income families and older people in society. This happen when prices for food and domestic utilities such as water and heating rises at a rapid rate
• Falling real incomes: With millions of people facing a cut in their wages or at best a pay freeze, rising inflation leads to a fall in real incomes.
• Negative real interest rates: If interest rates on savings accounts are lower than the rate of inflation, then people who rely on interest from their savings will be
• Cost of borrowing: High inflation may also lead to higher borrowing costs for businesses and people needing loans and mortgages as financial markets protect themselves against rising prices and increase the cost of borrowing on short and longer-term debt. There is also pressure on the government to increase the value of the state pension and unemployment benefits and other welfare payments as the cost of living climbs
• Risks of wage inflation: High inflation can lead to an increase in pay claims as people look to protect their real This can lead to a rise in unit labour costs and lower profits for businesses

Business competitiveness: If one country has a much higher rate of inflation than others for a considerable period of time, this will make its exports less price competitive in world markets. Eventually this may show through in reduced export orders, lower profits and fewer jobs, and also in a worsening of a country’s trade balance. A fall in exports can trigger negative multiplier and accelerator effects on national income and

Business uncertainty: High and volatile inflation is not good for business confidence partly because they cannot be sure of what their costs and prices are likely to This uncertainty might lead to a lower level of capital investment spending.

what is CPI and WPI: CPI

• Consumer Price Index (CPI) is a price index which represents the average price of a basket of goods over time. CPI calculates the average price paid by the consumer to the shopkeepers.
• Education, communication, transportation, recreation, apparel, foods and beverages, housing and medical care are the 8 groups for which the CPI is measured.

WPI

Wholesale Price Index (WPI) is an indicator of price changes in the wholesale market. WPI calculates the price paid by the manufacturers and wholesalers in the market. WPI measure the changes in commodity price at selected stages before goods reach to the retail level.