Page 188 - DECO201_MACRO_ECONOMICS_ENGLISH

Unit 11: Control of Inflation and Philips Curve

Year Profit ( billion) Inflation (% of GDP) Notes
90-91 3.0 12.5000
92-93 3.5 10.1000
93-94 4.2 8.3325
94-95 5.8 10.8830
95-96 6.0 7.7500
The nature of recent inflationary developments is very different from that associated with the
upturn of the traditional business cycle; and government intervention by fiscal or other means
is likely to be such as to erode rather than enhance profitability. A higher than average rate of
inflation in one country may have adverse repercussions on the private corporate sector. Unless
exchange rates are allowed to adjust, sales to foreigners will become more difficult and purchases
from foreigners will become more tempting. Foreign willingness to invest funds in such a
country may also be tempered by fears of future depreciation, dividend controls and the like.

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Caution To understand the effects of inflation on business financing and investment we see
that:
1. Important components of additional costs due to inflation were the need for
supplementing depreciation provisions and pension funding.
2. Despite increase in tariffs and productivity improvements, much additional
borrowing was needed to provide the necessary funds.

3. The short-term cutbacks in investment were likely to plant imbalances in the future,
in that only some types of capital expenditure could readily be restricted.

Inflation and Marketing

Inflation affects all aspects of corporate activity but marketing which operates as the interface
between supplier and customer, is under the sharpest pressure of all. Due to inflation, the Indian
corporate sector faces distortion of the existing relationship between buyers and sellers and
thereby creates uncertainty over current and future trading practices. Inflation also affects wages
and salary levels, transport costs, packaging, printing and communications charges. Thus inflation
for the companies would result in:
1. An increased sensitivity on the part of the customers to price.
2. A heightened resistance to marketing blandishments.
3. A tendency to substitute for quality product those which, although of a lower quality, are
regarded as adequate.
4. An increased resistance to non-essential features of products.
5. A reduced rate of growth in real demand for goods and services.

6. A shift in expenditure away from non-essential goods and services.
7. Inflation and the Investment Decision.
Progressive income taxes and other income effects and corporation taxes levied on nominal
profits and stock gains affect the profitability of capital investment in both nominal and real
terms. Also, companies cannot benefit in real terms from after-tax stock gains unless the rate of
gain is somewhat greater than rate of inflation.

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