Page 94 - DMGT401Business Environment

Unit 3: Economic Environment of Business

Notes
Zimbabwe failed to break Hungary's 1946 world record for hyperinflation. That said,
Zimbabwe did race past Yugoslavia in October 2008. In consequence, Zimbabwe can now
lay claim to second place in the world hyperinflation record books. Top three
hyperinflations are shown below:
Country Month with highest Highest monthly Equivalent Time required
inflation rate inflation rate daily inflation for prices to
rate double
Hungary July 1946 1.30 × 10 % 195% 15.6 hours
16
Zimbabwe Mid-November 2008 79,600,000,000% 98.0% 24.7 hours
(latest measurable)
Yugoslavia January 1994 313,000,000% 64.6% 1.4 days
Source: cato.org

3.5.2 General Causes of Inflation in India

Following are the main causes of inflation in India:
1. Supply Constraints
2. Demand Accelerators

Following are the main supply constraints because of which prices rise in India:
1. Fluctuation in Agricultural Output: Even today to a great extent, agriculture in India is
dependent on nature's blessings. Because of small individual holdings, the output per
hectare is very small in India. Peasants are unable to use modern technology, which
makes them more vulnerable to nature. Also, they do not have a professional approach
because of which they can't select the right crop according to the climate and market
demand. All this results in fluctuations in agricultural output. As the output declines in the
country, their prices rise sharply. Since agricultural products get a high weightage in the
index of wholesale prices, a rise in their price gets automatically reflected in the general
price index.

Example: Since industrial workers spend a big amount of their incomes on food, a hike
in food prices leads them to purchase other goods, whose prices also see a rise in times of failure
of agriculture produce.
2. Hoarding of Essential Goods: Expectations of crop failures and speculations have always
encouraged big farmers and intermediaries to hoard agricultural products in the expectation
that the prices of those commodities would increase. Such activities have aggravated the
price situation in India.

3. Low Growth of Industrial Sector: In India the performance of the industrial sector left
much to be desired, especially in the early post-independence period. It was bad during
1965-85 when it posted a measly growth of 4.7% per annum. Less production and rising
gap between demand and supply resulted in inflation. The situation improved only after
1991.
4. Increment in Administered Prices: The government used to fix the prices of a number of
goods such as coal, steel, electricity, fertilizers, petroleum products, etc. To increase the
revenue of the inefficient public sector, the government used to keep raising the prices.
Because most of these goods are raw material for other goods, a rise in heir prices affects
the general price level and leads to inflation in the economy.

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