?

Inflation: it is a quantitative measure of how quickly the price of goods in an economy is

increasing. Inflation is caused when goods and services are in high demand, thus creating a drop-
in availability. Supplies can decrease for many reasons; a natural disaster can wipe out a food
crop, a housing boom can exhaust building supplies, etc. Whatever the reason, consumers are
willing to pay more for the items they want, causing manufacturers and service providers to
charge more.

Deflation: it is a general decline in prices for goods and services, typically associated with a
contraction in the supply of money and credit in the economy. During deflation, the purchasing
power of currency rises over time.

Types of inflation Basis of Causes:

(i) Currency inflation: This type of inflation is caused by the printing of currency notes.

(ii) Credit inflation: Being profit-making institutions, commercial banks sanction more loans
and advances to the public than what the economy needs. Such credit expansion leads to a rise in
price level.

(iii) Deficit-induced inflation: The budget of the government reflects a deficit when expenditure
exceeds revenue. To meet this gap, the government may ask the central bank to print additional
money. Since pumping of additional money is required to meet the budget deficit, any price rise
may be called the deficit-induced inflation.

(iv) Demand-pull inflation: An increase in aggregate demand over the available output leads to
a rise in the price level. Such inflation is called demand-pull inflation .But why does aggregate
demand rise? Classical economists attribute this rise in aggregate demand to money supply. If
the supply of money in an economy exceeds the available goods and services, DPI appears. It has
been described by Coulborn as a situation of “too much money chasing too few goods.”

(v) Cost-push inflation: Inflation in an economy may arise from the overall increase in the cost
of production. This type of inflation is known as cost-push inflation. Cost of production may rise
due to an increase in the prices of raw materials, wages, etc. Often trade unions are blamed for
wage rise since wage rate is not completely market-determined. Higher wage means high cost of
production. Prices of commodities are thereby increased.

On the Basis of Speed or Intensity:

(i) Creeping or Mild Inflation: If the speed of upward thrust in prices is slow but small then we
have creeping inflation. A creeping or mild inflation is one when annual price rise varies
between 2 p.c. and 3 p.c. If a rate of price rise is kept at this level, it is considered to be helpful
for economic development.
(ii) Walking Inflation: If the rate of annual price increase lies between 3 p.c. and 4 p.c., then we
have a situation of walking inflation

(iii) Galloping and Hyperinflation: Walking inflation may be converted into running inflation.
Running inflation is dangerous. If it is not controlled, it may ultimately be converted to galloping
or hyperinflation. It is an extreme form of inflation when an economy gets shattered.”Inflation in
the double or triple digit range of 20, 100 or 200 p.c. a year is labeled “galloping inflation”.

2. What are the various causes of inflation? State the current inflation rate of
India?
 There are two factors which determine the inflation such as demand side factors (excess
aggregate demand) and supply side factors (cost push factor). If demand for a commodity
exceeds its supply, then the excess demand pushes the price up. On the other hand, when
the factor prices increase, the cost of production rises too. This leads to an increase in the
price level as well. some of main causes of inflation described below
 Inflation can arise from internal and external events
 Some inflationary pressures direct from the domestic economy, for example the
decisions of utility businesses providing electricity or gas or water on their tariffs for
the year ahead, or the pricing strategies of the food retailers based on the strength of
demand and competitive pressure in their markets.
 A rise in the rate of VAT would also be a cause of increased domestic inflation in the
short term because it increases a firm's production costs.
 Inflation can also come from external sources, for example a sustained rise in the
price of crude oil or other imported commodities, foodstuffs and beverages.
 Fluctuations in the exchange rate can also affect inflation – for example a fall in the
value of the pound against other currencies might cause higher import prices for items
such as foodstuffs from Western Europe or technology supplies from the United
States – which feeds through directly or indirectly into the consumer price index

 Increase in Public Spending:

 Government spending is an important element of the total spending. It is also an

important determinant of aggregate demand.

 Usually, in lesser developed economies, the Govt. spending increases which

invariably creates inflationary pressure on the economy.

 Deficit financing of public spending:

 There are times when the spending of Government increases beyond what taxation
can finance. Therefore, in order to incur the extra expenditure, the Government
resorts to deficit financing.
  For example, it prints more money and spends it. This, in turn, adds to inflationary
pressure.

 Population Growth: As the population grows, it increases the total demand in the market.
Further, excessive demand creates inflation.

 Increased Velocity of Circulation:

 total use of money is equals to the multiplication of money supply of the

government and the velocity of the circulation

 When an economy is going through a booming phase, people tend to spend money
at a faster rate increasing the velocity of circulation of money.

 Hoarding:

Hoarders are people or entities who stockpile commodities and do not release
them to the market. Therefore, there is an artificially created demand excess in the
economy. This also leads to inflation.

 Genuine Shortage:

It is possible that at certain times, the factors of production are short in supply.
This affects production. Therefore, supply is less than the demand, leading to an increase in
prices and inflation.

 Exports:

The total production must fulfill the domestic as well as foreign demand. If it fails
to meet these demands, then exports create inflation in the domestic economy.

 Trade Unions:

Trade union work in favor of the employees. As the prices increase, these unions
demand an increase in wages for workers. This invariably increases the cost of production
and leads to a further increase in prices.

 Tax Reduction:

While taxes are known to increase with time, sometimes, Governments reduce taxes
to gain popularity among people. The people are happy because they have more money in
their hands. However, if the rate of production does not increase with a corresponding rate,
then the excess cash in hand leads to inflation.
  The imposition of Indirect Taxes:

Taxes are the primary source of revenue for a Government. Sometimes,

Governments impose indirect taxes like excise duty, VAT, etc. on businesses. As these
indirect taxes increase the total cost for the manufacturers and/or sellers, they increase the
price of the product to have a minimal impact on their profits.

 Price-rise in the International Markets:

Some products require to import commodities or factors of production from the

international markets like the United States. If these markets raise prices of these
commodities or factors of production, then the overall production cost in India increases
too. This leads to inflation in the domestic market.

 Non economic reason:

There are many non economic reasons which can cause inflation in an economy. For
example, if there is a flood, then crops are destroyed. This reduces the supply of
agricultural products leading to an increase in the prices of the commodities.

 CURRENT INFLATION RATE IN INDIA: from Ministry Of Statistics and Programme

Implementation.

calendar GMT reference actual previous consensus TEForecast

2020-01-13 12:00 PM Dec 7.35% 5.54% 6.2% 6.1%
2020-02-12 12:00 PM Jan 7.59% 7.35% 7.4% 7.5%

3. How inflation can be prevented and controlled? Is inflation good or bad?

Inflation generally controlled by central bank or the government. The main policy used is
monetary policy (changing interest rates). However, in theory, there are a variety of tools to
control inflation including:

1. Monetary policy

2. Control of money supply

3. Supply-side policies

4. Fiscal policy

5. Wage controls

1. Monetary policy:
In monetary policy, the central bank increases rate of interest on borrowings for commercial
banks. As a result, commercial banks increase their rate of interests on credit for the public. In
such a situation, individuals prefer to save money instead of investing in new ventures.

This would reduce money supply in the market, which, in turn, controls inflation. Apart from
this, the central bank reduces the credit creation capacity of commercial banks to control
inflation.

2. Fiscal measures:

 Apart from monetary policy, the government also uses fiscal measures to control
inflation. The two main components of fiscal policy are government revenue and
government expenditure. In fiscal policy, the government controls inflation either by
reducing private spending or by decreasing government expenditure, or by using both.
 It reduces private spending by increasing taxes on private businesses. When private
spending is more, the government reduces its expenditure to control inflation. However,
in present scenario, reducing government expenditure is not possible because there may
be certain on-going projects for social welfare that cannot be postponed.
 Besides this, the government expenditures are essential for other areas, such as defense,
health, education, and law and order. In such a case, reducing private spending is more
preferable rather than decreasing government expenditure. When the government reduces
private spending by increasing taxes, individuals decrease their total expenditure.
 For example, if direct taxes on profits increase, the total disposable income would reduce.
As a result, the total spending of individuals decreases, which, in turn, reduces money
supply in the market. Therefore, at the time of inflation, the government reduces its
expenditure and increases taxes for dropping private spending.

3. Price control:

 Another method for ceasing inflation is preventing any further rise in the prices of goods
and services. In this method, inflation is suppressed by price control, but cannot be
controlled for the long term. In such a case, the basic inflationary pressure in the
economy is not exhibited in the form of rise in prices for a short time. Such inflation is
termed as suppressed inflation.

 The historical evidences have shown that price control alone cannot control inflation, but
only reduces the extent of inflation.

 High inflation is bad for country and individuals. When inflation is too high of course, it is not
good for the economy. Inflation will always reduce the value of money, unless interest rates
are higher than inflation. And the higher inflation gets, the less chance there is that savers will
see any real return on their money. Although in theory that should be good for the economy,
by encouraging people to spend rather than save.

4) What is the purpose of Economy in the building of a nation? What

 are various types of an economics system in India?
The purpose of the economy should be to distribute the earth's resources such as food, water,
land, minerals etc among human beings in a sustainable manner. Virtually every major problem
facing the world today, from global warming, to world poverty, to the conflicts in Syria,
Afghanistan, and Somalia, has an economic dimension. If you are going to be part of solving
those problems, you need to be able to understand them. Economics is crucial. Economic
development is a critical component that drives economic growth in our economy, creating high
wage jobs and facilitating an improved quality of life.

 Job creation: Economic developers provide critical assistance and information to

companies that create jobs in our economy. We help to connect new-to-market and
existing companies with the resources and partners they need to expand, such as Career
Source Central Florida, utilities, and county and city partners.

 Industry diversification: A core part of economic development works to diversify the

economy, reducing a region’s vulnerability to a single industry. While tourism plays an
important role in creating jobs in the Orlando region, economic development efforts help
to grow industries outside of tourism, including Innovative Technologies and Digital
Media, Life Sciences & Healthcare, Aviation, Aerospace & Defense, Advanced
Manufacturing, and Business Services.

 Business retention and expansion: A large percentage of jobs in the Orlando economy are
created by existing companies that are expanding their operations. Our economic
development team executed 73 business retention and expansion visits to local companies
just last year to assist with their operational needs.

 Economy fortification: Economic development helps to protect the local economy from
economic downturns by attracting and expanding the region’s major employers.

 Increased tax revenue: The increased presence of companies in the region translates to
increased tax revenue for community projects and local infrastructure.

 Improved quality of life: Better infrastructure and more jobs improve the economy of the
region and raises the standard of living for its residents.

 ECONOMIC SYSTEM IN INDIA:

The economy in India today resembles a capitalist economy with certain modifications. Most
economies in the world sit somewhere between a market economy and a centrally planned
economy – India is one of these countries that has a mixed economy with several characteristics
of a market economy. This country tries to change the structure of the capitalist economy to
make it more appropriate for model economy situations. India is a combination of a Socialist and
a Capitalist economy. This economic system was adopted after Independence with the intention
of procuring the advantages of both systems while avoiding the disadvantages. Economic
systems in India mainly comes under following types

1. Traditional economic system:

  The economy in the traditional economy is largely shaped by the custom or religion. The
customs and religion determine the WHO, WHAT and HOW. For example – India is
based on a caste system that restricts the choice of occupation, meaning that a social class
is separated or made distinct on the basis of profession, wealth or even hereditary rank

2. Command economic system:

 In a command economic system, a large part of the economic system is

controlled by a centralized power For example; in the USSR most decisions were
made by the central government. This type of economy was the core of the
communist philosophy
 Since the government is such a central feature of the economy, it is often
involved in everything from planning to redistributing resources. A command
economy is capable of creating a healthy supply of its resources, and it rewards
its people with affordable prices. This capability also means that the government
usually owns all the critical industries like utilities, aviation, and railroad
 In a command economy, it is theoretically possible for the government to create
enough jobs and provide goods and services at an affordable rate.

3. Pure Market Economy:

 In a free market economy, firms and households act in self-interest to determine how

resources get allocated, what goods get produced and who buys the goods. This is
opposite to how a command economy works, where the central government gets to keep
the profits.
 In this type of economy, there is a separation between the government and the market.
This separation prevents the government from becoming too powerful and keeps their
interests aligned with that of the markets.

4. Mixed economy:

 A mixed economy is a combination of different types of economic systems. This

economic system is a cross between a market economy and command economy. In the
most common types of mixed economies, the market is more or less free of government
ownership except for a few key areas like transportation or sensitive industries like
defense and railroad.

 However, the government is also usually involved in the regulation of private businesses.
The idea behind a mixed economy was to use the best of both worlds – incorporate
policies that are socialist and capitalist.

5.Compare the economies of top nations- India, China, USA, japan, germany,
UK, France and Brazil?
The size of a nation’s economy is commonly expressed as its gross domestic product, or GDP,
which measures the value of the output of all goods and services produced within the country in
a year. It is common to use GDP as a measure of economic welfare or standard of living in a
nation

COUNTRY RANK 2019-GDP(nominal )(billions of $)

United States 1 21,439.45
China 2 14,140.16
Japan 3 5,154.48
Germany 4 3,863.34
India 5 2,935.57
United Kingdom 6 2,743.59
France 7 2,707.07
Brazil 9 1,847.02

Let we compare the economies system of above countries

Country Economics system

United States The United States has a mixed economy. It works according to an
economic system that features characteristics of both capitalism and
socialism.
China China has a socialist market economy, which is characterized by state-
owned enterprises and public ownership within a market economy
Japan Japan's collective capitalism relies on cooperation, but ignores the fact
that the means of production are private. It cannot be considered socialist
because the means of production belongs to corporations
Germany Germany has a capitalist economy, and very little of the economy is
owned by government. In fact, some industries that were government-
owned not long ago have been privatized, such as the railways and the
postal service.
India India has a combination of a Socialist and a Capitalist economy that is a
mixed economic system
United Kingdom The United Kingdom has a mixed economy that is the fifth largest in the
world in terms of market exchange rates and the sixth largest by
purchasing power parity (PPP)
France France operates a mixed economy that combines capitalist and socialist
characteristics
Brazil Brazil operates a mixed economy that includes characteristics of market-
based capitalism, as well as socialist planning

6. What is GST? What are the various tax subsumed under GST?

The goods and services tax (GST) is a value-added tax levied on most goods and services sold
for domestic consumption. The GST is paid by consumers, but it is remitted to the government
by the businesses selling the goods and services. In effect, GST provides revenue for the
government.
CENTRAL TAXES TO BE SUBSUMED IN GST

 Central Excise Duty (CENVAT)

 Additional Excise Duties
 The Excise Duty levied under the Medicinal and Toiletries Preparations (Excise Duties)
Act 1955
 Service Tax
 Additional Customs Duty, commonly known as Countervailing Duty (CVD)
 Special Additional Duty of Customs – 4% (SAD)
 Central Sales Tax to be phased out.

STATE TAXES TO BE SUBSUMED IN GST

Following State taxes and levies would be, to begin with, subsumed under GST:

 VAT / Sales tax

 Entertainment tax (unless it is levied by the local bodies)
 Luxury tax
 Taxes on lottery, betting and gambling
 State Cesses and Surcharges in so far as they relate to supply of goods and services
 Octroi and Entry Tax
 Purchase Tax

7. What are the various types of GST?

As per the newly implemented tax system, there are 4 different types of GST:

1. Integrated Goods and Services Tax (IGST)

2. State Goods and Services Tax (SGST)
3. Central Goods and Services Tax (CGST)
4. Union Territory Goods and Services Tax (UTGST)

 Integrated Goods and Services Tax or IGST:The Integrated Goods and Services Tax or
IGST is a tax under the GST regime that is applied on the interstate (between 2 states)
supply of goods and/or services as well as on imports and exports. The IGST is governed by
the IGST Act. Under IGST, the body responsible for collecting the taxes is the Central
Government. After the collection of taxes, it is further divided among the respective states
by the Central Government.
 The State Goods and Services Tax or SGST: it is a tax under the GST regime which is
applicable on intrastate (within the same state) transactions. In case of intrastate supply of
goods and/or services, both State GST and Central GST are levied. However, the State GST
or SGST is levied by the state on the goods and/or services that are purchased or sold within
the state. It is governed by the SGST Act. The revenue earned through SGST is solely
claimed by the respective state government.
 Central Goods and Services Tax: just like State GST, the Central Goods and Services Tax
of CGST is a tax under the GST regime which is applicable on intrastate (within the same
 state) transactions. The CGST is governed by the CGST Act. The revenue earned from
CGST is collected by the Central Government.
 The Union Territory Goods and Services Tax or UTGST: it is the counterpart of State
Goods and Services Tax (SGST) which is levied on the supply of goods and/or services in
the Union Territories (UTs) of India. The UTGST is applicable on the supply of goods
and/or services in Andaman and Nicobar Islands, Chandigarh, Daman Diu, Dadra and Nagar
Haveli, and Lakshadweep. The UTGST is governed by the UTGST Act. The revenue earned
from UTGST is collected by the Union Territory government. The UTGST is a replacement
for the SGST in Union Territories. Thus, the UTGST will be levied in addition to the CGST
in Union Territories.

8. How is GST applied to Indian Construction industry?

One of the most complex areas of the tax levied by the Centre and the States is works contract
and sale of property. Currently, such transactions are broken into three parts and the value of
goods and materials, value of services and value of land. The States apply VAT to the goods
portion and the Centre taxes the services portion, with no explicit tax on the transaction value of
land.

In GST regime, there will not be any concept of manufacture, sale or service etc. There will be
only one concept i.e. ‘Supply’. All the supplies will be categorized as Supply of goods or Supply
of Services. Construction activities will be ‘works contract’ which is being categorized as
‘Services’. All builders and developers in India will be collecting and paying CGST and SGST
(i.e. Central GST and State GST. The place of supply of the service is the location of the
immovable property.

Impact of GST on construction industry

1. Seamless flow of credits

In GST regime, all the above duties/taxes (except stamp duty) will get subsumed, therefore
builders should be able to avail the input tax credit of all its procurement of goods/ services
except for few restrictions. Therefore, it would reduce the tax costs substantially in the
construction industry.

2. Expected Rate of Tax

The GST council has agreed upon the 4 rate structure for levying tax on various goods and
services i.e. 5%, 12%, 18% and 28%. It is expected that the rate of GST that may be applicable
on this sector would be mostly 12%. There may not be any further abatement/ composition on
this rate. Although this rate will be little on the higher side as compared to current tax rates
which is between 6% to 10%, however this impact could largely get reduced due to ease in
credits availability.

3. Multiple Registrations

Concept of centralized registration for all the projects will end and builders having a site in
multiple States would be required to obtain registration in each State from where the construction
activity/ supplies are being undertaken even though the project is for a very small period or for a
small value. Although, this scenario is in existent in the current law for the state taxes but the
same will now be done even for the central taxes.

4. Time of Supply in GST

Currently, many builders pay taxes on receipt basis (without complying with the point of
taxation) in case of service tax i.e. tax is paid only once the monies are received from the
customers. However, in the GST regime, tax needs to be paid immediately on earliest of
completion of service, raising of invoice or receipt of monies from customers. This could have
an impact and could cause blockage of working capital.

9. Compare the pre and post GST effect on construction materials – Cement,
steel, sand, bricks, primer etc. (At least 10 materials to be taken for
comparison)

Material Unit Before (%) After (%) Change (%)

Cement Bag of 50Kg 27 28 +1
steel tonnes 19.5 18 -1
white cement Kg 27 28 +1
Sand Cu.m 27 5 -22
Bricks No. 18 5 -13
Aggregate Cu.m 18 5 -13
Binding wire m.Tonne 18 18 0
Primer Litre 27 28 +1
Admixture Kg 27 18 -9
Tiles Sq.m 27 18 -9
Nails Kg 18 18 0
Paint Litre 27 28 +1
Fly ash brick No. 18 12 -6
 Gypsum Bag of 50Kg 18 5 -13

Description:
In the pre GST era, the rate of tax on steel was around 19.5% (Excise rate 12.5%, VAT 5%, CST 2%).
After the implementation of GST, with effect from July 1, 2017, the rate of GST for steel is 18% and for
some of the input used by the steel industry like iron, coal & transportation services, the GST rate is as
low as 5%. As a result of the low tax rate, the overall cost of steel will decrease. This will have a positive
impact on the housing sector.