Inflation in India

Inflation rate in India was 5.5% as of May 2019, as per the Indian Ministry of Statistics and Programme Implementation. This represents a modest reduction from the previous annual figure of 9.6% for June 2011. Inflation rates in India are usually quoted as changes in the Wholesale Price Index (WPI), for all commodities.

Many developing countries use changes in the consumer price index (CPI) as their central measure of inflation. In India, CPI (combined) is declared as the new standard for measuring inflation (April 2014).[1] CPI numbers are typically measured monthly, and with a significant lag, making them unsuitable for policy use. India uses changes in the CPI to measure its rate of inflation.

The WPI measures the price of a representative basket of wholesale goods. In India, this basket is composed of three groups: Primary Articles (22.62% of total weight), Fuel and Power (13.15%) and Manufactured Products (64.23%). Food Articles from the Primary Articles Group account for 15.26% of the total weight. The most important components of the Manufactured Products Group are, Food products (19.12%); Chemicals and Chemical products (12%); Basic Metals, Alloys and Metal Products (10.8%); Machinery and Machine Tools (8.9%); Textiles (7.3%) and Transport, Equipment and Parts (5.2%).

WPI numbers were typically measured weekly by the Ministry of Commerce and Industry. This makes it more timely than the lagging and infrequent CPI statistic. However, since 2009 it has been measured monthly instead of weekly.

Issues

The challenges in developing economy are many, especially when in context of the monetary policy with the Central Bank, the inflation and price stability phenomenon. There has been a universal argument these days when monetary policy is determined to be a key element in depicting and controlling inflation. The Central Bank works on the objective to control and have a stable price for commodities. A good environment of price stability happens to create saving mobilisation and a sustained economic growth. The former Governor of RBI C. Rangarajan points out that there is a long-term trade-off between output and inflation. He adds on that short-term trade-off happens to only introduce uncertainty about the price level in future. There is an agreement that the central banks have aimed to introduce the target of price stability while an argument supports it for what that means in practice.

Optimal inflation rate

It arises as the basic theme in deciding an adequate monetary policy. There are two debatable proportions for an effective inflation, whether it should be in the range of 1โ€“3 per cent as the inflation rate that persists in the industrialized economy or should it be in the range of 6โ€“7 per cent. While deciding on the elaborate inflation rate certain problems occur regarding its measurement. The measurement bias has often calculated an inflation rate that is comparatively more than actual. Secondly, there often arises a problem when the quality improvements in the product are in need to be captured out, hence it affects the price index. The consumer preference for a cheaper goods affects the consumption basket at costs, for the increased expenditure on the cheaper goods takes time for the increased weight and measuring inflation. The Boskin Commission has measured 1.1 per cent of the increased inflation in USA every annum. The commission points out for the developed countries comprehensive study on inflation to be fairly low.

Money supply and inflation

[2] The Good Quantitative Easing by the central banks with the effect of an increased money supply in an economy often helps to increase or moderate inflationary targets. There is a puzzle formation between low-rate inflation and a high growth of money supply. When the current rate of inflation is low, a high worth of money supply warrants the tightening of liquidity and an increased interest rate for a moderate aggregate demand and the avoidance of any potential problems. Further, in case of a low output a tightened monetary policy would affect the production in a much more severe manner. The supply shocks have known to play a dominant role in the regard of monetary policy. The bumper harvest in 1998โ€“99 with a buffer yield in wheat, sugarcane, and pulses had led to an early supply condition further driving their prices from what were they in the last year. The increased import competition since 1991 with the trade liberalisation in place have widely contributed to the reduced manufacturing competition with a cheaper agricultural raw materials and the fabric industry. These cost-saving-driven technologies have often helped to drive a low inflation rate. The normal growth cycles accompanied with the international price pressures has several times being characterized by domestic uncertainties.

Global trade

Inflation in India generally occurs as a consequence of global traded commodities and the several efforts made by the Reserve Bank of India (RBI) to weaken rupee against the dollar. This was done after the Pokhran Blasts in 1998.[3] This has been regarded as the root cause of inflation crisis rather than the domestic inflation. According to some experts the policy of RBI to absorb all dollars coming into the Indian economy contributes to the appreciation of the rupee.[4] When the U.S. dollar has shrieked by a margin of 30%, the RBI had made a massive injection of dollar in the economy make it highly liquid and this further triggered off inflation in non-traded goods. The RBI picture clearly portrays for subsidising exports with a weak dollar-exchange rate. All these account for a dangerous inflationary policies being followed by the central bank of the country.[5] Further, on account of cheap products being imported in the country which are made on a high technological and capital intensive techniques happen to either increase the price of domestic raw materials in the global market or they are forced to sell at a cheaper price, hence fetching heavy losses.

Factors

There are several factors which help to determine the inflationary impact in the country and further help in making a comparative analysis of the policies for the same. The major determinant of the inflation in regard to the employment generation and growth is depicted by the Phillips curve.

Demand factors

It basically occurs in a situation when the aggregate demand in the economy has exceeded the aggregate supply. It could further be described as a situation where too much money chases just few goods. A country has a capacity of producing just 5,500 units of a commodity but the actual demand in the country is 7,000 units. Hence, as a result of which due to scarcity in supply the prices of the commodity rises. This has generally been seen in India in context with the agrarian society where due to droughts and floods or inadequate methods for the storage of grains leads to lesser or deteriorated output hence increasing the prices for the commodities as the demand remains the same.

Supply factors

The supply side inflation is a key ingredient for the rising inflation in India. The agricultural scarcity or the damage in transit creates a scarcity causing high inflationary pressures. Similarly, the high cost of labor eventually increases the production cost and leads to a high price for the commodity. The energies issues regarding the cost of production often increases the value of the final output produced. These supply driven factors have basically have a fiscal tool for regulation and moderation. Further, the global level impacts of price rise often impacts inflation from the supply side of the economy.

Consensus on the prime reason for the sticky and stubbornly high Consumer Price Index, that is retail inflation of India, is due to supply side constraints; and still where interest rate remains the only tool with the Reserve Bank of India.[6] Higher inflation rate also constraints India's manufacturing environment.[7]

Domestic factors

Developing economies like India have generally a lesser developed financial market which creates a weak bonding between the interest rates and the aggregate demand. This accounts for the real money gap that could be determined as the potential determinant for the price rise and inflation in India. There is a gap in India for both the output and the real money gap. The supply of money grows rapidly while the supply of goods takes due time which causes increased inflation. Similarly, hoarding has been a problem of major concern in India where onion prices have shot high. There are several other stances for the gold and silver commodities and their price hike.[8]

External factors

The exchange rate determination is an important component for the inflationary pressures that arises in India. The liberal economic perspective in India affects the domestic markets. As the prices in United States rises it impacts India where the commodities are now imported at a higher price impacting the price rise. Hence, the nominal exchange rate and the import inflation are a measures that depict the competitiveness and challenges for the economy.[9]

Value

The inflation rate in India was recorded at 6.2% (WPI) in August 2013. Historically, from 1969 until 2013, the inflation rate in India averaged 7.7% reaching an all-time high of 34.7% in october 1974 and a record low of -11.3% in May 1976.

The inflation rate for Primary Articles is currently at 9.8% (as of 2012). This breaks down into a rate 7.3% for Food, 9.6% for Non-Food Agriculturals, and 26.6% for Mining Products. The inflation rate for Fuel and Power is at 14.0%. Finally, the inflation rate for Manufactured Articles is currently at 7.3%.[10]

Indices

17th century

Given below is a comparison of GDP Deflator, average consumer price inflation, cost (for filing tax returns) inflation, gold, silver and house inflation indices in India (collated from IMF, CBDT, RBI and multiple sources). GDP Deflator is a composite index of time series constructed independently by Angus Maddison and government departments (since 1950). Price index is useful in gauging income and profit of sellers, cost index is useful in gauging expenditure and loss of buyers while the gold index helps measure wealth. The gold index is in vogue for three centuries.[11][12][13]

YearGDP Deflator
(index 2011 = 100)
Cost Index
(CBDT)
Gold Index
(RBI)
Silver Index
(RBI)
House Index
(RBI)
16870.100
16880.100
16890.100
16900.100
16910.100
16920.100
16930.099
16940.099
16950.100
16960.110
16970.112
16980.111
16990.107

18th century

YearGDP Deflator
(index 2011 = 100)
Cost Index
(CBDT)
Gold Index
(RBI)
Silver Index
(RBI)
House Index
(RBI)
17000.106
17010.108
17020.111
17030.109
17040.109
17050.108
17060.110
17070.111
17080.111
17090.110
17100.109
17110.110
17120.110
17130.109
17140.109
17150.108
17160.108
17170.106
17180.107
17190.106
17200.107
17210.106
17220.106
17230.107
17240.106
17250.106
17260.106
17270.107
17280.107
17290.106
17300.105
17310.105
17320.106
17330.107
17340.108
17350.109
17360.107
17370.106
17380.105
17390.105
17400.105
17410.105
17420.105
17430.105
17440.106
17450.106
17460.106
17470.108
17480.106
17490.104
17500.102
17510.101
17520.102
17530.102
17540.102
17550.103
17560.105
17570.104
17580.105
17590.101
17600.100
17610.104
17620.109
17630.108
17640.103
17650.104
17660.105
17670.106
17680.106
17690.106
17700.105
17710.105
17720.104
17730.103
17740.102
17750.103
17760.102
17770.101
17780.102
17790.103
17800.103
17810.103
17820.101
17830.102
17840.103
17850.104
17860.104
17870.104
17880.102
17890.103
17900.105
17910.105
17920.106
17930.105
17940.107
17950.109
17960.109
17970.108
17980.109
17990.110

19th century

YearGDP Deflator
(index 2011 = 100)
Cost Index
(CBDT)
Gold Index
(RBI)
Silver Index
(RBI)
House Index
(RBI)
18000.110
18010.109
18020.109
18030.110
18040.111
18050.114
18060.113
18070.114
18080.120
18090.121
18100.121
18110.133
18120.146
18130.155
18140.129
18150.126
18160.110
18170.108
18180.113
18190.110
18200.110
18210.112
18220.111
18230.111
18240.110
18250.110
18260.110
18270.110
18280.110
18290.110
18300.111
18310.110
18320.110
18330.111
18340.110
18350.111
18360.110
18370.111
18380.111
18390.110
18400.109
18410.110
18420.111
18430.111
18440.111
18450.111
18460.111
18470.111
18480.111
18490.110
18500.110
18510.108
18520.109
18530.107
18540.107
18550.108
18560.108
18570.107
18580.108
18590.106
18600.107
18610.108
18620.107
18630.108
18640.108
18650.108
18660.108
18670.109
18680.109
18690.109
18700.109-0.090--
18710.106-0.090--
18720.114-0.091--
18730.121-0.092--
18740.117-0.094--
18750.112-0.096--
18760.113-0.103--
18770.115-0.100--
18780.112-0.104--
18790.124-0.106--
18800.137-0.105--
18810.153-0.106--
18820.159-0.105--
18830.160-0.108--
18840.152-0.108--
18850.144-0.112--
18860.156
18870.161
18880.168
18890.172
18900.178-0.114--
18910.201
18920.196
18930.180
18940.162
18950.183
18960.196
18970.172
18980.192
18990.224

20th century

YearGDP Deflator
(index 2011 = 100)
Cost Index
(CBDT)
Gold Index
(RBI)
Silver Index
(RBI)
House Index
(RBI)
19000.228
19010.242
19020.242
19030.257
19040.254
19050.291
19060.306
19070.354
19080.311
19090.293
19100.304
19110.314
19120.342
19130.365
19140.320
19150.347
19160.430
19170.525
19180.760
19190.688-0.113--
19200.838
19210.650
19220.624-0.098--
19230.755-0.091--
19240.735-0.089--
19250.758-0.078--
19260.792-0.078--
19270.783-0.078--
19280.795-0.077--
19290.812-0.078--
19300.712-0.078--
19310.602-0.084--
19320.458-0.107--
19330.439-0.105--
19340.510-0.126--
19350.573-0.130--
19360.631-0.128--
19370.704-0.128--
19380.661-0.130--
19390.692-0.143--
19400.740-0.159--
19410.912-0.159--
19421.177-0.159--
19431.384-0.159--
19441.544-0.159--
19451.596-0.159--
19461.676-0.159--
19471.829-0.159--
19481.988-0.158--
19491.902-0.173--
19502.057-0.229--
19512.123-0.229--
19522.031-0.228--
19532.083-0.227--
19541.879-0.228--
19551.853-0.229--
19562.091-0.228--
19572.162-0.228--
19582.245-0.227--
19592.304-0.227--
19602.392-0.228--
19612.443-0.228--
19622.551-0.228--
19632.764-0.228--
19643.000-0.228--
19653.250-0.228--
19663.681-0.288--
19673.998-0.360--
19684.095-0.404--
19694.232-0.429--
19704.298-0.3761.383-
19714.527-0.4231.211-
19725.017-0.6041.529-
19735.912-1.1062.698-
19746.897-1.7523.902-
19756.784-1.8504.066-
19767.189-1.5354.305-
19777.595-1.7764.352-
19787.782-2.1655.197-
19799.006-3.42715.106-
198010.042-6.60013.401-
198111.12910.0005.4498.724-
198212.03110.9004.8679.431-
198313.06011.6005.84811.722-
198414.09412.5005.5909.367-
198515.10813.3005.3497.987-
198616.13414.0006.3377.400-
198717.63915.0007.91610.055-
198819.09116.1008.3209.905-
198920.70217.2008.4699.487-
199022.91118.2009.1948.597-
199126.06119.90011.26710.899-
199228.39822.30013.26712.499-
199331.19824.40015.42215.803-
199434.31225.90016.52217.291-
199537.42228.10017.06819.364-
199640.25630.50018.86919.208-
199742.86333.10016.51020.513-
199846.29735.10016.67623.813-
199947.71738.90016.48724.288-

21st century

YearGDP Deflator
(index 2011 = 100)
Cost Index
(CBDT)
Gold Index
(RBI)
Silver Index
(RBI)
House Index
(RBI)
200049.45740.60017.21423.700-
200151.04842.60017.55522.362-
200252.94444.70020.67624.228-
200354.99246.30023.21126.608-
200458.14148.00025.37432.555-
200561.40949.70026.80038.057-
200666.56851.90037.39960.446-
200771.19155.10039.31162.460-
200877.73658.20051.79066.864-
200983.20963.20064.35379.933-
201091.96871.10076.495116.83653.300
2011100.00078.500100.000181.06867.050
2012107.93485.200123.907177.76380.400
2013114.61293.900113.067138.81090.250
2014118.430102.400105.716118.703106.050
2015121.130108.100101.825106.972109.550
2016125.052112.500114.900127.866121.000
2017130.016115.900112.055116.539129.100
2018135.066119.280118.634115.134133.350
2019138.295-133.678--
2020146.041-179.1182--
2021160.062-181.712--

References

  1. "RBI adopts new CPI as key measure of inflation". The Hindu. 2014-04-02.
  2. "Central Banking In New Millennium- Andrew Crockett" (PDF).
  3. G. Shailaja (2008). International Finance. Universities Press. p. 58. ISBN 978-81-7371-604-1. Retrieved 9 September 2013.
  4. Venkitaramanan S (15 August 2003). Indian Economy: Reviews And Commentaries -. ICFAI Books. p. 168. ISBN 978-81-7881-161-1. Retrieved 9 September 2013.
  5. From fiscal dominance to currency dominance: diagonosing and addressing India's inflation crisis of 2008
  6. "Interest rates a blunt tool, but sole option in inflation fight: RBI Governor". livemint. 1 October 2014.
  7. "Inflation fears blurring Modi's 'Made in India' vision". East Asia Forum. 25 September 2014.
  8. "Hoarding In India" (PDF). The New York Times. 7 July 1889.
  9. Inflation Determination in Open Economy Phillips Curve
  10. "India - Prices". Quandl. Archived from the original on 2014-02-14. Retrieved 2014-02-14.
  11. IMF price inflation index
  12. CBDT cost inflation index
  13. Gold and Silver inflation in India as per RBI
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