Inflation - India

Structural Inflation

Inflation not caused merely by the excess of demand over supply but built into an economy due to the government's monetary policy.

Monetary Inflation

Monetary inflation is a sustained increase in the money supply of a country. It usually results in price inflation, which is a rise in the general level of prices of goods and services.

Inflation India Trends

Inflation WPI and CPI-Industrial Workers (CPI-IW) averaged 5.3% and 6.8%, respectively. Over the last 10 years on an annual average basis, WPI inflation crossed 10% not once while CPI-IW crossed 10% only one time. During 2003-07, Indias GDP growth averaged 8.9% and WPI inflation averaged 5.5%.. Indias investment to GDP gradually rose from 25.2% in F2003 to 37.7% in F2008 and savings to GDP to rose from 26.3% in F2003 to 36.4% in F2008. Infrastructure spending also increased from a trough of 4.3% of GDP in F2003 to 6.4% of GDP in F2008. Total factor productivity growth accelerated to 3.8% during 2003-07 from an average 2.4% in the 1990s. Indian Inflation Rate reported 9.41 in April 2011.

India Inflation - History

The inflation rate in India was last reported at 9.41 percent in April of 2011. Previous value of Inflation was 8.82. From 1969 until 2010, the average inflation rate in India was 7.99 percent reaching an historical high of 34.68 percent in September of 1974 and a record low of -11.31 percent in May of 1976.

India Inflation Rate 1994 to 2011

All Commodities
12

10

6 All Commodities 4

India Inflation Average

The Average Inflation in India was reported at 10.88 percent change in 2009, according to the International Monetary Fund (IMF). In 2015, India's Average Inflation is expected to be 4.03 percent change. Data for inflation are averages for the year; not end-of-period data. In 2009, India's economy share of world total GDP, adjusted by Purchasing Power Parity, was 5.06 percent. In 2015, India's share of world total GDP is forecasted to be 6.12 percent.

India Inflation Average 1981 to 2016

Nature of Inflation

Inflation in India has largely been structural Despite RBI increasing the repo rate 10 times in past 16 months, inflation is still hovering at uncomfortable levels Monetary policy measures have been slow to take effect on inflation Monetary instruments, when used to deal with price shocks, have no immediate impact on the price fluctuation, as they are due to structural reasons Rising income in India over a period of time has resulted in a change in consumption pattern which is skewed towards key protein sources, such as pulses, followed by milk and milk products , eggs and fish The volatile supplies of the aforementioned commodities have put an upward pressure on headline inflation Persistent price increases in commodities for which there are less effective substitutes have resulted in an increase in potential rate of inflation over a period of time

Repo Rate vs. CPI Inflation

Repo Rate vs CPI - Inflation (%)
18 16

14

12

10

Inflation

Repo Rate

India Food Inflation

It is believed that a large part of the food inflation is because of low productivity dynamic of government spending in the rural India and less due to structural shift in protein consumption. Structural shift cannot justify a cumulative rise of 55% in primary food inflation since January 2008. Food inflation has averaged 12.2% year-on-year since summer 2008 due to two years of back-to-back poor farm output. During 2006 and 2007 when GDP growth averaged 9.7% and domestic food demand growth was strong, average food inflation was in the 6-7% range. This was higher than the preceding fiveyear (2001-05) period, when average food inflation was 3.4% and GDP growth was 6.6%. Thus in the event of GDP growth remaining strong at 8.5-9%, considering the structural supply hurdles, food inflation is likely to remain high in the 6-7% range. The structural component in food inflation is all about protein.

India Food Inflation

Over the last few years, the acceleration in the pace of per capita income growth, particularly in the lower income groups, is reflected in higher protein-related food items. It is believed that in the medium term, food inflation could average higher at 6-7%, assuming there is no major crop failure. However, with continued rise in non-farm investments, productivity growth is expected in that segment to ensure that overall inflation is maintained in the 5-5.5% range over the medium term.

India Food Inflation

Agricultural output(million tonne)
250 40000 240 230 220 35000

per capita income

210
200 190 180 170 160 150 1 2 3 4 5 6 7 8 9 10

30000 Agricultural output(million tonne) 25000 per capita income

20000

15000 1 2 3 4 5 6 7 8 9 10

Inflation - Reasons

While inflation till the early nineties was primarily caused by domestic factors (supply usually was unable to meet demand, resulting in the classical definition of inflation of too much money chasing too few goods). Inflation today is caused more by global rather than by domestic factors. Naturally, as the Indian economy undergoes structural changes, the causes of domestic inflation too have undergone tectonic changes. Causes of today's inflation are complicated. It is indeed intriguing that the policy response even to this day unfortunately has been fixated on the traditional anti-inflation instruments of the preliberalisation era.

Inflation - Reasons

Global Imbalance the cause of Global Liquidity and hence Inflation. Rather than demand pushing the value of commodities higher in the recent past, it has been the (impending) dollar's devaluation against commodities that has pushed commodity prices to record highs."

Factors Contributing to Inflation

Food Grain contribution to % change in Inflation
0.04 0.03 0.02 0.01 5.00% 0.00 -0.01 -0.02 -0.03 -0.04 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 -10.00% -5.00% Food Grain contribution to % change in Inflation 10.00% 15.00%

Non Food Contribution to % change in Inflation

0.00%

Non Food Contribution to % change in Inflation

Factors Contributing to Inflation

oil import bills(thousand crores)
100000 90000 80000 70000 60000 50000 40000 30000 20000 10000 0 oil import bills(thousand crores) 0.045 0.04 0.035 0.03 0.025 0.02 0.015 0.01 0.005 0 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

Electricity Contribution to % change in Inflation

Electricity Contribution to % change in Inflation

Factors Contributing to Inflation

Manufacturing contribution to % change in Inflation
0.09 0.08 0.07 0.06 0.05 0.04 0.03 0.02 0.01 0 Manufacturing contribution to % change in Inflation

Organized Retailing

Organised retailing refers to trading activities undertaken by licensed retailers, that is, those who are registered for sales tax, income tax, etc. These include the corporatebacked hypermarkets and retail chains, and also the privately owned large retail businesses. The organized retail market in India is growing at 35 percent annually while growth of unorganized retail sector is pegged at 6 percent.

Organized Retailing An option to reduce Inflation ?

Organised retail trade is just four per cent of retail trade in India vis-a-vis 20 per cent in China and 55 per cent in Malaysia. Multi-brand retail will expand organised retail and bring in new technology. It would also provide remunerative prices to farmers and fair prices to consumers especially during the peak marketing season. It will help farmers gain access to global markets large corporations can source from India and sell abroad. As of now, India allows 51 per cent foreign investment in single-brand retail and 100 per cent in wholesale cash and carry format of business.

Anti Inflationary Steps

Amend the Agricultural Produce Market Commodities Act in order to enable farmers to bring their products to retail outlets and allow retailers to purchase directly without having to go through middlemen. In its current form, the APMC has abetted monopolistic behaviour and reduced the choices available to small farmers. It has contributed to cartelization and collusion amongst incumbent traders. Preliminary study has revealed that nonperishable food items play a greater role in fueling inflation as these items can be stored to be sold

Conclusion

The key risk in our view, from a cyclical and structural perspective, will be the government's policies. If the government and the central bank attempt to boost growth through the support of loose fiscal and monetary policies instead of structural reforms, which help boosts savings and investments, inflation will be higher than expectations.

References

http://www.indianexpress.com/news http://www.rediff.com/money http://economictimes.indiatimes.com http://www.rbi.org.in http://www.commerce.nic.in