- Michelle Cherian*

Inflation has become a buzz-word in India during the past half-decade, not only in the economic sphere but in the political spectrum as well. Moderate levels of inflation to the tune of 2-3%, are beneficial, if not desired, for the country’s growth. However, the persistently high levels of inflation that have been ever so recalcitrant since 2009, have only tamed since October 2014. Turns out that this spot of good news bodes well for the Aam Aadmi, no doubt, but for our political bosses too, in good measure.

Price Trends in India since 1991

1991 marked a watershed in Indian Economic history; India opened up its economy to foreign companies and investors, albeit under international pressure to finance its staggering CAD (current account deficit). The liberalization was a phased one, and that along with many other factors like the depreciation of the rupee (India’s economic crisis caused investors to flee initially leading to less demand for our currency and therefore its downfall), excessive consumer demand, demand -supply imbalances accentuated the problem of chronic inflation facing the economy at that point in time. Then, from 1999 to 2008, inflation depicted a unique decelerating trend; we had inflation but it was inching up at a slow pace for reasons like high growth levels, rising real incomes and low demand during the initial phase of the global recessionary phase which did not stoke the flames of inflation at first. The ten-year average of headline WPI inflation was around 5.4 per cent from 2000-01 to 2009-10, which in Indian terms is considered manageable.

The problems arose in December 2009 when price rise, exhibiting persistence on the back of elevated inflation expectations, hike in vegetable prices (onions became astronomically high, with prices of Rs.90 a kilo prevailing even today) with unseasonal rains post-monsoon and rising global commodity prices that resulted in significant cost-push and demand-pull pressures. India uses two indices to measure inflation, the WPI (wholesale price index) and the CPI (consumer price index). The CPI places more weight on the food, as compared to energy, and owing to soaring global food prices (our prices will have to adjust to those), lacunae in infrastructure which hamper supply as well as the reasons mentioned above, inflation since 2009 has been proving itself quite detrimental to India’s growth story, which seemed to have got off on a good start. The financial year started with a headline inflation of 9.7 per cent which briefly touched double digit in September 2011 before coming down to 6.6 per cent in January 2012. Primary food articles inflation declined sharply during November 2011–January 2012, from above 10 per cent to negative territory, largely reflecting a seasonal decline in the prices of vegetables and a favourable base effect. However, prices rebounded significantly subsequently, resulting in food inflation reverting to double-digit levels by April 2012.

Appropriate anti-inflationary decisions were soon taken in the form of increasing the interest rates but the average WPI inflation (the measure used more widely in India because of its inclusivity and proper weights) still hovered around 8.17% in the 45-month period from December 2009 to August 2013.

The Reasons

With global oil prices on the rise as well as the familiarly accepted issue of domestic supply side bottlenecks, rising fuel inflation was easier to stomach than rising food inflation. There had been substantial growth in the food and food products segment since 2008-2009 so with satisfactory levels of food supply, the only possibility for such high food inflation was a growing demand. High value agricultural goods like milk, eggs, fish and meat have been witnessing historically increasing demands which is adding pressure indigenously to inflation. Strikingly enough, food inflation at the global level, based on the Food and Agriculture Organisation’s (FAO) food price index with base 2002-04, has been low/negative during most of the period we have been discussing. Another possible reason for stubborn food prices is the rising cost of production (CoP) of food commodities. The main reasons for the escalation in the costs of producing food are the rapid increase in farm input prices and long term structural deficiencies such as low productivity, fragmented landholdings, and declining public investments in agricultural infrastructure. With the exception of agricultural machinery and related inputs, the prices of various farm inputs, measured by the WPI inflation rate, were subject to significant increases in recent years. On an average basis, the WPI inflation rate of fodder recorded an increase of 19.64% between December 2009 and August 2013, followed by light diesel oil (19.01%), electricity for agricultural purposes (12.66%), high speed diesel oil (12.43%), lubricants (10.04%) and fertilizers (9.74%).

Why Inflation is a political problem in India

Yes, Inflation currently economically ails our country as it writes down the real value of our incomes, reduces the savings rate with the loan to deposit ratio increasing and causing eventually a liquidity crunch and works against building a favourable investment climate. But it is also a political issue, as level and the intensity of inflation makes people decide who to bring to power every time there is an election.

From 1999 till 2008, the intensity of inflation was not excessive and high growth had eroded the social consensus in favour of moderate inflation. With the elections in October 1999, the one year old BJP government had not been able to achieve much in terms of price reduction. However, this was a period when our growth trajectory was pointing up and so, people had other concerns against other parties when they decided to bring back the incumbent government to power. In 2004 though, the UPA came riding on the promise that they would deliver better in terms of reducing inflation. Moreover, any attempts of the opposition, namely the BJP to galvanize public opinion against the UPA government did not see much success and the UPA was voted in for a second term in 2009. The initial phase of the global recession in 2008 brought down soaring demands and with them soaring prices, but only for a while. Up till the 2009 elections, the government also used the bounty of additional resources generated because high growth ensured that consumer demands could be met easily. The Indian voter is no fool, however much he may be perceived to be one by the political parties. The UPA began to face anti-incumbency woes when its two terms in power were unsuccessful in curbing price rise and the BJP cashed in on this defeat. At present, economic analysts suggest that food inflation is within the feasible limit of 6.67% and so investors are eyeing a slash in interest rates to carry on business conducively.

Source: Lokniti NES Post-poll survey data 
Inflation, as can been understood from the article, has been a perpetual economic and political problem for the country. We cannot get rid of it economically and perhaps it will be quite some time before inflation signs off politically as well.

*Michelle Cherain is a student of BA (Hons.) Economics at St. Stephen’s College, University of Delhi. She is presently an intern at Lokniti.