An Analysis of Inflation in India

(I am conscious that Economics is not my subject, so I probably shouldn't analyze inflation in India. I nevertheless decided to go a bit deeper and analyze as a layman because I won't learn unless I decide to write. In the process of writing this blog, I did learn quite a few things about economics, and especially inflation. That is the satisfaction I will carry!)

My personal experience is that the prices in India have been mostly stable in last 3-4 years, except some seasonal spikes. The spikes do happen, for example tomato and onion prices. However, these spikes are short lived, and the prices invariably come down after few days.

There was a time of high inflation. Every few months, there was an upward revision of prices. It was very visible even to the well-to-do families like ours. For example, after every few months, milk price was being revised until around 2014. The prices still increased after 2014, but at a much slower pace.
See following figures for an example:
 a. Full cream milk price was increased to 52 Rs/litre in March 2017
 b. Same full cream milk was priced at 48 Rs/litre in May 2014 (See here)
 c. The price of full cream got almost doubled in 5 years. It was 25 Rs/litre in July 2009 (See here)

Milk is just an example which impacts me, you and everyone around us. The price increased 92% in 5 years before 2014, and it increased 8% in 3 years after 2014!

Now, let us look at the overall inflation trend. We will look at annual inflation rate based on CPI (Consumer Price Index) and not WPI (Wholesale Price Index) because we are impacted more by CPI.

Annual Rate of Inflation: This is the % change in CPI over a period on one year.

(Source: www.inflation.eu. Click here for direct link)

Analysis of the inflation trend:
Inflation is driven by multiple factors. E.g. natural (like monsoon, hailstorms, etc), global factors (like oil prices, global demand), domestic policy (e.g. RBI controlled interest rates, government controlled import/export policies, taxation, law and order situation, etc).

Now looking at the numbers of last 20 years:
- 1998 was a particularly bad year for inflation. That was the era of political instability and several economic sanctions were applied by international community because of nuclear tests carried out by India. 15.32% inflation is too high by any standards!
- 1999 was the year of Kargil war. But still the inflation rate came down to benign 0.47%.
- Between 1999 and 2004, the inflation stayed between 3.5% and 5%. This is quite a healthy rate, as most economists will tell. This is the era of Atal Bihari Vajpayee.
- After 2004, there was a steady increase in inflation. By 2009, inflation increased to 15% once again. I remember when I returned to India in 2009 after 2 years of stay in UK, I was shocked to see the prices of essentials like lentils. These were costlier in India than in UK.
- From 2009 to Dec 2013, the inflation stayed high (around 10%) except a small dip in 2011 to 6.5%. For people like me, inflation was not just a number published in newspaper, the pinch of mahangaai was to be experienced in daily life.
- Starting Dec 2014 figures, the inflation figures have steadily come down . From 9% in Dec'2013, it came down to 6% in Dec'2014 and Dec'2015. Then onwards it is around 2-3%.

Government's role in controlling inflation after 2014:
Soon after Modi's famous victory in May'2014, most commentators found taming of inflation as one of the most difficult tasks for Modi government (see this and this). Inflation was indeed a major election issue as was corruption, so government must deliver it soon after assuming power.

While softening of oil prices did help Indian people, government also did its bit.

1. Raids against hoarding: Soon after assuming power, Modi government nudged state governments to raid hoarders. Some friendly state governments did cooperate and that was a shot in the arm to tame inflation of some essential commodities. This has continued over last 3+ years. No artificial shortage of essential commodities has been allowed. (References: 1, 2, 3, 4, 5). This is something which was missing in UPA era (except some selective raids under public pressure).

2. Use Imports and Exports to keep prices stable: Modi government has taken proactive steps to keep prices stable. That means if there is a surplus in India, government promoted exports. Similarly, if a shortage is envisaged, the government used imports to ensure there are enough supplies available. (Reference: 1, 2, 3)

3. Setting up of Inflation Target: As a major monetary policy reform in 2016, an inflation target was set for next 5 years in the range of 4-6% with a tolerance band of 2%. This reinforced the commitment government is showing towards maintaining a balance between inflation and growth. (See this)

Conclusion: Modi government has shown commitment to tame inflation so far. Now that oil prices are increasing, there may be an increase in prices of day-to-day use items. Government will need to stay on course. As a citizen, I iterate my satisfaction.

So far, so good :-)