Inflation in India

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Inflation rate in India was 3.78% as of August 2015, 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.

Provisional annual inflation rate based on all India general CPI (Combined) for November 2013 on point to point basis (November 2013 over November 2012) is 11.24% as compared to 10.17% (final) for the previous month of October 2013. The corresponding provisional inflation rates for rural and urban areas for November 2013 are 11.74% and 10.53% respectively. Inflation rates (final) for rural and urban areas for October 2013 are 10.19% and 10.20%, respectively.[2]

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(Food products 19.12%) Group are 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 thanlagging and infrequent CPI statistic. However, since 2009 it has been measured monthly instead of weekly.


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[edit]

It arises as the basis theme in deciding an adequate monetary policy. There are two debatable proportions for an effective inflation, whether it should be in the range of 1–3 per cent as the inflation rate that persists in the industrialized economy or should it be in the range of 6–7 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 in nature. 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[edit]

[3]The 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 1998–99 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[edit]

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.[4] 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.[5] 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.[6] 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.


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[edit]

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[edit]

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.[7] Higher inflation rate also constraints India's manufacturing environment.[8]

Domestic factors[edit]

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.[9]

External factors[edit]

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.[10]


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 September 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%.[11]


Given below is a comparison of 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). 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.[12][13][14]

Year Price Index
Cost Index
Gold Index
Silver Index
House Index
1970 - - 0.447 1.383 -
1971 - - 0.516 1.211 -
1972 - - 0.801 1.529 -
1973 - - 1.455 2.698 -
1974 - - 2.123 3.902 -
1975 - - 2.078 4.066 -
1976 - - 1.847 4.305 -
1977 - - 2.169 4.352 -
1978 - - 2.750 5.197 -
1979 - - 5.264 15.106 -
1980 8.960 - 7.423 13.401 -
1981 10.094 10.000 6.049 8.724 -
1982 10.875 10.900 6.251 9.431 -
1983 12.241 11.600 6.710 11.722 -
1984 13.038 12.500 6.468 9.367 -
1985 13.853 13.300 6.448 7.987 -
1986 15.085 14.000 7.885 7.400 -
1987 16.451 15.000 9.562 10.055 -
1988 17.638 16.100 9.801 9.905 -
1989 18.444 17.200 10.315 9.487 -
1990 20.509 18.200 10.821 8.597 -
1991 23.274 19.900 14.205 10.899 -
1992 25.570 22.300 16.664 12.499 -
1993 27.431 24.400 18.831 15.803 -
1994 30.249 25.900 19.320 17.291 -
1995 33.263 28.100 20.942 19.364 -
1996 36.400 30.500 21.428 19.208 -
1997 38.891 33.100 18.879 20.513 -
1998 43.996 35.100 19.761 23.813 -
1999 46.503 38.900 19.483 24.288 -
2000 47.240 40.600 20.038 23.700 -
2001 49.278 42.600 21.301 22.362 -
2002 51.237 44.700 25.310 24.228 -
2003 53.213 46.300 27.867 26.608 -
2004 55.252 48.000 29.880 32.555 -
2005 57.689 49.700 33.951 38.057 -
2006 61.554 51.900 45.688 60.446 -
2007 65.370 55.100 49.485 62.460 -
2008 71.320 58.200 64.084 66.864 -
2009 78.880 63.200 77.849 79.933 -
2010 86.374 71.100 94.687 116.836 53.300
2011 94.579 75.800 126.970 181.068 67.050
2012 104.037 85.200 144.595 177.763 80.400
2013 113.816 93.900 128.696 138.810 90.250
2014 120.418 102.400 122.602 118.703 106.050
2015 126.318 108.100 121.157 106.972 109.550
2016 132.002 112.500 135.582 127.866 121.000
2017 137.009 115.900 133.092 116.539 129.100


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

External links[edit]