Inflation In India

• Inflation is measured by the Wholesale Price

Index (WPI) and Consumer Price Index (CPI)
• WPI is the measure of headline inflation in
India
• WPI preferred to CPI
-wider commodity coverage
-available on weekly basis
-computed at all-India basis
 Trends in WPI
• Average for 1980s : 7.5 (point-to-point)
• Average for 1990s : 6.3 (point-to-point)
(excluding crisis years)
• Secular decline in inflation began in 1996-97 :
Average 1996-97 to 2002-03 4.7 per cent

Chart : Inflation Rate - 1980-81 to 2002-03

21

18

15

12

0
1980-81

1983-84

1986-87

1989-90

1992-93

1995-96

2001-02
1998-99
 Composition of WPI
Wholesale Price Index
(weight =100)

Primary Articles (wt= 22.0) Fuel Power, Light & Lubricants (wt.= 14.2) Manufactured Products (wt.63.8)
Cereals, Pulses,Fruits & Mineral Oil Sugar,edible oils
vegetables, milk, oilseeds, Electricity textiles, chemicals, iron & steel
egg, fish, oilseeds, spices, fibres, etc Coal Mining machinery, transport equipment, etc

Chart : Major Group's Weighted Contributions to WPI

120
100
80
Per cent

60
40
20
0
-20
Apr-00

Jun-00

Aug-00

Oct-00

Dec-00

Feb-01

Apr-01

Jun-01

Aug-01

Oct-01

Dec-01

Feb-02

Apr-02

Jun-02

Aug-02

Oct-02

Dec-02
Primary Fuel Mfg.
 Trends in Fiscal Deficit
• Gross fiscal Deficit
1980s : 6.8 % of GDP
1992-93 to 2001-02 : 5.7 % of GDP
(ten years excluding crisis years)
• Net RBI Credit to Government
1980s : 2.1 % of GDP
1992-93 to 2001-02 : 0.4 % of GDP
 GFD and Inflation
Chart A: Inflation Rate and GFD - 1980-81 to 1989-90 Chart C: Inflation Rate and GFD - 1990-91 to 1994-95

21 18
18 15
15

Per cent
12
Per cent

12 9
9
6
6
3 3
0 0
1980-81

1981-82

1982-83

1983-84

1984-85

1985-86

1986-87

1987-88

1988-89

1989-90
1990-91 1991-92 1992-93 1993-94 1994-95
Year
Year
GFD Inflation rate GFD Inflation rate

Chart B: Inflation Rate and GFD - 1990-91 to 1999-2000 Chart D: Inflation Rate and GFD - 1995-96 to 2001-02

18.0 8
15.0
Per cent

6
12.0
Per cent

9.0 4
6.0 2
3.0 0
0.0 1995- 1996- 1997- 1998- 1999- 2000- 2001-
1990-91

1991-92

1992-93

1993-94

1994-95

1995-96

1996-97

1997-98

1999-2000
1998-99

96 97 98 99 2000 01 02
Year

Year
GFD Inflation rate GFD Inflation rate
 Reasons for Sustained Maintenance
of Price Stability in the 1990s

• Structural changes in the global economy

• Productivity gains
• Favourable supply shocks
• Institutional reforms in monetary policy
 Inflation viewed from supply-side

• Even though fiscal deficit is high

– High food stocks
– High forex reserves (sterilised intervention)
• Fuel Inflation
– Upto end of 1990s Administered Prices
– Even after deregulation, low pass-through of
import prices
 Demand Side- Monetary Management

• Monetary Policy objectives : Price stability and

Growth
• Money Demand Function reasonably stable
• M3 = f (1.6 GDP, 1.0 Price)
• Reserve Money is the operating target
• In 1990s Compositional Shift in Reserve Money
– NFEA is predominant component of RM
– Net RBI Credit to Government down
 Demand Side- Monetary Management
(Contd..)
• Monetary Policy operational framework has changed
• Automatic monetisation of fiscal deficit that prevailed
upto mid-1990s terminated
• Net RBI credit to Government moderated greatly
• Government debt sold in market at market-related
rates
• RBI modulates liquidity through LAF
• Moving towards Fiscal Responsibility and Budget
Management Bill (FRBMB) which envisages
withdrawal of RBI from primary subscription of
Government paper
 Monetised Deficit and Inflation Rate

17
15
13
11
9
7
5
3
1
-1
1980-81 1983-84 1986-87 1989-90 1992-93 1995-96 1998-99 2001-02

Monetised Deficit Inflation Rate