Inflation in India

India’s 2008 Economic Survey Report targeted a drop in India’s Inflation Rate – but with food, oil and commodity price rises worldwide, the opposite is happening.

According to the 2008 Economic Survey Report, India’s inflation rate was targeted by the Reserve Bank of India (RBI) to be 4।1%, down from a rate of 5.77% in 2007. Inflation rates for many investment goods have decreased dramatically in recent years. The price of basic goods such as lentils, vegetables, fruits and poultry were expected to slow their rise. The price of various manufactured goods also fell in 2007, and this contributed to a reduced inflation rate
However, the beginning of 2008 has seen a dramatic rise in the price of rice and other basic food stuffs. There has also been a no-less alarming rise in the price of oil and gas. When coupled with rises in the price of the majority of commodities, higher inflation was the only likely outcome.

Indeed, by July 2008, the key Indian Inflation Rate, the Wholesale Price Index, has risen above 11%, its highest rate in 13 years. This is more than 6% higher than a year earlier and almost three times the RBI’s target of 4.1%.

Inflation has climbed steadily during the year, reaching 8.75% at the end of May. There was an alarming increase in June, when the figure jumped to 11%. This was driven in part by a reduction in government fuel subsidies, which have lifted gasoline prices by an average 10%.

The Indian method for calculating inflation, the Wholesale Price Index, is different to the rest of world. Each week, the wholesale price of a set of 435 goods is calculated by the Indian Government. Since these are wholesale prices, the actual prices paid by consumers are far higher. In times of rising inflation this also means that cost of living increases are much higher for the populace. Cooking gas prices, for example, have increased by around 20% in 2008.

With most of India’s vast population living close to – or below – the poverty line, inflation acts as a ‘Poor Man’s Tax’. This effect is amplified when food prices rise, since food represents more than half of the expenditure of this group.

The dramatic increase in inflation will have both economic and political implications for the government, with an election due within the year.

Economic growth in emerging markets has slowed but is far from over. With the BRIC countries (Brazil, Russia, India and China) alone accounting for more than 3 billion people, and with these people consuming more resources every year, it is likely that higher inflation rates will be with us for a good while yet – and that is worrying news for the government of India.