Capter --- 3.

Company profile 22

Inflation in India- Historical Perspective

ABSTRACT leads to increased demand, thereby fuelling prices. The

case is of too much money chasing too few goods. An
Inflation is a rise in the general level of prices of goods increase in demand could also be a result of declining
and services in an economy over a period of time. When interest rates, a cut in tax rates or increased consumer
prices rise, each rupee buys less goods and services than it confidence.
had been before, consequently eroding the purchasing
power of money. It is measured through inflation rate- the The Cost Push theory, on the other hand, states that
annualized percentage change in a general price index - inflation occurs when the cost of producing rises and the
Consumer Price Index and Wholesale Price Index over increase is passed on to consumers. The cost of production
time. Inflation affects both the economy of a country and can rise because of rising labor costs or when the
its social conditions, as well as the political and moral producing firm is a monopoly or oligopoly and raises
lives of its inhabitants. Inflation is the gravest economic prices, cost of imported raw material rises due to exchange
concern which has gripped India into its jagged tentacles. rate changes, and external factors, such as natural
India has been plagued by the disease of inflation since calamities or an increase in the economic power of a
the 1950s but it has started showing its prominently certain country.
harmful symptoms and ill effects since 1991, post
liberalization since previous year’s global meltdown An increase in indirect taxes can also lead to increased
somewhat crippling the Indian economy, the inflation rate production costs. A classic example of cost-push or
has been steadily rising to surpass the double digits. At supply-shock inflation is the oil crisis that occurred in the
present, it is hovering around 9 per cent. Present paper is 1970s, after the OPEC raised oil prices. The US saw
an attempt to understand inflation and its historical double digit inflation levels during this period. Since oil is
development in India. used in every industry, a sharp rise in the price of oil leads
to an increase in the prices of all commodities.

INTRODUCTION While money growth is considered to be a principal long-

term determinant of inflation, non-monetary sources, such
as an increase in commodity prices, have played a key role
Inflation is a rise in the general level of prices of goods
in triggering inflation in the past four decades.
and services in an economy over a period of time. When
prices rise, each rupee buys less goods and services than it
had been before, consequently eroding the purchasing MEASURES OF INFLATION
power of money. It is measured through inflation rate- the
annualized percentage change in a general price index - The inflation in the Indian economy can be measured in 3
Consumer Price Index and Wholesale Price Index over ways:
time. Inflation affects both the economy of a country and 1) National Income Deflator- This is defined as ratio
its social conditions, as well as the political and moral of GDP at current prices and GDP at Constant
lives of its inhabitants. The GDP deflator is another very Prices. It is a comprehensive measure as it
important measure of inflation as it measures the price encompasses all the goods and services produced in
changes in goods that are produced domestically. In effect, the economy. However, its application is limited as
inflation decreases the value of money and makes it more it is released on a quarterly basis by CSO and then
expensive to buy goods and services. it comes with a lag of 2 months (e.g. figures for
quarter Jan-Mar 2008 quarter are released on 30
Different schools of thought provide different views on May, 2008). Further the GDP figures are subject to
what actually causes inflation. However, there is a general revisions (though this applies to WPI as well) and
agreement amongst economists that economic inflation together these factors make it of little use for
may be caused by either an increase in the money supply policymakers.
or a decrease in the quantity of goods being supplied. The 2) Based on Wholesale Price Index (WPI)- This is the
proponents of the Demand Pull theory attribute a rise in most common measure of inflation and is used for
prices to an increase in demand in excess of the supplies policy purposes.
available. An increase in the quantity of money in 3) Based on Consumer Price Indices- Within
circulation relative to the ability of the economy to supply Consumer Price Indices, there are four sub indices

i-Explore International Research Journal Consortium www.irjcjournals.org

 23

that are based to capture price levels across different types • The producers would not be able to control the cost
of consumers. They are: of raw material and labor and hence the price of the
a. CPI - Industrial Workers final product. This could result in less profit or in
b. CPI- Urban Non-Manual Employees some extreme case no profit, forcing them out of
c. CPI- Agricultural labor business.
d. CPI- Rural Labor • Manufacturers would not have an incentive to
invest in new equipment and new technology.
Inflation is caused due to several economic factors: • Uncertainty would force people to withdraw money
• When the government of a country print money in from the bank and convert it into product with long
excess, prices increase to keep up with the increase lasting value like gold, artifacts.
in currency, leading to inflation. • Inflation hits wage-earners and salaried people very
• Increase in production and labor costs, have a direct hard. Although wage- earners, by the grace of trade
impact on the price of the final product, resulting in unions, can chase galloping prices, they seldom win
inflation. the race. Since wages do not rise at the same rate
• When countries borrow money, they have to cope and at the same time as the general price level, the
with the interest burden. This interest burden results cost of living index rises, and the real income of the
in inflation. wage earner decreases.
• High taxes on consumer products, can also lead to • Those who invest in debentures and fixed-interest
inflation. bearing securities, bonds, etc, lose during inflation.
• Demands pull inflation, wherein the economy However, investors in equities benefit because more
demands more goods and services than what is dividend is yielded on account of high profit made
produced. by joint-stock companies during inflation
• Cost push inflation or supply shock inflation,
wherein non availability of a commodity would THE HISTORY OF INFLATION IN INDIA
lead to increase in prices.
India has been plagued by the disease of inflation since the
The problems due to inflation would be: 1950s but it has started showing its prominently harmful
• When the balance between supply and demand goes symptoms and ill effects since 1991, post liberalization.
out of control, consumers could change their buying Kick started by the fiscal crisis of 1991, marked by deficits
habits, forcing manufacturers to cut down in government finances and devaluation of the rupee, a
production. whopping inflation of 13.66 per cent took its toll on the
• Inflation can create major problems in the Indian economy. Though later controlled, average
economy. Price increase can worsen the poverty inflation rate has been stubborn at a 9.3 per cent per year
affecting low income household, till the end of the 19th century. India has seen both high
• Inflation creates economic uncertainty and is a and low inflation, and plotting the graph since 1953 puts
dampener to the investment climate slowing growth things in perspective.
and finally it reduce savings and thereby
consumption.

Source-www.capitalmind.in

i-Explore International Research Journal Consortium www.irjcjournals.org

 24

In 2010-11, inflation was at 9.6% (official) which makes it to keep inflation under some sort of control is one part of
the highest since 1994-95, when it was 12.6%. India’s good economic record. The other part is the ability
to stay clear of foreign defaults though, lest we forget,
The highest inflation in 16 years is still only a partial India has had three trysts with semi-defaults since it
indicator, since we use Wholesale Product Prices to became an independent country. The government
calculate inflation, rather than the more acceptable rescheduled foreign debt in 1958, 1969 and 1972.
consumer prices which would have included Rent and
Wages. In the early days of the Indian republic, other than So, on the one hand, we have India’s reasonably good
1956, inflation stayed at a controlled level below 10%. No record in avoiding financial crises and hyperinflation. On
one could even set their own prices, since everything was the other hand, we have the iron law that high-growth
government controlled. At some level integration issues economies tend to fall into trouble every now and then.
would have given rise to price validity problems as well.
The rate of inflation in India is currently hovering around
In the 60s, we faced spiky inflation as wars hit our 9% mark. Official confirmation of inflation was made in
economy – the Chinese war in 62, and then the war with the month of May’11 by Indian government as 8.72%. If
Pakistan in 65. Prices of wholesale goods spiked and after we look at the rate of inflation since year 1969 till date, on
India devalued it’s currency, things got slightly better, an average the rate of inflation has increased by almost at
with inflation going below the zero level in 1969. the rate of 7.99%. May be not many will believe that the
inflation rate in India has peaked in the year Sep-1974
The 70s saw the great oil spike which led to extremes in touching the market of 34%. Simultaneously the rate of
inflation – the Emergency calmed things down .After ‘77, inflation in India also bottomed to (-)11% in two years
when the emergency was lifted, prices spiked again, and after 1974 in year 1976.
spiked to over 18% in 1981-82.
Here we present you a graphical presentation of how
The rest of the 80s were about benign inflation as rules inflation has behaved in last ten years:
were eased, slowly, over supply and prices. But
government control flourished, with manufacturers being
told how much of any commodity they could produce,
how much they could increase capacity by, every year.

Inflation spiked again in the 90s as India devalued and

went through a payments crisis. The liberalization of the
early 90s helped keep inflation low as supply pressures
eased, and productivity increased. But even through the
Russian crisis, the Asian currency crisis and the downturn
after the 2000 dot-com bust, Indian inflation remained
above zero and didn’t spike into double digits.

The 2008 oil price rise saw inflation temporarily go into

double digits (not reflected in annual numbers) and
interest rates went all the way to 9%. The Lehman bust There are several reasons why we should worry about the
then took inflation down to very low numbers in 2009. As spike in the inflation rate. Inflation is a tax on the poor and
the elections removed the left from power in 2009, the long-term lenders. Also, as Reinhart and Rogoff show,
subsequent recovery then took inflation back up “inflation crises and exchange rate crises travel hand-in-
vigorously, and it has been above the 8% mark since. hand”. Inflation is already too high, though it is definitely
not at economy-wrecking levels. But it’s best to be serious
India has never had to face such insanity since 1801. The about the threat it poses.
highest inflation that India has ever seen in the past two
centuries is 53.8%, in the famine year of 1943. The ability

i-Explore International Research Journal Consortium www.irjcjournals.org

 25

Trends in Inflation
(1) Index Numbers Of Wholesale Prices in India ( Monthly Averages)

(Base: 1993-94 = 100)

Year Month All Commodities Primary Articles Fuel, Power, Light &Manufactured Products
Lubricants
2006 January 196.30 194.78 310.80 171.28
February 196.43 192.88 314.10 171.40
March 196.75 191.90 315.50 171.90
April 199.02 195.84 317.00 173.76
May 201.30 200.63 320.08 175.05
June 203.10 205.05 324.73 175.30
July 204.02 202.76 326.94 177.00
August 205.28 204.93 328.80 177.83
September 207.76 211.72 330.32 179.08
October 208.65 213.35 328.93 180.20
November 209.08 213.95 326.70 181.13
December 208.44 212.98 322.34 181.46

2007 January 208.83 214.23 322.05 181.70

February 208.88 214.95 319.80 182.00
March 209.76 214.64 319.84 183.52
April 211.50 219.18 320.35 184.55
May 212.28 220.93 322.05 184.83
June 212.28 220.60 321.98 184.88
July 213.63 224.50 321.85 185.73
Aug 213.78 223.75 322.35 186.08
September 215.06 225.98 321.86 187.46
October 215.05 224.08 323.70 187.68
November 215.53 223.63 325.90 188.10
December 216.42 222.50 331.70 188.58

2008 January 218.15 224.58 334.50 189.95

February 219.88 230.55 335.25 190.43
March 225.54 235.86 341.52 196.10
April 228.50 238.63 342.85 199.48
May 231.08 241.94 346.96 201.50
June 237.38 243.95 376.43 204.50
July 240.00 248.68 377.20 206.35
August 241.24 249.28 377.94 207.94
September 241.13 251.50 375.30 207.63
October 239.03 251.45 369.15 205.73
November 234.18 250.94 348.00 203.00

i-Explore International Research Journal Consortium www.irjcjournals.org

 26

December 229.75 247.33 331.00 201.08

2009 January 229.64 248.98 328.62 200.86

February 227.78 247.93 323.50 199.43
Source: Reserve Bank of India (RBI)

(2) Monthly All-India Consumer Price Index (General) for Industrial Workers

(Base: 1982=100)
Year Jan Feb March April May June July August Sept Oct Nov Dec
2004 504 504 504 504 508 512 517 522 523 526 525 521
2005 526 525 525 529 527 529 538 540 542 548 553 550

(Base: 2001=100)
Year Jan Feb March April May June July August Sept Oct Nov Dec
2006 119 119 119 120 121 123 124 124 125 127 127 127
2007 127 128 127 128 129 130 132 133 133 134 134 134
2008 134 135 137 138 139 140 143 145 146 148 148 147
2009 148 - - - - - - - - - - -
( Linking Factor between 1982 and 2001 Series for the All-India is 4.63 )

(3) Consumer Price Index for Agricultural Labourers

(Base: 1986-87=100)
Year Jan Feb March April May June July August Sept Oct Nov Dec
2004 332 332 332 331 333 336 338 341 343 345 344 342
2005 341 340 340 341 343 345 350 352 354 356 360 358
2006 357 357 358 360 365 370 372 375 380 386 390 390
2007 391 392 392 394 395 399 404 408 410 413 414 413
2008 413 417 423 429 431 434 442 450 455 459 460 459
2009 461 - - - - - - - - - - -

(4) Consumer Price Index For Rural Labourers

(Base: 1986-87=100)
Year Jan Feb March April May June July August Sept Oct Nov Dec
2004 334 335 334 334 335 338 340 343 345 347 346 344
2005 343 343 342 344 345 347 353 354 356 358 362 361
2006 359 359 360 362 367 372 374 376 381 387 391 391
2007 391 393 393 395 396 400 404 408 410 413 414 413
2008 414 417 423 429 431 435 442 450 455 459 460 459
2009 461 - - - - - - - - - - -
Source: Labour Bureau , Ministry of Labour

i-Explore International Research Journal Consortium www.irjcjournals.org

 27

Table: Inflation Rates for Different Commodity Groups

Year-on-Year Inflation Rate

Wholesale Price Index (WPI) February 2009 February 2010

WPI - All Commodities 3.5 9.9

WPI - Primary Articles 6.9 15.5

WPI - Food Articles 9.4 17.8

WPI - Fuel Group -3.4 10.2

WPI - Manufactured Products 4.8 7.4

WPI - Manufactured Food Products 9.3 20.4

WPI – excl. Food Articles and Food Products 1.5 6.5

WPI – Manufacturing Products excl. Food Products 3.8 4.3

WPI – Essential Commodities * 10.5 21.6

February 2009 February 2010
Consumer Price Indices (CPIs)

CPI - Industrial Workers 9.6 14.9

CPI - Agricultural Labourers
10.8 16.5
CPI - Rural Labourers 10.8 16.5
CPI - Urban Non-manual Employees # 10.4 16.9

.# Pertains to January. * Essential commodities in WPI basket include rice, wheat, jowar, bajra, pulses, potatoes, onions,
milk, fish-inland, mutton, chillies (dry), tea, coking coal, kerosene, atta, sugar, gur, salt, hydrogenated vanaspati, rape &
mustard oil, coconut oil, groundnut oil, long cloth/sheeting, dhoties, sarees & voiles, household laundry soap and safety
matches.

Table: Inflation in India: Medium to Long-term

(per cent)
GDP
Decades WPI CPIIW PFCE Deflator
Deflator
1951−52 to 1960‐61 1.9 2.1 1.6 1.6
1961−62 to 1970−71 6.2 6.5 6.2 6.3
1971−72 to 1980−81 10.3 8.3 8.8 8.4
1981−82 to 1990−91 7.1 9.0 8.7 8.3
1991−92 to 2000−01 7.8 8.7 8.1 8.5
2001−02 to 2008−09 5.2 5.3 4.6 4.4

Longterm Trend 1971−72 to 2008−09 7.7 (6.4) 8.0 (6.7) 7.7 (6.3) 7.6 (6.3)
(Longer term 1951−52 to 2008−09)

i-Explore International Research Journal Consortium www.irjcjournals.org

CONCLUSION [7] Dornbusch, Rudiger (1992): .Lessons from
experiences with high inflation., The World Bank
Notwithstanding the current inflation scenario, it is Economic Review, vol 6, no 1 (January), pp 13-31.
important to recognise that in the last decade, the average [8] Dornbusch, Rudiger and Stanley Fischer (1993):
inflation rate, measured in terms of WPI and CPI, had .Moderate inflation., The World Bank Economic
moderated to around 5.5 per cent. More specifically, non- Review, vol 7 (January), pp 1-44.
food manufacturing inflation, which the Reserve Bank [9] Fielding, David and Michael Bleaney (2000):
uses as an indicator of demand pressures and is the most .Monetary discipline and inflation in developing
responsive to monetary actions, averaged 4.0 per cent over countries: the role of the exc Gerlach, Stefan
this period. A period of low inflation preceded the high- (2000): Modelling the demand for broad money in
growth phase in 2003-08, which was in turn characterized India., (unpublished),
by high investment-GDP and declining fiscal deficit-GDP [10] History of inflation in India, By Investment
ratios. Inflation remained moderate in the early part of the Blogger, on July 14th,
high-growth phase, but increased in the period 2011http://www.getmoneyrich.com/history-of-
immediately preceding the global financial crisis, inflation-in-india/
reflecting the emergence of domestic bottlenecks. [11] Inflation: a short history Cafe Economics | Niranjan
Inflation affects both the economy of a country and its Rajadhyakshahttp://www.livemint.com/2008/06/10
social conditions, as well as the political and moral lives of 221118/Inflation-a-short-history.html
its inhabitants. From last few decades India has witnessed [12] Marshall, D A (1992): “Inflation and asset returns
lot of fluctuations in inflation rate. But it is also observed in a monetary economy”, Journal of Finance,
that India is deeply intolerant of high inflation. It could be XLVII(4), pp 1315-42.
because India is blessed with very conservative [13] Parikh, Ashok (1997): “An approach to monetary
policymakers who always try to control inflation. targeting in India”, Indian Economic Journal, 45,pp
1-18.
[14] Reserve Bank of India (1998): .Working Group on
BIBLIOGRAPHY Money Supply: analytics and methodology of
compilation. (Chairman: Dr Y V Reddy).
[1] Agénor, Pierre-Richard and Alexander W [15] Stock, J H and M W Watson (1999): .Forecasting
Hoffmaister (1997): .Money, wages, and inflation inflation., Journal of Monetary Economics, vol
in middle-income developing countries., IMF 44,no 2 (October), pp 293-335.
Working Paper, WP/97/174 (December). [16] Deepak Shenoy,The History Of Inflation In India
[2] (1995): Relative-price change as aggregate supply ,August 25th, 2011
shocks, Quarterly Journal of Economics, vol 110 http://capitalmind.in/2011/08/the-history-of-
(February), pp 162-93. inflation-in-india/
[3] Balakrishnan, P (1991): Pricing and inflation in [17] Taylor, J B (2000): .Low inflation, pass-through
India, Delhi: Oxford University Press. and the pricing power of firms., European
[4] Bhattacharya, B B and Madhumita Lodh (1990): Economic Review, 44, 1389-1408
“Inflation in India: an analytical survey”, Artha [18] http://www.tradingeconomics.com/india/inflation-
Vijnana,32(1) pp 25-68. cpi
[5] Central Statistical Organisation (1980): Sources and [19] http://theviewspaper.net/inflation-in-india/
Method, New Delhi [20] http://www.mysmp.com/bonds/inflation.html/
[6] Deepak Shenoy, The History Of Inflation In India, [21] http://tutor2u.net/economics/revision-notes/a2-
August 25th, 2011 macro-causes-of-inflation.html/
http://capitalmind.in/2011/08/the-history-of-
inflation-in-india/