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 9 6 3 18- 1 908 18- 4 938 18- 7 968 18- 0 999 19- 3 929 19- 6 959 19- 9 989 20- 2 010 0

Composition of WPI
Wholesale Price Index (weight =100)

Primary Articles (wt= 22.0) Cereals, Pulses,Fruits & vegetables, milk, oilseeds, egg, fish, oilseeds, spices, fibres, etc

Fuel Power, Light & Lubricants (wt.= 14.2) Mineral Oil Electricity Coal Mining

Manufactured Products (wt.63.8) Sugar,edible oils textiles, chemicals, iron & steel machinery, transport equipment, etc

Chart : Major Group's Weighted Contributions to WPI

120 100 80 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

Per cent

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 15 12 9 6 3 0 1980-81 1981-82 1982-83 1983-84 1984-85 1985-86 1986-87 1987-88 1988-89 1989-90

18 15 12 9 6 3 0 1990-91 1991-92 1992-93 Year GFD Inflation rate 1993-94 1994-95

Year GFD Inflation rate

Chart B: Inflation Rate and GFD - 1990-91 to 1999-2000

Per cent Per cent

Per cent

Chart D: Inflation Rate and GFD - 1995-96 to 2001-02

18.0 15.0 12.0 9.0 6.0 3.0 0.0 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1999-2000 1998-99

8 6 4 2 0 1995- 199696 97 1997- 1998- 199998 99 2000 Year GFD Inflation rate 2000- 200101 02

Per cent

GFD

Inflation rate

Year

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