Reining in Inflation in India: Options for a Developing Economy

Case Code: ECON036
Case Length: 30 Pages
Period: 2005-2011
Pub Date: 2012
Teaching Note: Not Available

Price: Rs.400
Organization : -
Industry : -
Countries : India
Themes: Macro Economics Evaluation

Excerpts

Structural Deficiencies in Agriculture

Long-term impairments in the farming sector further aggravated the situation. The share of agriculture in the GDP had been declining decade after decade and had declined to around 14% by 2010-2011 from over 55% during 1953-54. Even though contribution of agricultural output to the national GDP had been falling, the population dependent on agriculture for a livelihood remained high at about 50% in 2011. The disproportionately high population dependent on agriculture was subjecting the sector to tremendous stress and any shortfall in production was followed by sharp increases in prices...

Rising High with the Foreign Tide

The influence of international prices on domestic inflation was observed. The global economy slipped into recession during 2008-2009, inducing governments across the globe to ease fiscal and monetary policies besides coming up with huge fiscal stimulus packages. According to the Food and Agriculture Organization (FAO) of the United Nations, the prices of most agricultural commodities increased significantly in 2008 and 2009. The FAO Food Price Index averaged 236 points in February 2011, up by 34.09% compared to February 2010. The index of that level was reported to be a record in real and nominal terms since 1990. Major factors responsible for the increase were supply and demand imbalances in key producing nations and the weakening of the US Dollar. By February 2011, food prices increased nearly by 100% compared to the beginning of 2005, according to the World Bank's index of real global food prices. According to analysts, the loose monetary situation across the globe coupled with the increased demand in the developing nations had led to a surge in international commodity prices. Energy (crude oil, natural gas, and coal), metals (copper, aluminium, and iron ore) and food (cereal and meat) prices increased significantly...

Policy Paradox

The United Progressive Alliance (UPA) government was severely criticized by economists for its 'popularist policies.' Since coming to power for its first term in 2004, the UPA had embarked on social welfare programs like the Mahatma Gandhi National Rural Employment Guarantee Scheme (MNREGS) to ensure inclusive growth. The MNREGS was designed to provide 100 days of work per year to rural laborers, who were living under $1.2 a day. Under the program, any villager could approach a government office and enroll himself/herself for building roads, digging wells, or creating other rural infrastructure.

According to the scheme, laborers would be paid a minimum of Rs. 125 ($2.5) or more depending on the State of residence. The largest welfare scheme in India costing 1% of GDP, it was designed to protect the 500 million rural poor. While the idea of the scheme was to guarantee employment for the rural population, farmers across the country complained that the scheme had deprived them of agriculture laborers...

Why was Economy Over-Heating?

Entrepreneurs had long been complaining over the issues hampering industrial output. Economists kept stressing the importance of reforms in the factor markets - primarily land and labor - apart from reforms in the power sector. First among the problems was inadequate infrastructure. Poor transportation across the nation had been a concern for decades; however, government was not able to allocate adequate finances due to deficits. Even when resources were allocated or when infrastructure projects were taken up through public-private-partnership, land acquisition was proving to be a major hurdle...

Inflation: The Worst Public Tax

According to a survey by the Associated Chambers of Commerce and Industry of India (ASSOCHAM), in the metro cities, the prices of 8 varieties of essential food items had increased by 72% over the five- year period between fiscal 2005-06 and 2010-11, whereas income rose by only 38%...

Monetary Policy: Only Tool for Price Stability?

During the economic reform period of the early 1990s, monetary policy was a nominal anchor for the Indian economy, which was undergoing deep-seated structural changes. By the mid 1990s, with the economic reform process and subsequent opening up of the economy, monetary policy was subjected to exogenous influences from the external environment...

Exhibits

Exhibit I(A): Historical WPI (average) in India
Exhibit I(B): Inflation in India from Mid-2000s
Exhibit II: South-west Monsoon Rainfall (in mille meters, 50 year Moving Average)
Exhibit III: Sectoral Inflation during 2009-2011
Exhibit IV: Contributors to Food Inflation (%)
Exhibit V: Demand and Supply of Pulses and Edible Oils
Exhibit VI: Composition of GDP Over 60-Year Period
Exhibit VII: Minimum Support Price for Foodgrains According to Crop Year (Fair Average Quality)
Exhibit VIII: Growing Prices of Oil in International Markets
Exhibit IX: Commodities in WPI and Corresponding Weights
Exhibit X: Contribution of Various Fuels to Power Generation in India
Exhibit XI: Production and Consumption of Coal (Million Short Tons)
Exhibit XII: Growth in International Coal Prices
Exhibit XIII: Comparison between Actual Production and Potential of Various Energy Sources
Exhibit XIV: Growing Industrial Output Prices
Exhibit XV: Index of Industrial Production - Annual Averages (Base: 1993-94=100)
Exhibit XVI: Deficits of Central Government (2003-2011)
Exhibit XVII: GDP Composition by Sector and Labour Force by Occupation (2009 estimates)
Exhibit XVIII: Spiraling in Interest Rates
Exhibits XIX(A): Index of Industrial Production (% Growth) Over 16 years
Exhibits XIX(B): Index of Industrial Production (% Growth) From Nov 2010 to Nov 2011

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