March 24, 2010Indiaby EconomyWatch Content

Indian Inflation

On March 19, 2010, the Reserve Bank of India raised its benchmark reverse repurchase rate to 3.5% percent, after this rate touched record lows of 3.25%. The repurchase rate was raised to 5% from 4.75% as well, in an attempt to curb Indian inflation.

 

India’s 2009-10 Economic Survey Report suggests a high double-digit increase in food inflation, with signs of inflation spreading to various other sectors as well. The Deputy Governor of the Reserve Bank of India, however, expressed his optimism in March 2010 about an imminent easing of Indian wholesale price index-based inflation, on the back of falling oil and food prices.

For 2009, Indian inflation stood at 11.49% Y-o-Y. This rate reflects the general increase in prices, taking into account the purchasing power of the common man. According to the Economic Survey Report for 2009-10, economic growth decelerated to 6.7% in 2008-09, from 9% in 2007-08. The economy is expected to grow by 8.7% in 2010-11, with a return to a growth rate of 9% in 2011-12.

 

The Indian method for calculating inflation, the Wholesale Price Index, is different from 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 the 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.

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