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Decimal Digest
10 Sep 2012

India’s Stagflation Approaching?

In the first two quarters of this calendar year India’s GDP growth has slowed to below trend levels. However, the more noteworthy part of this slowdown is the pickup in inflation in the first six months of the year.

Tracking the CPI inflation in India on a half-yearly basis shows some interesting trends. The first half of calendar year in India has quiet and predictable weather; while the second half of calendar, India has rough and unpredictable monsoon. Inflation analysis based on the two calendar halves clearly shows the effect of all important monsoon on India’s CPI, as shown below in the table below:

Table 1: Analysis of Indian Inflation based on halves of calendar year

Source: Decimal Point Analytics. Data not annualized. So a 5% half-yearly inflation means roughly 10% annual inflation

The most important data point in the above chart is the latest observation of 5.6% CPI inflation in the first half of 2012. This reading in the second highest in last 20 years, and has come about inspite of slowing domestic and international economy. Given that this year’s monsoon has been erratic, the outlook for inflation for second half of year is not particularly bright, in spite of continued slowdown in the economy. Maybe, the RBI is in the most unenviable position among the central banks of the world.


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