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Decimal Digest
23 Jul 2012

A Tale of Two Shocks

Since the turn of millennium, India has received two global shocks. First being the burst of tech bubble in March 2000; and second being the onset of credit crisis in July 2007.

As a result of both the shocks, Indian GDP growth rates came down, stock markets corrected, and most other economic variables behaved as they should behave during an external economic shock.

However, one critical variable has behaved rather differently in the two periods. The chart below shows the core CPI inflation for 59-month1 period since the onset of two external shocks.

Chart 1: Core CPI comparison

Source: Decimal Point Analytics estimates for core CPI

The above chart clearly shows that something is seriously wrong with the working of the Indian economy. While in the March 2000 external shock, the inflation behaved as it should during periods of slow growth; in the July 2007 shock inflation continued to ratchet up continuously in spite of slowing economy and falling stock markets.

This conundrum remains the biggest challenge to Indian policy makers, should they desire to bring India back to growth trajectory and get millions of out of poverty quickly.

1The latest CPI data is available for May 2012, that is 59 months since July 2007. Hence 59 months comparision.


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