9 February 2016

India Inflation - A pure domestic structural phenomenon

The Indian CPI has been persistently high in recent past, in spite of the producer prices (WPI) being in deflation for long.

Nearly 50% of the CPI weight is food products, hence it would be instructional to look at evolution of Indian Food Inflation as against the International Food Inflation.

The chart below shows the Food and Agriculture Organization (FAO) Food Index recalculated in Indian Rupees and rebased to 100 for Jan 2011 as international food index. It also shows the domestic food prices as given by the CPI component for food, again rebased to 100 for Jan 2011 as domestic food index.

The chart clearly shows that when the food prices were generally rising from early 2011 till mid 2013, the Indian food prices were rising faster. However, when international food prices turned direction for lower, in spite of recent El Nino affecting global crops, the Indian food prices refused to follow the lead, and continued to move higher.

Thus, the inflation in India is purely a domestic phenomenon mainly due to mal-investment, underinvestment and lack of meaningful reforms in food production and distribution sector. Maybe it is important for policy makers to appreciate this and do not get blind-sighted by high domestic food inflation when determining monetary policy alternatives.

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