Inflation

Period:- 1949-2014
INFLATION - INDIA

INFLATION
 Inflation is defined as a sustained increase in the general
level of prices for goods and services. It is measured as
an annual percentage increase.

Phases:
 Phase 1: YEAR 1949-1960
 Phase 2: YEAR 1960-1970
 Phase 3: YEAR 1970-1980
 Phase 4: YEAR 1980-1990
 Phase 5: YEAR 1990-2000
 Phase 6: YEAR 2000-2014

1949-50
 The devaluation of rupee in 1949, following the devaluation other
currencies, did not sound well from the point of view of keeping the
inflation in check in the forthcoming years.
 It is on this background and also on the background of nationalization of
RBI in 1949, which followed the nationalization of central banks in other
countries .
 There were measures adopted by the govt. for which inflation rate
remained at low level of 2.4% in 1949-50.

 The first year of this phase , witnessed govt.’s endeavour to realise the
benefits of devaluation and to suppress the inflationary impact of the
measure. The important steps initiated were
 Cut in the prices of controlled commodities like food grains, cloth, yarn,
pig iron and steel.
 Prohibition of futures trading in several commodities to check the
speculation.
 Imposition of export duties on some of the articles exported.
 Reduction in govt. expenditure, regulation of credit facilities so as to
discourage speculative hoarding of stock of essential commodities.
 Introduction of national savings campaign as also substantial tax reliefs
and other concessions to individuals and industries with a view to
encourage investment.

1950-55
 The following two years, viz. 1950-51 and 1951-52, however saw the
inflation inching up to around 6% primarily because of an external cause,
i.e. Korean War boom.
 The Korean boom, which was essentially a raw material boom, created a
huge stock piling demand, pushing the prices of several internationally
traded strategic materials to abnormally high levels.
 The index of industrial raw materials sprang by nearly 40% from 490 to
689 by the middle of 1951, pushing the general index of wholesale
prices up from 393 in May 1950 to 458 in April, 1951.29

 The year 1952-53 brought with it a big surprise of prices entering into the
negative territory. It was the higher agricultural production that was
behind the deflation of 1952-53.
 Two more years, which witnessed negative inflation rates during the
decade of 1950’s and during the second phase of our study were 1954-55
(-6.8%) and 1955-56 (-5.2%). The main factors responsible were
 Relaxation of controls over wide sector resulted in bumper agricultural
production & booming of industrial sectors because of large imports &
dishoarding
 The first plan, which was essentially an agricultural plan, emphasized
the development of agricultural sector, succeeded not only in achieving
its growth target of 2.1% per annum but also in keeping the inflation
under control.
.

FROM 1955-1960
 The subsequent plans, It was the industrialization that received the policy
priority and we were doomed to live with high inflation in the following
years
 The first year of the second plan, viz. 1956-57, began with an inflation
rate of 14% which was the result of huge demand pressure emanating
particularly from the investment due to industrialization
 The latter half of the fifties presented a vastly more complicated
environment in the monetary sphere. It involved a planned public sector
investment outlay of Rs. 4800 crores, a quarter of which was to be met
through deficit financing.

FROM 1955-1960
 The average inflation rate for the second plan turned out to be 6.28%,
nearly 8% higher than the one recorded during the first plan.
 Apart from the large size of the second plan and the manner of financing
it, the other factors responsible for relatively high inflation were
 Harvest shortfalls and a sharp fall in foreign exchange reserves due to
large imports particularly of capital goods.
 Consequent imposition of controls on imports of many consumer and
intermediate goods.

• During the pre-reform period, high fluctuations in inflation
rates were experienced.
• The rise in in inflation rates were induced by the two wars
occurred in 1962 and 1965 respectively.
• The crop failure of 1965-66, one of the worst drought ever
experienced.
• The crop failure led to a fall in agriculture production which fall
by 16% .
• The percentage change in prices varied from a negative value
of 12.8% in 1952-53 to the highest inflation of 13.8 per cent in
1956-57.

• During this period the average inflation increased to
6.2%
• The highest inflation rate was recorded for the period
1966-67 at 13.95% followed by an inflation of 11.56%
for the following year.
• Factors contributing to high inflation rates for the
period 1966 to 1967-Pakistan war and famine.

6.6
0.2
3.8
6.2
11
7.6
13.9
11.6
-1.1
3.7
-2
0
2
4
6
8
10
12
14
16
1960-61 1961-62 1962-63 1963-64 1964-65 1965-66 1966-67 1967-68 1968-69 1969-70
Inflation-1960-70

Episodes of High Inflation in
India: 1971 to 2012
 It may be noted that all
three major drivers of
inflation, viz., food, fuel and
core have been significantly
contributing to the high and
persistent inflation.
 Even though these high
inflation periods had
different drivers like oil
shocks, drought and
currency devaluation,
persistence of inflation
seems to be a common
pattern when inflation
turns high.

1970-
71
1971-
72
1972-
73
1973-
74
1974-
75
1975-
76
1976-
77
1977-
78
1978-
79
1979-
80
1980-
81
1981-
82
Series1 5.5 5.6 10 20.2 25.2 -1.1 2.1 5.2 0 17.1 18.2 9.3
-5
0
5
10
15
20
25
30
InflationRate(%)
Inflation Trend during the decade 1970-80

Trend of inflation : 1970-1980
 This period turns out to be the most tumultuous
period in India in terms of fluctuations in inflation,
witnessing relatively high rates inflation on account of
the supply shocks emanating mainly from
agricultural and oil prices.
 Nationalization of 14 private sector banks on July 20,
1969 was the single most important economic
decision taken by the govt.

 The first year of this phase 1969-70, which was also
the first year of fourth five year plan saw the
wholesale price inflation to rise very modestly by
3.7%.
 During the subsequent two years (i.e. 1970-71 and
1971-72), the increase in consumer price index (CPI-
IW) also was slightly lower.
 This modest growth in both WPI and CPI-IW inflation
was achieved mainly because of following reasons :

 Better availability of goods of mass consumption
 Due to good procurement, not withstanding the larger
increases in money supply at 11.3% and 14.0%
respectively in these two years.

 The inflation recorded during the years 1973-74 and
1974-75 was 20.2% and 25.2% respectively.
 It was mainly due to the failure of Kharif crops in 1972-
73 as also to the hike in crude oil prices in 1973.
 Another important reason that high inflation of this
period can be attributed to, was the massive influx of
refugees from Bangladesh following the Indo-Pak war
of December 1971.

 It led to considerable increase in demand for funds by
the govt. compelling it to draw heavily on credit from
the Reserve Bank of India thus causing heavy inflation
in the economy.
 The period of four years from 1971-72 to 1974-75 saw
the country passing through a phase of hyper-inflation,
with the average inflation rate touching a high of
15.25% during this period.
 It was for the 3rd time in India’s history from 1935 that
price rise had assumed such an alarming proportions.

 In the early years of 1970’s govt. relied entirely on
monetary and fiscal measures, but realizing their
inadequacy, began its operations against hoarders,
black marketers and smugglers.
 The inflation rate moderated from a high 25.2% in
1974-75 to -1.1% in 1975-76, the lowest level
recorded for the decade of 1970’s.
 Next two years did not see inflation raising its head
much and in the third year (1978-79) it touched 0%.

 The year 1979-80, however, witnessed a strong resurgence
of inflationary pressure, resulting mainly from the poor
agricultural output and the second oil shock, raising the
prices of crude oil.
 The average inflation during the 1970’s was 9.0%, higher
than the one worked out for the decade of 1960’s.
 The standard deviation of 4.9 worked out for the decade of
1960’s, jumped up to 9.0 during the 1970’s.

1980-81 1981-82 1982-83 1983-84 1984-85 1985-86 1986-87 1987-88 1988-891989-90
Series1 18.2 9.3 4.9 7.5 6.5 4.4 5.8 8.1 7.5 7.5
18.2
9.3
4.9
7.5
6.5
4.4
5.8
8.1
7.5
7.5
0
2
4
6
8
10
12
14
16
18
20
inflationrate
Inflation trend during decade 1980-1990

 The decade of 1980’s began its journey with the
high inflation rate of 18.2% in 1980-81.
 It was due to influence of second oil shock
resulting in oil price hike. The oil price hike of
1979-80 had larger influence on price level in
India compared to first oil price hike.
 The relative lower inflation that followed was the
result of substantial and readily available food
stocks, which helped mitigate the scarcity.
Trend of inflation : 1980-1990

 The inflation during the whole decade of 1980’s
remained steady with the actual inflation rate staying
above 7.0% for around 6 years
 It was below 5% only during two years of 1982-83 and
1985-86.
 The average inflation turned out to be 8.0% for the
entire decade, very low compared to last decade and
the standard deviation was under 4.

Causes of High Inflation
 BOP crisis leads to high inflation and Current account
deficit.
 Excess demand and supply imbalance in daily used
commodities.
 High Exchange rate fluctuation.
 Uneven progress of monsoon.
 Continuous rise in oil prices, reaching to double digit of
13% increment.

Measures to Control Inflation
 This phase was basically focusing on making economy
stable and grow.
 Stabilization and structural adjustment programme was
implemented.
 These programme cover industry, finance, external sectors.
 Liberalization on imports, exchange rate, reservation in
public sector
 Abolishing licensing on industries.

 Restrictive provision in MRTP act.
 Abandonment of practice of automatic monetization.
 RBI took hold of situation through LAF controlling
deficit.
 Food price ease due to deceleration in prices.
 Cooling of global inflation.

Effect on Inflation due to measures
 Slow depreciation of rupee from 11% in first half to
4% in second half.
 High stock in agriculture releasing some pressure on
food inflation
 Increment of foreign reserve help in supply of
different commodity through import.
 All these factors help in curbing inflation to 8% for the
decade which was 12% in 1990.

Increases in the administered prices of
petroleum products following the
international crude oil price escalation.
Country faced a severe
drought, Adverse
developments such as
border tensions and high
international crude oil
prices
, inflation remained
Moderate at 3.4 per cent
.Previous year
fuelled a spurt in
inflation in India
during the first half of
2004-05 which began
to ease during the
second half due to the
impact of combination
of fiscal and
monetary policies
and south west
Inflation in all the
three sectors
remained high
on account of
high
international
fuel and
commodity
prices.
The year 2009-
10 was an
abnormal one
due to global
slowdown and
unfavourable
monsoon.
Notwithstanding,
the average
inflation was 3.6
per cent backed
by negative
inflation in fuel.
2010-11 was marked by
inflation persisting with
headline inflation
averaging 9.6 per cent.
Hike in vegetable prices
with unseasonal rains
post-monsoon and rising
global commodity prices
that resulted in significant
cost-push and demand-
pull pressures .
Headline inflation of 9.7
per cent which briefly
touched double digit in
September 2011 before
coming down. The major
reason was increase in food
prices, revision in the
administered prices of fuel
as well as an increase in
manufactured product prices

Inflationary Experience of India in Comparison to
World
 In the 62 years since 1950-51 average annual inflation rate as measured by
changes in the wholesale price index (WPI) increased at a rate of 6.7 per cent per
annum in comparison to the world inflation averaged around 17 per cent per
annum
 In the eight year period from 2000 to 2007, the world inflation averaged 3.9 per
cent per annum. Even the emerging and developing economies (EDEs) which
traditionally had very high inflation showed an average annual inflation at 6.7 per
cent. India’s inflation performance was even better at 5.2 per cent as
measured by WPI and 4.6 per cent measured by the CPI.

Food inflation
Years Reason
1952-53 Bumper agricultural sale leading to deflation of -12.7
1965-67 Worst drought for 2 year in Indian history reason to 13.9%
1970-71 Good yield helping lowering and containing the inflation
1972-73 But due to high yield and demand the inflation increased.
1973-75 Now due to high demand and low yield, inflation reached to 20% mark
1991 Low progress in monsoon created a rise in prices of basic food commodity like food.
1995-96
Due to decrease in procurement price of food commodity decreases the prices
from 12% to 6% also increase in stock of food help lowering price.
2002 Record stock of food as 58million tons help in stabilizing inflation
2002-03 Help in fighting with drought and fuel prices
2004-05 Low yield in agriculture

Years Reasons
1971 Nixon shock increased the prices in fuel and hence inflation
1979
Second oil shock increasing inflation and prices of all commodity were
very high.
1990-92 Trade deficit increased the price of fuel
2000-2002 Increase in oil prices increased the inflation rate
2003-05 Continuous increase in price from $54 to $70 increased inflation rate
2006 Increasing fuel price by Rs 2 petrol and Rs 4 diesel
2007-08 Decreasing fuel price help in lowering inflation
2008-09 Fuel prices skyrocketed to $147
Fuel inflation

Crude oil prices and its effects

Crude oil prices from 1970
till 2014
Source: Statista.com

Oil prices effect on India
 Last year- around $110, Yesterday- $46.18
 Due to soaring demand and conflicts in oil
producing nations
 India is 4th largest importer of Oil.
 It constitutes of 37% of total imports or two-third of
trade deficit.
 Current price have positive effect.
 Subsidy will reduce leading to ease in fiscal deficit.
 Inflation go down as transportation will be cheap.
 It will help in appreciating the currency.
 Negative effect
 Oil countries which invest abroad has less surplus to
invest.

 Fear of possible default by major oil producer
which will hurt the market.
 India leads in receipt of remittance and maximum
comes from oil producing nations, which will go
down.
 Currently due to very low Prices Indian exports
are also hurting.
 People are now thinking on spending on
automobile according to THE ECONOMIST.
 What measure now government will take is a
big question?

Made By
Vrinda Jain
Vaibhav Goyal
Sarthak Krishan
Daksh Bakaya
Saumya Madhvan
Tejaswi Polisetty

Inflation

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