The Past and Present of Indian Inflation

Inflation in India is currently at a high, this comes with a sudden and intensive monsoon in the months of June and July. The consumer price index (CPI), which calculates the value of a normal basket of consumer goods, is the tool used to calculate retail inflation. With a very powerful monsoon in many parts of India- a monsoon that has broken several records- food crops have been heavily affected, especially Indian staple items such as tomatoes, onions and potatoes. High costs of widely used crops have led to a surge in the CPI which then points towards a season of high inflation.

India’s retail inflation surged to 4.81 per cent in June after hitting a 25-month low of 4.25 per cent in May on an annual basis. Projections for the Indian monsoon in 2023 were shown to be below average, this was however proven wrong with the onset of a powerful monsoon. Extremely heavy rainfall was recorded in several states such as Delhi, Himachal Pradesh, Punjab and more. An exceptionally high monsoon subsequently leads to the problem of crop damage, evidence of this can be seen in the unusually high prices of food items, with a very popular example currently being for tomatoes. Tomatoes, a major staple item in the Indian diet, saw retail prices at Rs 80-120/kg. In fact, the prices were so high that McDonald’s in India, one of the largest fast-food chains, announced that they were stopping the use of tomatoes in their items.

However, this is not the first time that India has witnessed a high inflation level. Going back to the 1970’s, Indian inflation was very high. The 70s were perhaps the most tumultuous period in terms of inflationary uncertainty, this was largely due to the price of crude oil which went up due to an oil shock. The situation only deteriorated further, with the 1980’s seeing an even worse inflation situation. The government adopted expansionary fiscal policies in the form of monetization and government spending, in order to curb government debt. However, printing money is not the solution as it leads to an increase in general price levels, causing further inflation. In the 1990’s the government introduced economic reforms in the form of LPG- Liberalisation, privatisation and globalisation. This opened up the Indian economy to foreign markets, greatly improving the economic performance and strength of India. The road ahead then was a mix of good and bad times for the economy, with the financial crisis of 2008 and the COVID-19 pandemic being two major events for an economic downturn. While until recently inflation was in control, the unpredictable monsoon has changed the situation.

The government relies on fiscal measures to control inflation levels. Changing the levels of CRR or cash reserve ratio and bank rate or participating in open market operations change the spending habits of people, thereby controlling inflation. For example, a high bank rate discourages spending due to higher interest levels, which reduces the price level.

India’s inflation history is a mix of highs and lows. Although the current situation is not ideal, India has always managed to bounce back from high inflation, extra focus just needs to be given to agricultural reforms to better absorb agri-related shocks, and fiscal discipline of the government.

Arshiya Khattar, the writer is a student of Economics at KREA University and former intern with VeKommunicate.