Inflation In India

I have generally avoided social media for last few months just because I wanted to avoid negativity associated with political discourse in India but now elections being so near, I feel I have a role to play and try to steer discourse in slightly positive direction based on facts and data. So I will try to write few articles based on data with primary sources. I will also try to interpret the data so that everybody can make sense of it.

For first article, I am picking up inflation as I believe

1. Stable and low inflation is basic necessity for progress in any economy

1. Inflation affects common people by compounding which is very difficult for them to comprehend

1. Inflation disproportionately affects lower and middle class of the society

1. Difference between high inflation (8%) and low inflation (4%) appear very small in first glance and people do not appreciate the difference it causes in medium to long term

1. Mostly people remember with nostalgia that prices used to be low long time ago but they can not associate Govt’s with them.

1. In Short term people always believe prices are increasing and hence do not appreciate efforts a Govt. undertakes to reduce inflation

For this exercise I have used World Bank Database to get data on inflation in India as far back as 1960. Here is basic chart showing inflation in last 28 years

This chart clearly shows India mostly had inflation hovering around 8-10% in last 28 years apart from two periods of 1999-2005 and 2014 onwards when it was/is distinctively lower
Before making any further let me quickly go over Economics 101 and explain impacts of inflation. I am just copying from Wikipedia and explaining its meaning in plain english

1. An increase in the general level of prices implies a decrease in the purchasing power of the currency. It means if inflation over a period of 5 years is 10% than monthly budget of a family will increase from ₹20K per month to ₹32K per month

1. Debtors who have debts with a fixed nominal rate of interest will see a reduction in the "real" interest rate as the inflation rate rises. It means value of your money (in bank or post office and FD) will actually decrease instead of increasing. Raghuram Rajan explained this very well using Dosanomics

1. High Inflation increases overhead in the economy like frequent price adjustment, extra effort for planning instead of production and incentivises illegal activities like hoarding. All of them are written on Wikipedia

Overall wikipedia article and most of the economists agree that a moderate inflation is good for growing economy like India while high inflation is bad. RBI and GoI have decided that moderate inflation for India is somewhere around 4% and they have put it in RBI targets as well. Another thing to note about inflation is that its spiral in nature which means that high inflation in a year pushes even higher inflation in following years
Now with all these facts in mind let’s examine the inflation during last 20 years divided by various Govt’s

1. 1998-2004 Vajpayee NDA Govt: Average inflation during this time period was 4.05% and this looks even more commendable since  it was time of War( Kargil), International sanctions (Post Pokhran 2) and International economic turmoil (dot com burst and 9/11). This time period also ended almost 10 years of high inflation (10% and more).

1. 2004-2009 Manmohan Singh UPA-1 Govt: Average inflation during this time was 7.2% and it increased every year as shown in below exhibit.

1. 2009-2014 Manmohan Singh UPA-2 Govt: Inflation continued to be on ~10% levels for most of UPA-2 as well and touched 16% for few months in 2010. Average Inflation for UPA-2 was 9.5%

1. 2014-Now Narendra Modi NDA Govt: Average inflation in last 4 years have been moderate 4.4%. Though inflation had reduced to 6.6% in 2014 but it have been brought down significantly to 4% level since then

Above data clearly shows that NDA Govt’s have been more successful in controlling inflation. Just to add color to Inflation for a middle class person, Let me add an illustration showing effect of inflation during various Govts on monthly expenses of middle class Indians. Let’s assume a common family spending about ₹20,000 a month on various needs, following table shows increase in monthly expenses after a tenure of 5 years from various Govt’s

Prime Minister	Increase in Monthly expenses for a family spending 20000 initially
Vajpayee	4,392
Manmohan Singh 1	8,314
Manmohan Singh 2	11,485
Narendra Modi	4,805

1. For 2017 and 2018 data, I have used other data sets as WB data is no available. Full data set here
2.  Data Source https://www.inflation.eu/inflation-rates/india/historic-inflation/cpi-inflation-india-2010.aspx

I guess it’s pretty clear by now who does a better job in economic management