Analysis of Inflation in India

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What are the reasons for India’s recent (since December 2009) inflation? India has been experiencing inflation since December 2009, when the WPI inflation climbed to 7.5%. It continued to climb till April 2010 by when it reached just short of 11%. Thereafter the inflation has been decreasing slowly overall, and it is currently around 6-7%. Slowness of the downward trajectory of WPI inflation and spike in WPI inflation in December 2011 remains a cause of concern. Before December 2009, there was a year of negligible inflation. But just prior to that, there was another stint from March 2008 to December 2008, when WPI was around 10%. Before this, India had very little inflation for a dozen years. The current high inflation is a source of worry as it is eroding real income for common people, making the investment costly and destabilizing Government’s current fiscal status as its earning is reducing (due to reduced manufacturing activity and rising cost). Sustained high inflation is an emotive issue and can cause serious problems for economy. Let’s go ahead and try to unearth the reasons for the current high inflation. Study of y-o-y trends of the major groups in WPI indicators gives us the indication of the group-wise contribution to inflation. WPI inflation rose in 2008-2009 mainly because of the pressure from primary articles (mainly food articles) with the average inflation remaining persistently in double digits for the major period of 2008-2009 in this group. However the primary article inflation has come down to almost zero in early Q4 2011-2012 after it started declining since September 2011. This is the reason for decreasing trend in inflation in Q4 2011-2012. In comparison, the inflation in manufacturing group remained mostly at its long-run average of 5% mark. In recent months, however, there is an upward trend, and contribution of manufacturing article on overall headline WPI inflation has increased from 35% (2010-2011) to 49% in 2011-2012. The contribution...
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