Macro-Economics – Case Study
Inflation In India
Is inflation in India structural or monetary?
The recent inflation rise was largely cyclical and that the structural inflation trend should remain stable in the range of 5-5.5%. India's inflation has been lower compared with other emerging markets. Inflation WPI and CPI-Industrial Workers (CPI-IW) have averaged 5.3% and 6.8%, respectively, over the last 15 years compared with 11.2% average (CPI) for emerging markets. Double-digit inflation is not the norm. Indeed, over the last 10 years on an annual average basis, WPI inflation crossed 10% not once while CPI-IW crossed 10% only one time. during 2003-07, India's GDP growth averaged 8.9% and WPI inflation averaged 5.5%. In other words, India has been able to transition to higher growth without the significant acceleration in inflation but for the recent cyclical spikes in inflation as discussed above India's investment to GDP gradually rose from 25.2% in F2003 to 37.7% in F2008 and savings to GDP to rose from 26.3% in F2003 to 36.4% in F2008. Infrastructure spending also increased from a trough of 4.3% of GDP in F2003 to 6.4% of GDP in F2008. Capital deepening, a rise in trade to GDP, increased capital inflows, an improvement in technology and corporate management efficiency helped improve productivity growth. Total factor productivity growth accelerated to 3.8% during 2003-07 from an average 2.4% in the 1990s. However, in the long term, capacities are flexible and can be increased in response to rising demand pressure without stoking inflationary expectations. The structural inflation trend in India should be lower, not higher, due to the possibility of improved supply side conditions. What about structural rise in food demand and inflation? Disentangling the cyclical component from the structural component is not easy. Food inflation has averaged 12.2% year-on year since summer 2008 due to two years of back-to-back poor farm output. Prior to that, during 2006...
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