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Inflation: India’s Biggest Challenge

By Prutha Panhalkar

Edited by Nandita Singh, Senior Editor, The Indian Economist

One of the major challenges the new Indian Government (the NDA) faces is to control inflation. Having always been one of India’s primary economic concerns, the previous government (the UPA) was criticised for not being able to effectively control it. As a result, the baton was passed on to the newly elected government.

According to 2013 World Bank estimates, inflation in India, as measured by the consumer price index, was 10.9%. This was the highest among the BRICS nations (China = 2.6%, Brazil = 6.2%, Russia = 6.8% and South Africa = 5.7%). Clearly India needs to tighten its ropes on prices.

As per the laws of the supply-demand curve, one observes price equilibrium when supply equalises with demand. Inflation primarily occurs when supply numbers cannot match those of demand, thus resulting in a supply crunch, which in turn causes prices to rise in the market. As per the World Bank figures, India experienced high growth rates in the years 2009-10, reaching a high of almost 10.3%. Inflation is an inevitable by-product of growth. With growth, there was an accompanied rise in wages and living standards, and consequently India experienced higher demand in a short period of time. Thus, there was demand-pull inflation, and the UPA tried short-term, as well as long-term monetary measures to control it.

The short-term measures included a curb on exports, and a crack down on hoarding. Being a coalition government, Manmohan Singh’s cabinet was said to suffer from ‘policy paralysis,’ resulting in slow decision making. This not being enough, it was also rocked by a number of scandals including the coal gate, the 2G scam, or the rail gate to mention a few. Clearly the country’s resources were not being put to their best use, if not being entirely wasted. Infrastructure sectors like roads, railways, energy, and communication, suffered greatly, the load of their expenditure being delegated to the citizens and burning the pocket of the common man. India then witnessed cost-push inflation and growth slowed down.

India, which had a growth rate of around 9-10 %, grew only about 5% in 2012-13. Seeing the high growth in the years 2009-10, industries did increase the supply by pumping in capital and making investments in order to increase the country’s production capacities to meet rising demand. On the other hand, the government and the central bank tried to curb the demand by increasing the interest rates and introducing adverse repo rates, so as to reduce the cash available in the market. Furthermore,the international market also played a role by affecting the demand-supply fluctuations. The three factors that influenced this unprecedented inflation were – increasing supply, constricting the demand, and rise in the cost of the inputs as a result of the impact on the infrastructure sectors. The combination of these three factors resulted in higher industry costs, which were ultimately passed on to the consumer. Market prices reached heights never attained before. The government was vastly unsuccessful in controlling inflation, and this was one of the main reasons why the Manmohan Singh lead government had a crushing defeat in the 2014 elections.

Low growth rates and higher inflation rates, is what the NDA government faced as it came to power. One important advantage was that the present government won a clear majority in the 2014 elections, the absence of a coalition giving us hope that decision-making will be faster. For now, the government has adopted the same short-term measures to control inflation as its predecessor. Vegetables like the onion and potato were brought under the Essential Commodities Act. With the new government positioning itself as being pro-development, there are huge expectations. However, expecting the government to bring down the inflation within three months of it being in power is too much to ask for.

In its maiden budget, the NDA government focused on reviving infrastructure. Investments in green energy projects like solar and wind have been announced. Companies that start generating and distributingpower by March 2017 will be exempted from paying tax for 10 years. Emphasis on road and railways implies that 8,500 km of roads are to be built in 2014-15. Furthermore, in excess of 7,000 crore rupees are to be spent on creating smart cities, and along with infrastructure, the budget also gives a boost to urban and rural entrepreneurs. Some measures include a 10,000 crore rupee fund to be set up for incubation stage entrepreneurs, 200 crore rupee credit fund for Dalit entrepreneurs, and a start up programmed for the youth in rural India. As relief to manufacturing industries, the finance minister announced that the GST is likely to be rolled out in 2015. In addition to these promises, the government also took a few executive decisions. For example, the environment ministry eased rules for various sectors like irrigation, power, mining and roads, showing a practical approach, while still being committed to a clean environment. Infrastructure is key in a developing country like India, and developing this sector will ensure that costs inthe industrial sector decrease over time.

However, these optimistic goals require the effective implementation of policies. One hopes that the new government cracks down on corruption and ensures fair and effective implementation of their promises. During the last two months, the PMO has issued new guidelines for the bureaucracy (administration), in order to make it more effective, transparent and speedy. This will project a positive image of India to investors, who have currently lost interest in our economy.

It is said that when we hit our lowest point, we are open to the greatest change. Growth wise we have definitely hit an all time low, but prices have skyrocketed. The NDA government’s responsibility is not only to curb inflation, but also to encourage growth. Growth without inflation is impossible. The government has to tread carefully, because unlike with the previous government, this time expectations are high. How they will fare, only time will tell.

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