India Inflation Set to Drop Dramatically

January 12th, 2012
in Op Ed

by Sunil Chandra

India’s Reserve Bank of India is all set to earn kudos, albeit unearned, for its handling of the price scenario when the monthly inflation figures are announced on 16 January 2012. The Wholesale Price Index, measured on Year on Year (YoY) basis, is slated to fall from 9.11% as at the end of November 2011 to 7.75% (or even lower) when figures for the end of December 2011 become public this coming Monday. The background to this dramatic fall would be quite comical were it not for the farcical circumstances that surround it.

Follow up:

Food Inflation - The High Base Effect

Let us first have a look at the amusing part.  The expected fall in December inflation will be wholly on account of a fall in food index.  Prices of Manufactured Goods (Weight 65%) are expected to continue to grow at 7.50% levels.  Similarly Fuel Index (Weight 15%) would also grow at around 14.50% annually.  However, Primary Articles Index (Weight 20%) is expected to remain unchanged from last year’s levels due to the high prices that prevailed in December last year.  This apparent stability in primary articles will push down the inflation rates by almost 1.50% as this index has accounted for 1.75% to 3.00% of the overall inflation for a greater part of the year.


Of Potatoes and Onions

Now this stability in Primary Articles is also quite illusionary as many of the constituent items have become more expensive during the year.  However, there is a significant decline in prices of vegetables, which have a weight of just 1.75% in the entire inflation index.  Even amongst vegetables, there is a sharp fall of 50%-75% in prices of onions and potatoes (combined weight 0.40%).  Onions had become terribly expensive in late 2010 on account of a poor crop/supply shortage and the prices went up by almost five times.  Like in all such seasonal shortfalls, the supply this year has been more than normal and the prices have gone back to pre-2010 levels.

This fall in prices of Onions and Potatoes (and other seasonal vegetables) is thus helping the overall Vegetable Index to fall which in turn is helping the Food Articles Index to drop and, ultimately, the overall inflation to drop quite sharply.


A Slowdown in Economic Growth

The other part of the story is not only farcical but quite tragic. A central bank, over concerned with inflation- and refusing to acknowledge the role of food inflation, went on a rate increasing spree and interest rates on loans shot up by nearly 4% per annum within a period of a year and a half. As a result, India’s real economic growth has slipped from almost 9% annual levels to around 6.75% (the official estimate) or even lower. The Index of Industrial Production has actually shown a of 5.1% in October 2011 as against a normal two digit increase. This slowdown has led to a fall in stock markets thereby hampering mobilization of fresh capital. Falling Bond prices has kept away investors from fresh issues by manufacturing companies. This is further hampering economic growth.

RBI Action Expected Soon

It is, therefore, quite gratifying that the Reserve Bank has now acknowledged that the slowing down of the economic growth is a serious concern and has hinted at lowering of interest rates in the coming days (

This proposed easing, even though belated, will help the economy to recover and put itself back on the path of rapid growth. As for high core inflation, we do hope that the Reserve Bank would draw appropriate lessons from its ineffective tightening actions of last year. It could learn to accept that food and fuel prices are “interest rate neutral” and manufacturing prices can be better handled by letting the resurgent country fire up its production levels and resulting efficiencies.

Related Articles

The Farmer in the Dell by Sunil Chandra

Of Cows, Goats and Hens by Sunil Chandra

Sunil Chandra Sunil Chandra is CEO of an investment banking start-up, located in New Delhi. He was formerly associated with Punjab National Bank, one of India’s largest, and, later, as Country Head for some leading bond houses in India. He has earlier written for Hindustan Times and other publications.


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