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From 1935 to 2017, over the period of 80 years, inflation in India has ranged from highs to lows.
Between 1939 and 1949, during the first phase of World War II, India experienced the highest inflation rate of 15%.
In the second phase, between 1949 and 1969, it moderated to 4%, reaching a low of 1.5%. This sudden decline occurred as the prices of commodities increased, the national savings campaign was launched, substantial tax reliefs were implemented, speculative hoarding of essential products was regulated, futures trading in commodities was prohibited, export duties were imposed, and government expenses were cut.
The third phase, between 1969 and 1991, saw inflation reverse the trend from the previous phase, averaging 8%. The wars with China and Pakistan further decreased India’s ability to mitigate inflation. During this time, there was a greater focus on defense spending rather than stabilizing the economy. The price increase averaged 6% during the 1960s, reached double digits later, and then declined by the end of the decade. Prices of food also increased during 1964–67 due to food shortages and famines. The 1970s saw high inflation in India due to droughts in the early 1970s, combined with crop losses caused by floods in 1974, which contributed to food price shocks in India. A global oil price shock in 1973 and 1974 resulted in an annual increase in price of 17% and 30%, respectively. Although these high prices were short-lived, the deflation of 1976 somewhat mitigated them. Since then, prices have increased every year.
During the fourth phase (1991-2017), inflation averaged 6% due to actions by the government and the Reserve Bank of India (RBI) to control inflation. Since then, India’s inflation has fluctuated between 10% and 5%. After falling to about 5% in the next decade, it spiked from 2009 to 2013, driven by a sharp increase in food prices, before returning to 5% in 2014. The average annual rate since 1980 has been 9.6%.
In general, despite challenges, India has performed better than other emerging economies. Latin American countries such as Argentina, Brazil, Mexico, and Venezuela have experienced high or hyperinflation, but India has avoided this.
There is a significant correlation between food inflation and India’s overall inflation rate. In the 2012 consumer price index, food accounted for about 45% of the weight, reflecting its importance as a component of consumption expenditures. In advanced economies excluding Japan, food is assigned a much smaller weight—about 12% on average. This is an Achilles’ heel that India needs to address, as an economy cannot depend so heavily on one sector.
Inflation is often defined as “too much money chasing too few goods.” When demand and supply are mismatched, prices rise. Inflation in India has never reached hyperinflation levels, and in the past few years, the government has achieved success by continuously monitoring the situation, taking timely action through the RBI, and adhering to fiscal rules. The primary tool for controlling inflation should be an effective monetary policy, which is unaffected by supply-side factors. Central banks must be free from fiscal dominance so they can regulate money supply and liquidity more efficiently to achieve price stability. By establishing credibility as an inflation fighter, the central bank in India can gradually move towards aggressive inflation targeting using interest rates and other tools at its disposal.
As the country moves towards becoming a global economic player, it needs to establish itself as a nation with reliable economic conditions, including inflation control. India will need to address not only domestic challenges such as poverty, housing prices, and a growing young population demanding employment, but also navigate global macroeconomic crises such as wars, oil price fluctuations, and supply chain disruptions.
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