Inflation in India

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The following table shows the inflation rates of India in the last few months:

MonthInflation Rate
July 20118.43%
August 20118.99%
September 201110.06%
October 20119.39%
November 20119.34%
December 20116.49%
January 2012 5.32%
February 20127.57%
March 20128.65%
April 201210.22%
May 201210.16%
June 201210.05%

The table below provides an indication of the inflation rates of India in the last few years:

April 20035.12%
April 20042.23%
April 2005 4.96%
April 20064.65%
April 20076.67%
April 20087.81%
April 20098.70%
April 201013.33%
April 20119.41%

Inflation in India 2012

India’s inflation rate has grown more than expectations in May 2012 with increase in fuel and food prices. It is being assumed that this decrease will not be enough to stop the interest rate deduction, which is due to be effected in order to address the present situation of slow growth.

The benchmark wholesale price index has increased by 7.55% compared to the 2011-12 fiscal. In April 2012 it had increased by 7.23%. 37 estimates done by a survey conducted by Bloomberg News had produced a median figure of 7.5 percent. Other reports have also shown that India’s imports and exports have been going down in May 2012.

In the previous quarter India’s economic growth rate decreased to its lowest in the last ten years. A major reason for this was the lack of success of the initiatives for economic liberalization. The international sales prospects of India also took a beating thanks to the situation involving the debt crisis of Europe.

The RBI is expected, as a result of the slowdown, to decrease borrowing expenses - the Indian economy, which is one of the largest emerging markets globally, is struggling with one of its quickest inflations.

Meghna Patel works as a fixed income analyst with Emkay Financial Services Ltd., which is based in Mumbai. She opines that the core inflation rate of less than 5% and slowdown in economic growth are giving RBI the room to decrease rates.

However, according to her, it is not a question of only monetary policies – she feels that the government has to increase the speed of its reforms so that the economy could stand back on its feet.

The rate of increase in the prices of non-food manufactured goods is a proper indicator of core inflation. In April 2012 this rate was calculated at 4.77 percent, only to go up to 4.86 percent in May 2012. This information has been collected by Bloomberg, which also reveals that vegetable prices have increased by 49% compared to 2011, and power and fuel expenses have increased by 11.5%.

Condition of the INR

In the year gone by, the value of the INR with regards to the US Dollar has gone down by approximately. This has affected the share market negatively as well. Duvvuri Subbarao, the RBI Governor, is expected to bring down the benchmark repurchase rate by 7.75% and this is going to be a decrease of 0.25%.

Experts at Bloomberg also feel that the rate could come down to 7.5 percent, which will represent a decrease of 50%. Amol Agarwal, an economist from Mumbai, and working with STCI Primary Dealer Ltd feels that the decline of the INR means the food prices and fiscal deficit could increase further. He also opines that the RBI needs to take some growth oriented steps to address the situation.

Condition of Export and Import

The global economy is going through its worst phase after the previous meltdown ended in 2009 and this has forced the authorities to take some steps. For example, China and Australia have reduced their benchmark rates.

In May 2012, India exported goods and services worth 25.68 billion US dollars – this was a reduction of 4.16 percent compared to May 2011. Anup Pujari, the Director General for Foreign Trade of India, provided provisional statistics at a media briefing session held in New Delhi.

According to the information, imports have come down to 41.9 billion US dollars, which is a decrease of 7.36 percent. The trade deficit has been calculated at $16.3 billion.

Anubhuti Sahay, who works as an economist for Standard Chartered PLC, and is based in Mumbai feels that lower demand for India’s exports have held back its industrial sector.

The Indian government plans to achieve a growth rate of 20 percent in the 12 month period starting from April 1, 2012 but Sahay thinks this is an optimistic aim in context of the present global financial scenario.

Subir Gokarn, an RBI Deputy Governor, feels that the rate can be decreased even further with the decrease in oil prices and overall recession. On April 17, 2012 the apex fiscal body of India brought down borrowing rates from 8.5 percent to 8%. The amount to be reserved by lenders has also been reduced twice in 2012. This has been done to deal with liquidity concerns plaguing the national economy.

India Economic Growth

In the quarter that ended in March 2012, India’s GDP saw a growth rate of 5.3 percent compared to the quarter that ended in March 2011. This was the slowest rate after 2003.

India is the 3rd biggest economy in Asia but its economic growth, of late, has been rather modest and, even, this rate has been achieved after the RBI Governor increased the rates by 3.75 percentage points, which was an unprecedented figure.

The change took place from mid March in 2010 till October 2011 and its major aim was to restrict the inflation. For majority of 2011, India’s inflation rate was more than 9 percent.

At a speech in Hyderabad, Subbarao has stated that some of his critics feel that his methods to reduce inflation only ended up diminishing the growth. He has tried to defend his decisions saying that inflation cannot be tied down without letting go off some growth.

India’s current account deficit has a very worrisome structure at present, according to experts, but Subbarao has also stated that there are no chances that India will suffer a balance of payments crisis like 1991.

In the BRIC group, which also includes Brazil, China, and Russia, India has the quickest rate in terms of price increase. Standard & Poor’s has already notified on June 11 that India could be the first country in this group to not have an investment grade credit rating.

Several Indian companies have been on the receiving end of less-than-desirable economic growth and high price pressure. Maruti Suzuki India Ltd has witnessed a fall in its car sales during May 2012. The Indian units owned by General Motors and Ford have found the going tough due to high gasoline prices.

Factors for Inflation Rate

A newly released press note from the Central Statistical Office reveals that in 2011-12 India’s GDP has grown by 6.5 percent compared to 8.4% in 2010-11. In the first quarter of 2011-12 fiscal the growth had been estimated at 5.3% while in the final fiscal of 2010-11 the growth rate was 9.2%.

There are several possibilities that could be attributed as the major reasons for this scenario – delayed rains and its effects on the agricultural sector and reduction of production by companies to bring down its level of stocks.

Some experts have calculated that in between 2010-11 and 2011-12, India’s economic growth rate came down to 6.6 percent from 8.3%. In case of the first quarters of 2012 and 2011, the growth rate came down to 6.5% from 8.4%.

The decline rate varies between 1.9 percent and 1.7% on an annual basis, and 3.9% and 1.9% on a quarterly basis. Experts opine that a major reason for the present economic slowdown and resultant inflation are problems being faced by critical industrial sectors such as mining and manufacturing.

As per experts’ calculation the manufacturing sector growth in the first quarter of 2012 was 2.5 percent compared to the 7.6% in the 1st quarter of 2011. The mining sector actually shrank by 0.9% in the first 3 months of 2012 as opposed to a 5% growth in the corresponding period a year back.

The agriculture sector too witnessed lesser growth in the aforementioned period with the 2012 figures being 2.8% and the 2011 statistics reading 2.8%. In the construction sector there was a downfall to 5.3% from 8%. Statistically speaking, the above mentioned sectors can be held responsible for the slowdown but the base cause is seriously an industrial recession.

One of the major reasons behind the present condition of the Indian industrial sector is the continued decline in the machinery sector’s growth. At the start of 2010 this sector had been growing at excess of 40% but has now almost stopped growing.

The electrical equipment segment never grew at a stable rate. It was only for short periods that its growth rate was near 40% but its production has decreased of late. The metal products segment is still doing fairly well though in terms of growth.

The plastic products have come down to 5 percent previously from the 25% of the first few months of 2010 with regards to growth. The growth rate of chemicals was never really commendable, as per analysts, but now even that sector is seeing lesser growth.

To sum it up, experts feel that capital goods are at the forefront of the economic slowdown. The investment in this sector was pretty good during 2005 to 2009. When the period ended it had an obvious impact on the growth as well.

Analysts opine that the present situation has not resulted due to a lack of demand or capacity, which had been ensured by the 4 year investment boom. The continued increase in oil prices was a major issue and with it the surfeit in salaries and costs of living.

They also feel that the present administration is more inclined to go for deficit financing that is inflationary in nature and increase the prices of food grains. The textiles sector performed commendably in 2011 when Pakistan was plagued by floods but the good time has concluded. They think that investment is a major issue in this context.

Factors like the relative lack of growth in investments and the gradual decrease of investment goods prices have contrived to bring about the present situation. According to experts, the present situation can be termed a real investment slump. With reduction in domestic demand, imports have also reduced and the export sector has started performing better.

Now the question that comes up inevitably is when will this situation come to an end? The whole situation, as per the analysts, started with restrictions on industry margins and cost inflation. It was further exacerbated by the demand crisis.

Experts say that such situations conclude when the economic growth is sufficient to soak up the additional capacity. They think that it can be another 2-3 years for this process to be completed as a result of the high rates of investment during the time when the economy was doing well.

Last Updated 8/17/2012