High Inflation in India – A Threat to Growth and

High Inflation in India – A Threat
to Growth and Development?
A2 Macro – January 2014
Indian Population
Population still rising but
more slowly
Inflation in India is among the
highest in the Group of 20
leading economies
Causes of high Indian inflation
• High rates of food price inflation
• Fast pace of wage inflation
• Weak currency (rupee) which makes imports
even more expensive
• Supply bottlenecks – energy blackouts
• Failure to lift productivity in farming
• Expensive fuel and fertiliser subsidies leading to
high fiscal deficits
• Wheat and rice bought by the state at artificially
high prices to appease large farmers
• Lack of intense competition at retail level
Indian rupee has been falling consistently
against the US dollar since late 2011.
Good news for exporters perhaps but
India is a net importer of food and energy.
And a lot of corporate India has taken
loans over the past decade in foreign
currency – debts harder to repay!
Consequences of high inflation in India
• Harder for Indian businesses to sell their goods and services
abroad, risk of FDI moving to other countries
• Higher inflation expectations can cause currency weakness
• Uncertainty about future costs and prices
• Businesses are more reluctant to invest in new projects
• Pressure for wages to rise causing higher unit labour costs
Inequality and social unrest
• Regressive effects of rising food and energy prices
• Poor tend to hold a larger proportion of their savings in cash,
they are the worst hit by accelerating prices
Three Key Indicators for India
India needs to import crude
oil, machinery and many
other raw commodities
Combating the stagflation risk
• Monetary Policy
– Higher policy interest rates
– Proposal to introduce an inflation target of 4%
• Fiscal policy
– Scaling back extensive system of farm subsidies
• Structural reforms
Increasing competition in utilities and retail
New measures to attract inward FDI
Reforms to lift productivity in rural areas
Huge priority is address poor infrastructure
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