Inflation in India

Inflation in India is at an acceptable level and remains much lower than in many other developing countries. But off late prices of essential commodities such as food grain, edible oil, vegetables etc have risen sharply and in the process driving up the inflation rate.

Inflation is defined as a sustained increase in the general level of prices for goods and services. It is measured as an annual percentage increase. As inflation rises, the value of currency goes down. Thus the purchasing power of the currency, i.e. the goods and services that can be bought in a unit of currency, too goes down.

Measuring inflation is a difficult task. To do so a number of goods that are representative of the economy are put together into what is referred as a "market basket." The cost of this basket is then compared over time. This results in a price index, which is the cost of the market basket today as a percentage of the cost of that identical basket in the starting year. In India two types of index: Consumer Price Index (CPI) and Wholesale Price Index (WPI) are used to monitor inflation. Off the two, Wholesale Price Index (WPI) is the most widely used price index in India. It is used to measure the change in the average price level of goods traded in wholesale market and is available on a weekly basis with the shortest possible time lag only two weeks.

The current rise in inflation has its roots in supply-side factors. There was shortfall in domestic production vis-a-vis domestic demand and hardening of international prices, prices of primary commodities, mainly food items. Wheat, pulses, edible oils, fruits and vegetables, and condiments and spices have been the major contributors to the higher inflation rate of primary articles. The inflation was also accompanied by buoyant growth of money and credit. While the GDP growth zoomed to 9.0 per cent per annum, the broad money (M3) grew by more than 20 per cent. Demand for nearly everything from housing to fast moving consumer goods is outpacing supply in part because white-collar salaries are rising faster in India than anywhere else in Asia. One of the daunting tasks before the government is to reconcile the twin needs of facilitating credit for growth on the one hand and containing liquidity to tame inflation on the other.

Note: The above information was last updated on 21-07-2007