Economy
Economy
international commodity prices exert an important influence on India’ s inflation. The fuel component of the wholesale price index moves with the international commodity prices.
There are several consequences of high inflation. The conventional view was that high inflation affects growth, and persistently high inflation above a certain threshold level can be a drag on economic growth. Economic research has shown that there exists a statistically significant negative long term relationship between inflation and economic growth in India. Significant inflation-growth threshold
Achieving
Durable Inflation
Given the elevated and persistent inflation, the RBI may need to raise rates to tackle inflation durably, particularly if faced with a persistent and sizable supply-side food price shock putting pressure on broad-based inflation, write V. Srinivas
One of the major objectives of Government of India and the Reserve Bank of India is achieving durable inflation. Inflation in India had reached 10-11 percent in 2008 and remained elevated for several years. Over the past 3 years, inflation has come down from 9.4 percent in 2013 to 5.9 percent in 2014 to 4.9 percent in 2015 to a projected value of 4.7 percent in 2017. There has been a persistent demand for lowering policy rates. The dilemma is low policy rates are not possible with low inflation. The paper seeks to explore the challenges for RBI to lower policy rates.
The increase in inflation from 2008-13coincided with rapidly rising food and commodity prices. Food prices rose sharply from 2008 and by the end of 2013 had nearly doubled compared to 2007 prices. Food inflation was the key driver of India’ s high and persistent inflation. Further, effects have been observed in casesv of inflation rates above 5.5 percent. The average growth is higher in States where the inflation was below 5.5 percent and a statistically significant negative effect of inflation on long term growth was visible where inflation was higher than 5.5 percent.
Inflation hurts middle class and poor households quite significantly. Middle class households confronted with high inflation bring forward their purchases of clothing, appliances, houseware or
32 ebZ 2018