In the run up to last year’s general elections, the
Bhartiya Janata Party (BJP) had an acute sense of
the one seemingly intractable problem that was
unsettling Indian households.
Party propagandists, therefore, deftly coined
slogans such as “Bahut Hui Mehngai Ki Maar, Abki
Baar Modi Sarkar”—Enough of inflation; it’s now
time for Modi’s government.
Yet, inflation fell to single digit figures even before
the BJP government came to power.
So, what was it that brought retail inflation down
from 11.24% in November 2013 to 5% for
December 2014, after touching record lows of
4.38% in the previous month (November 2014)?
And what factors controlled the wholesale price
index, which fell to zero for November
2014, lowest in five-and-half years ( http://
inflation-falls-on-fuel-prices/1/213510.html ) ?
Effectively, there were three major reasons
why inflation subsided, to drop much below the
Reserve Bank of India’s (RBI) target of 8% by
January 2015 and 6% by January 2016.
Falling domestic and global prices
Firstly, food and fuel prices that had significantly
spiked during 2013, condensed. These two items
together constitute 57% of the consumer price
index (CPI) index, which measures the change in
prices of a select basket of goods and services
over a time period for Indian households.
Simultaneously, vegetable prices plummeted by
13.2% between December 2013 and January 2014
primarily on account of greater supply ( http://
record-26438-mt-of-foodgrain-in-201314.html ) .
The better prices fetched during the tail end of
2013 helped farmers bring more land under
cultivation and plant more thus producing more ( http://
rice-revolution-questioned ) , leading to an
oversupply in early 2014. “Higher production in
2013-14 has been achieved by expanding
acreage,” said the Economic Survey 2013-14.
Crashing oil prices also helped. Global prices of
crude oil—which generates the biggest import bill
for India—have been dropping since June 2014.
From $111.25 per barrel in the middle of June,
2014, US crude prices dropped by over 95%
to $56.55 per barrel in December 2014 ( http://
mincode=20 ) .
It did not take long for the Reserve Bank of India’s
governor Raghuram Rajan to realize the urgent
need to curb easy money flow to the hinterland
through agricultural loans and National Rural
employment guarantee (NREGA).
“More loans to agriculture have fostered
substantial private investment in agriculture, but
may also have pushed up rural wages,” Rajan
said six months after taking charge in early
“The rural wage growth,” Morgan Stanley’s Chetan
Ahya and Upasana Chachra explain in a January
16, 2014 report, “has been one of the key factors
resulting in higher food, services and overall CPI
Key indicators also pointed to the problem in the
rural economy. Barring October and November
2014, rural inflation has been higher than urban
inflation throughout the calendar year.
Suppressing this easy flow of money into the
hinterland was tackled by maintaining high interest
rates. The RBI hiked the repo rate by 0.25% to 8%
in January 2014, the third raise since Rajan’s
Later in June 2014, reducing the repo rate—rate at
which RBI lends to banks—would have meant
filling rural pockets with cheaper farm
loans. Instead, the RBI resorted to multiple cuts in
the statutory liquidity ratio (SLR), which are the
funds that banks need to compulsorily invest in
On June 3, 2014, SLR was reduced by 0.50% to
22.5% and by another 0.50% on Aug 5 to 22%,
thus shrinking the market for government securities and enlarging availability of
cheaper credit to the private sector.
By late 2014, Rajan had reason to be satisfied with
the rural wage growth numbers, as average growth
in daily wage rate for farmers stood at a modest
10% in June 2014 ( http://articles.economictimes.indiatimes.com/2014-10-01/news/54516743_1_cpi-inflation-wages-nomura )
as compared with 16.3% in 2013.
The last nail in the inflation coffin was a series of
changes in agricultural exports and marketing
policies, as prices started inching up again
between June 2014 and July 2014.
The Narendra-Modi government dis-incentivized
agricultural exports and introduced curbs on the
grain stock, the level of which had doubled under
the previous United Progressive Alliance
The grain stock at the beginning of June 2014
was nearly 75 million tonnes—28 million tonnes
higher than what the government requires to run
various subsidy programmes and emergency stock.
The government also cracked down on
hoarders and sold 50 lakh tonnes of rice reserves
in the open market during mid-July 2014. That
helped cool food grain prices.
Meanwhile, to reduce prices of fruits and
vegetables, finance minister Arun Jaitley
announced a slew of measures. These included
allowing farmers to sell directly in the open
market. The artificial price rise often induced by
middle men and traders was partly curbed.
It also helped that restrictions on minimum
support prices—the price at which the government
purchases crops from farmers irrespective of the
final market price of the crops—were introduced to
stem exorbitant price rise.
As inflation dropped to two-year low of 8.79% in
January 2014, the RBI governor has been assailed
by calls for cutting key rates.
He has, of course, defended his stance often.
“If lower rates generate higher demand and higher
inflation,” Rajan said in a speech on February 26,
2014, “people may produce more believing that
they are getting more revenues, not realizing that
high inflation reduces. what they can buy out of the revenues…bursts of
inflation can generate growth for some time.”
But when the corroborative steps and easing
global crude prices have led to inflation reducing
to 5% in December 2014—a little less than the
target of 6% for January 2016—why is RBI not
That’s because the central banks expects the
number to surge to 8% between January and
March 2015. “With favourable base effects
reversing in the following months inflation is likely
to climb back,” the RBI said in its September
Monetary Policy Report.
Softening crude prices, however, might slow down
this climb. With the crude oil basket prices
hovering around $53.65 per barrel, inflation may
be dampened for longer. The forecasts of inflation
hovering around 7% plus have now reduced to
5.5-6% on an average ( http://www.moneycontrol.com/news/economy/need-
rbi_1263025.html ) panning over the next twelve
Meanwhile, rate cut expectations have been
building up steadily.
In 2015, economists expect a total of 50-75 basis
points (0.50-0.75%) cut in the repo rate.
In all likelihood, this could be staggered—with the
first cut being anticipated after the budget at the
end of February, if not earlier than month when the
RBI will hold another policy meeting.
URL : http://qz.com/325182/this-is-how-india-controlled-its-once-untameable-inflation-problem/