Inflation in India: Will it ever decrease?

Inflation – a gradual decrease in purchasing power with time – affects all human beings. The average inflation in India is more than twice the average inflation in the US.  Will inflation in India ever increase?  Many seem to believe that after a long time (say a couple of decades later) inflation will decrease, as India becomes a developed country.

I am no expert in economics, but such sentiments seem to be a baseless dream, for the following reasons

India – the land of subsidies

A subsidy is a privilege offered by a government when it sells something (usually a resource) to its people for a price much lower than the production cost or the price of import.

We all know that the price of petrol, kerosene, and LPG (among other things) and subsidized by a huge amount – about 30-35%.

To me, this is the most important cause of inflation.  We do not have enough resources in our country to produce our own petrol, kerosene, and LPG.  We import crude oil – a very expensive thing to do!

Each time the international crude oil price increases the Government does not pass on the increase to the people – it incurs a loss.

There is of course a limit to the total loss the Govt. can bear.  Therefore, the subsidy gets lowered gradually with time.

So Indians (at least the ones living in India!) have to contend with two factors

  • General inflation of all resources
  • The extent of loss the Govt. can withstand with respect to each resource.

I would guess that the net result of these two factors is repeated price increase –although I do not know how or why!

Bottomline: If there was no subsidy, the increase in fuel prices will be much, much smaller, almost equal to the general international inflation.

Questions:

  • If the fuel subsidy is removed, how many of us can afford to use a vehicle?
  • Will it not adversely affect the economy?
  • Do you see the subsidy going away anytime soon?  (Think politics.  Think elections)

India – the non-industrial economy

 It is obvious to everyone that India is not an industrial power.  We do not manufacture most of the things that we use – from computers, to smart phones to vehicles to … the list is endless.

India is an agricultural power. No doubt about that. Thanks to sustained government effort, our agricultural exports have steadily increased; we can serve more mouths and can handle a famine without alarming increase in inflation.

Typically a nation that starts out with an agricultural economy moves onto an industrial economy and then to a service economy. China is very good example.  China has a thriving agricultural and industrial economy. Perhaps because of its communist government it cannot have a good service economy, but that it is no big deal.  Agriculture and industry will hold the nation together.

In India, we jumped from an agricultural economy to a service economy, completely ignoring industrial growth.

By service economy, I am referring to software industries!  Other nations give us work and we do it.  If they do not give us work, we are out of a job!

It is obvious that among the three economies, we have very little control over the service economy.  Unfortunately, because service economy has preceded industrial economy, there is very little chance of India becoming an industrial power.

Being an industrial power is important for not just the growth of the country but also for containing inflation.

Bottomline:  When we manufacture what we need, we control the prices better.

Questions:

  • Do you see India becoming an industrial power anytime soon?
  • Do you see Indian youth preferring hardcore engineering jobs to comfortable software jobs anytime soon?

India – the land of monsoons

We all know that our agricultural produce depends crucially on the amount of rainfall we receive.

Bottomline: Rainfall has a huge role to play in determining inflation, at least food inflation.

Questions:

  • Do you see this situation changing anytime soon?
  • What are the chances of India receiving normal rainfall year after year?  (Think of global warming and general destruction of world ecology)

India – the land of corruption                                                                                         

We may not be the most corrupt country in the world, but we certainly are a contender.  Widespread corruption implies disproportionate distribution and access to resources.

Misuse of public funds implies increased burden on the taxpayer.

As I said, I am not economics expert, but I willing to bet that corruption is one of the major factors that influences inflation.

Question: Do you foresee corruption in India decreasing anytime soon?

India – the land of .. er ..  people

Let us face it; every problem in India can be traced in two steps to its population.

India maybe an agricultural giant (relatively speaking), but there are still more malnourished children in India than there are people in many countries!

Every country has subsidies.  It is India’s population that makes the amount and extent of subsidies appear huge.

Population may or may not directly influence inflation.  It certainly magnifies the factors that influence inflation – corruption and subsidy to name just two.

Large population implies inefficient distribution of resources and high costs involved existing distribution mechanisms.

The mid 80s saw a very vocal population control drive. It is nowhere to be seen today.

Controlling population is not only important for the economy, it is also crucial for the fiscal fitness of young Indian couples!

~~~~

  Given all these factors, do you really think inflation in India will decrease anytime soon?

Let us ask a more specific and more relevant question.

Given all these factors, what are the chances that inflation will decrease before we retire?

My answer: No chance

My solution:

What do you think?

PS. I apologise for the non-technical nature of this post. My point is even a layman like me with a little thought can realize that inflation is not going to decrease anytime soon.

If you can offer more sensible explanations please feel to add them in the comments section.

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45 thoughts on “Inflation in India: Will it ever decrease?

  1. Ramamurthy

    Another good reason along with corruption
    TOTAL absence of Law ,Order,Discipline and Justice.
    I was an optimist once but not any longer.I urge people to get out of India as early as possible.

    Reply
  2. Ramamurthy

    Another good reason along with corruption
    TOTAL absence of Law ,Order,Discipline and Justice.
    I was an optimist once but not any longer.I urge people to get out of India as early as possible.

    Reply
  3. Mohit

    Nice Pattu. According to me there are mainly three reason:-

    1. Lack of accountability towards nation in political class.

    2. Corruption : Let's accept it, now corruption is in Indian blood.

    3. Population.

    Reply
  4. Mohit

    Nice Pattu. According to me there are mainly three reason:-

    1. Lack of accountability towards nation in political class.

    2. Corruption : Let's accept it, now corruption is in Indian blood.

    3. Population.

    Reply
  5. Siva

    I agree with yourselves and Ramamurthy above, it is becoming out of control in all ways and living in India would soon become like living in a dictator ruled African nation.......

    Reply
  6. Siva

    I agree with yourselves and Ramamurthy above, it is becoming out of control in all ways and living in India would soon become like living in a dictator ruled African nation.......

    Reply
  7. Anand Doctor

    Dear Pattu,
    Kudos for an unconventional analysis of inflation in India. You've made some good points.

    However I remain an optimist for 2 reasons:

    1.High inflation on its own is not necessarily bad. All growing economies have it. However, it needs to accompany high growth (2003-2008). Inflation is really pinching us right now because the growth is low and inflation is high. This cannot sustain and one of the two will move to meet the other.

    2. It seems to me that Indian economy does not grow in linear fashion but in leaps: 1 leap forward-2 steps back. With proper planning and some common sense, we should be able handle this roller coaster ride well enough.

    So cheer up!

    Reply
    1. pattu

      Thanks for your views Anand. I agree that the individual needs proper planning. I also agree that growth is crucial and that it cannot be continuous. Each time there is a lull it becomes even harder to spring back. The govt needs to focus on industry and agriculture.

      Reply
  8. Anand Doctor

    Dear Pattu,
    Kudos for an unconventional analysis of inflation in India. You've made some good points.

    However I remain an optimist for 2 reasons:

    1.High inflation on its own is not necessarily bad. All growing economies have it. However, it needs to accompany high growth (2003-2008). Inflation is really pinching us right now because the growth is low and inflation is high. This cannot sustain and one of the two will move to meet the other.

    2. It seems to me that Indian economy does not grow in linear fashion but in leaps: 1 leap forward-2 steps back. With proper planning and some common sense, we should be able handle this roller coaster ride well enough.

    So cheer up!

    Reply
    1. pattu

      Thanks for your views Anand. I agree that the individual needs proper planning. I also agree that growth is crucial and that it cannot be continuous. Each time there is a lull it becomes even harder to spring back. The govt needs to focus on industry and agriculture.

      Reply
  9. ashalanshu

    Dear Pattu, thanks for one more GEM. I do agree, within next few years thing can only go worse from here but the wheel 'll change. The people are coming out on street for supporting common cause (Anna's Movement, Delhi Gangrape movement). I'm an optimist and believe in the collective power. Earlier having 4-5 children as a common thing for a couple. Economic hardships have teach the lesson and without any major push from Govt. people have now shifted to family size of 2+1 (2+2 was the Govt. advised size 🙂 )

    There are several bottlenecks within whole India and we need at least few thousands if not millions E Shreedharan (Delhi Metro fame) to come over these bottlenecks and deliver.

    Thanks

    Ashal

    Reply
    1. pattu

      Thanks Ashal. Yes I fully agree with you. A new awakening and collective responsibility is important for the economic and fiscal strength of our country.

      Reply
  10. ashalanshu

    Dear Pattu, thanks for one more GEM. I do agree, within next few years thing can only go worse from here but the wheel 'll change. The people are coming out on street for supporting common cause (Anna's Movement, Delhi Gangrape movement). I'm an optimist and believe in the collective power. Earlier having 4-5 children as a common thing for a couple. Economic hardships have teach the lesson and without any major push from Govt. people have now shifted to family size of 2+1 (2+2 was the Govt. advised size 🙂 )

    There are several bottlenecks within whole India and we need at least few thousands if not millions E Shreedharan (Delhi Metro fame) to come over these bottlenecks and deliver.

    Thanks

    Ashal

    Reply
    1. pattu

      Thanks Ashal. Yes I fully agree with you. A new awakening and collective responsibility is important for the economic and fiscal strength of our country.

      Reply
  11. Ramamurthy

    Another reason is, thriving Black Market.Why all the measures being taken by RBI to control inflation is failing because the black market has its own rules and economy.Any official policy is doomed to fail until black market is wiped out.In India we know this is impossible.
    Why RBI is still bent upon rate increases is beyond me. For a change why cannot they start reducing the interest rates.Who knows the economy may pick up.This in any case is one theory.

    Reply
  12. Ramamurthy

    Another reason is, thriving Black Market.Why all the measures being taken by RBI to control inflation is failing because the black market has its own rules and economy.Any official policy is doomed to fail until black market is wiped out.In India we know this is impossible.
    Why RBI is still bent upon rate increases is beyond me. For a change why cannot they start reducing the interest rates.Who knows the economy may pick up.This in any case is one theory.

    Reply
  13. bharat shah

    indeed thoughtful post and the comments. the most serious of all discussed , i think , corruptions . over population and black market economies are main. out of them, i think, population would be controlled by education. as education increases, educated people would prefer better life and small families. other two could be changed through political will at the top..

    Reply
  14. bharat shah

    indeed thoughtful post and the comments. the most serious of all discussed , i think , corruptions . over population and black market economies are main. out of them, i think, population would be controlled by education. as education increases, educated people would prefer better life and small families. other two could be changed through political will at the top..

    Reply
  15. Partha

    As per economic theories, reduction of inflation isn not good for the economy of a country. Instead, a healthy rate of inflation (around 3-5% p.a.) is good for economic progress.
    Partha

    Reply
    1. pattu

      Thanks for your views. I certainly would not mind an inflation of 3-5%. I also understand that inflation in inevitable. It is interesting to learn that a non-zero inflation is actually necessary for the health of the economy! Can you please elaborate?

      Reply
  16. Partha

    As per economic theories, reduction of inflation isn not good for the economy of a country. Instead, a healthy rate of inflation (around 3-5% p.a.) is good for economic progress.
    Partha

    Reply
    1. pattu

      Thanks for your views. I certainly would not mind an inflation of 3-5%. I also understand that inflation in inevitable. It is interesting to learn that a non-zero inflation is actually necessary for the health of the economy! Can you please elaborate?

      Reply
  17. Jeetu Jordon

    Dear Pattu

    Awesome Article .. I do agree with you As days goes on Inflation Slowly Increase which will ruins Life of Many peoples. Some time back i read an article in that you mentioned that invest & Save as much as you can and even i started that . Thanks for guiding me.. 🙂

    Regards
    Jeetandar Ojha

    Reply
  18. Jeetu Jordon

    Dear Pattu

    Awesome Article .. I do agree with you As days goes on Inflation Slowly Increase which will ruins Life of Many peoples. Some time back i read an article in that you mentioned that invest & Save as much as you can and even i started that . Thanks for guiding me.. 🙂

    Regards
    Jeetandar Ojha

    Reply
  19. Partha

    Before I start I must admit that I am not an economist. But certain amount of inflation is necessary for supply and circulation of money, which, in turn, increases the purchasing power of people. This helps the industry and service sector. So, inflation within a reasonable limit is good for the health of economy.

    Reply
    1. pattu

      Thanks for your response. hmm ... I will need to think more about this but I get the basic hang of what you are saying. Thanks. Do keep visiting and sharing your thoughts.

      Reply
  20. Partha

    Before I start I must admit that I am not an economist. But certain amount of inflation is necessary for supply and circulation of money, which, in turn, increases the purchasing power of people. This helps the industry and service sector. So, inflation within a reasonable limit is good for the health of economy.

    Reply
    1. pattu

      Thanks for your response. hmm ... I will need to think more about this but I get the basic hang of what you are saying. Thanks. Do keep visiting and sharing your thoughts.

      Reply
    1. pattu

      Many thanks for the useful link. I am not sure about what the new RBI governor can do. We will have to wait and watch. India is a strange country! Many people as competent as him, if not more competent, have occupied the chair before.

      Reply
    1. pattu

      Many thanks for the useful link. I am not sure about what the new RBI governor can do. We will have to wait and watch. India is a strange country! Many people as competent as him, if not more competent, have occupied the chair before.

      Reply
  21. Jayadeep Purushothaman

    Who says there is inflation ? 🙂

    - Car prices haven't gone up (bought one in 1998 for 2.3L, bought another for 3.2L 3 years back) ?
    - Fridges haven't gone up either - 16K in 1997, I can get a good one at 20K with better features
    - 2003,a text based mobile was 10K+, 1K for the same now and can get a descent smart phone for 5K.
    - Petrol/Oil prices have been dropping - can you believe that ? Did any of the financial experts or economists predict that ? 🙂
    - I can learn from Stanford Professors with Coursera and other MOOCs, no money and delivered anywhere ! I always wonder why our IITs never did this before.
    - I can learn how to play football by watching youtube 🙂
    - Where is the inflation if I produce my own food to eat ? I get copious amount from 500sqft terrace garden (leave alone the 2acre farm which was cheaper than the 500sqft terrace) even after sharing with the monkeys !

    So where's the inflation Pattu ? 🙂

    Reply

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