One
of the more striking changes in the Indian economy
in the recent past is the significant decline in rates
of inflation that has been experienced over the last
few years. As Chart 1 indicates, the annualised point-to-point
rate of inflation for the last day of each year, while
fluctuating, fell quite sharply from the middle of
the past decade. Thus inflation according to the Wholesale
Price Index (WPI) is now less than 1.4 per cent per
annum according to the latest estimate from the end
of May, bringing it very close to a deflationary situation.
Chart
1 >> Click
to Enlarge
How did such a process occur? And what were the main
elements of this decline in terms of different product
categories? The government has been quick to claim
the credit for this tendency, arguing that this speaks
for the success of its economic strategy. But this
is probably misleading. Indeed, the overall recessionary
context within which this is occurring suggests that
the real causes of declining inflation may simply
be macroeconomic and international tendencies which
reflect weakness in the Indian economy, rather than
strength.
It should be noted that, since inflation in economies
operating below full employment is the macro-economic
effect of the struggle over distributive shares, in
a sense changing rates of inflation reflect the changing
balance of class forces in an economy. In the Indian
economy, inflation has always been relatively low
by international standards, and certainly well below
the inflationary tendencies so commonly found in the
Latin American countries, for example.
This is primarily because most of the workers and
agriculturalists in the country have incomes which
are effectively not indexed to price change. This
means that increases in cost can be passed on by industrialists
and other producers in the form of higher prices,
but these do not necessarily result in higher money
wage demands which could lead to spiralling effects
on price. This also means that even small changes
in price levels can have adverse effects on most wage
incomes. It further means that low inflation rates
themselves reflect low and possibly falling product
wages (as wages decline as a proportion of the total
value of the product). These points should be borne
in mind in what follows.
Let us consider first the actual pattern of price
change as enumerated by movements in the WPI. This
index is dominated by manufactured goods, which account
for almost two-third of the weight, as shown in Chart
2. Primary products account for just over one-fifth
of the weight, while the remainder refers to fuels,
light and lubricants. A decomposition reveals, in
Chart 3, that both manufactured goods and primary
products have shown substantial deceleration of price
changes, creating the overall decline in inflation
described earlier. By contrast, fuels, etc., show
a much more fluctuating and volatile price pattern
with no clear declining trend.
Chart
2 >> Click
to Enlarge
Chart
3 >> Click
to Enlarge
Consumer price indices quite often tend to behave
rather differently from the WPI, and this is also
the case for the past decade and more in India. Chart
4 shows the movement of these two indices. While the
consumer price indices for industrial workers (CPI-IW)
and agricultural labourers (CPI-AL) have indeed decelerated
compared to the beginning of the 1990s, the slowdown
is nowhere as sharp as it has been for the WPI. In
fact, the CPI-IW continued to increase briskly
until the end of the 1990s.
Chart
4 >> Click
to Enlarge
One of the more obvious reasons for this higher rate
of increase in the CPIs, was the importance of food
grain and food products in the CPIs. As Chart 5 reveals,
the food and foodgrain wholesale price indices tended
to move more rapidly than the general index until
the end of this period, and do not show the very sharp
deceleration evident for the general index. One major
reason for this was the progressive opening up of
agricultural trade over the 1990s, which brought Indian
domestic prices of agricultural products, which were
earlier typically lower, closer to world levels. The
fact that most world agricultural prices tended to
stagnate and fall after 1996 did affect domestic prices,
but only subsequently. Also, the government's operations
in the foodgrain market prevented sharp downward changes
in these prices for most of this period.
Chart
5 >> Click
to Enlarge
