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Persistent Inflation Poses Challenges for India

  • Anjana Pasricha

An Indian girl reaches out for a passer-by as she begs for change near the Jama Masjid during the holiday of Eid al-Adha in New Delhi, India, October 27, 2012.

An Indian girl reaches out for a passer-by as she begs for change near the Jama Masjid during the holiday of Eid al-Adha in New Delhi, India, October 27, 2012.

In India, stubbornly high inflation is hampering the government’s efforts to revive the economy. The rate of economic growth in India has plunged in the past year, raising concern that Asia's third largest economy has lost steam.

High inflation

Forty-two-year-old Komal Thukral and her husband receive about $180 a month from her wages as a cleaning maid in New Delhi. But a steady increase in food prices and rising rentals for their single room in a slum has cut into their income.

Thukral says onions and potatoes - the staple in a poor household’s diet - cost about 50 cents a kilogram. That is nearly double of what they cost two years ago.

Thukral says incomes are not keeping pace with rising prices. She says even though both she and husband work, they are not able to save anything. She worries how she will manage to educate and marry off her children.

Thukral’s concerns are widely shared in a country where two-thirds of the population live on less than $2 a day.

In a report this week, the central bank says that persistently high inflation is a greater worry than slowing growth.

The inflation is mostly fanned by rising food and fuel costs.

D.K. Joshi, the chief economist at ratings agency, CRISIL in Mumbai, says galloping prices - particularly of milk, lentils and meat -- are impacting food consumption, particularly among poor people.

“We looked at the protein consumption in India in the last few years and what we found was that the protein consumption has not increased too much, but the amount spent on protein has doubled," said Joshi. "Last six years has seen food inflation at around 10-11 percent per annum. It used to be four percent per annum, five years before that.”

The high inflation rate is hampering efforts to revive an economy that has slowed to about 5.5 percent - down from eight percent a year ago.

Lower interest rates, cheap credit

The government wants the central bank to lower interest rates, saying cheaper credit will spur investment and growth.

But the central bank did not lower interest rates this week, saying inflation is unlikely to taper off in the coming months.

That has disappointed policy makers. But Indian Finance Minister P. Chidambaram says the government will do all it can to spur growth. “If government has to walk alone to face he challenge of growth, well, we will walk alone,” stated Chidambaram.

The government has adopted other measures to increase investment. It has announced a series of reforms that include opening the retail and aviation sectors to foreign investors. It also proposes to liberalize the insurance and banking sectors to overseas investors.

Slow growth

However, economists say India is unlikely to return to the nearly double-digit growth of recent years, anytime soon.

N.R. Bhanumurthy, an economist at New Delhi’s National Institute of Public Finance and Policy, says India will experience more moderate growth in the coming years, especially if the global economy continues to be weak.

“Our assessment is that nine percent growth is more of a history now," noted Bhanumurthy. "We are really talking about a new normal growth of around seven, seven and a half percent.”

Although that may be high compared to many Western countries, it may not be high enough for India. With millions of people entering the workforce in a young country, economists say India needs to quickly “increase the size of the cake” (the share of the nation's output) to ensure more inclusive growth.