Inflation in independent India: From credit targeting to a rule-based inflation targeting framework
Source Title: Reference Module in Social Sciences, DOI Link
View abstract ⏷
Historical data on inflation indicates that India has experienced moderate inflation, though there have been episodes of sharp spikes due to factors like drought, war, oil shocks, and demand shocks. Recently, the combination of the COVID-19 pandemic and subsequent geopolitical tensions in Gulf and European countries created considerable challenges to the Indian economy in controlling inflation. The longterm average WPI based inflation since Independence is 6.04. This means the purchasing power of the sum of ?100 in 195152 is worth just ?1.46 in 202324 or ?100 in 195152 would be worth approximately ?6867.02 in 202324. Against this background, the study attempts to present stylised facts about inflation dynamics in India by using alternative measures since Independence. The study examines key inflation trends, analysing its trajectory and volatility across different periods, including the pre- and post-economic periods, various decades, and during different monetary policy regimes. The paper also briefly explains the evolution of monetary policy owing to financial development, openness of the Indian economy, and shifts in monetary policy transmission mechanism. The results indicate that inflation in India was high and volatile before economic reforms. However after reforms, not only inflation, its variability, incidence and duration have also declined significantly. High inflation and volatility are associated with low and unstable growth rates. The fall in inflation is attributed to economic reforms of 1991, better supply management, monetary-fiscal coordination, and effectiveness of monetary policy implementation. The paper supports the transition from targeting WPI based headline inflation to CPI based headline inflation as a nominal anchor, following the adoption of a rule-based inflation targeting regime
