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Indian Inflation 2008-2013 – What Happened ?
Indian Inflation 2008-2013 – What Happened ?
Surjit S Bhalla Oxus Investments
New Delhi, Feb 2014
Feb 2014 1 Surjit Bhalla
Indian Inflation 2008-2013 – What Happened ?
High Inflation in India – Past and Future
2 Surjit Bhalla Feb 2014
This paper about the high inflation of the past: Record high inflation in India for the last six years , 2008 to 2013. This has averaged 9.8 % and nearly equal to the six-year average of 10.1 observed in 1975. Recall that the 1975 average was induced by a quadrupling of the price of oil in Oct. 1973. And about impending future inflation: “There are consistent signs of inflation falling at a rate faster than that envisaged by the RBI. While 8 percent headline inflation is targeted for end-2014, all indications are that inflation will be below that level by May 2014.” Monthly GDP Report, Zyfin Research, Feb. 2014
Indian Inflation 2008-2013 – What Happened ?
What determines inflation in India?
3 Surjit Bhalla Feb 2014
Model of Inflation: CPI inflation is primarily dependent on administered food prices. These are the minimum support prices administered by the government for 24 crops; most importantly wheat and rice. Administered prices also explain high rural wages (not MNREGA!), and high rural land prices (not monetary policy!) If trade is restricted, then output price movements dictate movement in factor costs involved in production; Hence, administered prices for wheat, rice, etc., determine prices of fruits, vegetables, milk - not protein
Indian Inflation 2008-2013 – What Happened ?
Determinants of High CPI Inflation
4 Surjit Bhalla Feb 2014
•What has caused this high inflation: Is it the fiscal deficit – No. Is it “embedded” inflationary expectations? No
(This begs the question of what causes inflationary expectations?)
Is it excess agricultural or GDP growth ? No It is government administered procurement prices; after rising at an average rate of 14 percent per year, 2007-2012, such prices increased by only 6 % in 2013 These prices act with a 1 year lag; this is why inflation is set to decline regardless of monetary policy! Model predicts a 3.5 percentage point decline in CPI inflation in 2014
Indian Inflation 2008-2013 – What Happened ? 5 Surjit Bhalla Feb 2014
Inflation (CPI) and its 5 year moving average
-15
-10
-5
0
5
10
15
20
25
30
351950
1953
1956
1959
1962
1965
1968
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
2013
Annual % change, CPI
5 Years Moving Average
Indian Inflation 2008-2013 – What Happened ?
Inflation: India Vs Developing Countries
6 Surjit Bhalla Feb 2014
0
2
4
6
8
10
12
14
16
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
2013
India
Median Inflation Developing Countries
Indian Inflation 2008-2013 – What Happened ?
Inflation (CPI) and Fiscal Deficit of India
7 Surjit Bhalla Feb 2014
-12
-10
-8
-6
-4
-2
0
-10
-5
0
5
10
15
20
25
30
351970
1973
1976
1979
1982
1985
1988
1991
1994
1997
2000
2003
2006
2009
2012
CPI Inflation
Fiscal Deficit % GDP
Indian Inflation 2008-2013 – What Happened ? 8 Surjit Bhalla Feb 2014
GDP growth, inflation and fiscal deficit of India
-12
-10
-8
-6
-4
-2
0
-15
-10
-5
0
5
10
15
20
25
30
351950
1953
1956
1959
1962
1965
1968
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
2013
Fiscal Deficit, India
GDP Growth, India
CPI, India
Indian Inflation 2008-2013 – What Happened ?
RBI Inflation Expectations: Explained by What?
9 Surjit Bhalla Feb 2014
RBI Inflation Expectations: Random Noise?
Variable Expected Inflation
Annual Quarter
Annual WPI 0.37***
Annual CPI 0.06
Quarter WPI (seasonally adjusted) 0.14*
Quarter CPI (seasonally adjusted) -0.31***
R2 0.29 0.31
Number of Observations 22 22
* p<0.1; ** p<0.05; *** p<0.01
Indian Inflation 2008-2013 – What Happened ?
RBI expected Inflation and current WPI – Related till 2013
10 Surjit Bhalla Feb 2014
0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00
2005q1
2006q1
2007q1
2008q1
2009q1
2010q1
2011q1
2012q1
2013q1
2014q1
WPI
RBI Expected Inflation
Indian Inflation 2008-2013 – What Happened ?
UPA social engineering: Terms of trade: Agriculture to Non- Agriculture Prices
11 Surjit Bhalla Feb 2014
-20
-15
-10
-5
0
5
10
15
0
20
40
60
80
100
120
140
160
1960
1964
1968
1972
1976
1980
1984
1988
1992
1996
2000
2004
2008
2012
% change Relative Price Of Agriculture to Non- Agriculture, GDP data, 2004=100
Agriculture to Non- Agriculture, GDP data, 2004=100
Indian Inflation 2008-2013 – What Happened ?
Relative Price of Food: Up, Up and Away
12 Surjit Bhalla Feb 2014
80
90
100
110
120
130
140
19971
19982
19993
20004
20021
20032
20043
20054
20071
20082
20093
20104
RP - Agricultural: Non-Agricultural
RP - Mfg Non-Food: WPI
Relative Prices (Indices, Base = 2004/05)
Indian Inflation 2008-2013 – What Happened ?
CPI And Procurement Prices
13 Surjit Bhalla Feb 2014
0
5
10
15
20
25
30
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
2013
Inflation : CPI
Inflation : Procurement Price, Lagged One Year
Indian Inflation 2008-2013 – What Happened ?
Models of CPI inflation: Significance of Lagged Procurement Prices
14 Surjit Bhalla Feb 2014
CPI Inflation: Role of Procurement Prices
Variable
Model
Dependent Variable: CPI Inflation
(1) (2) (3) (4) (5) (6)
Government Deficit 0.12 0.28
Lagged Government Deficit 0.14 -0.23 0.02 -0.15
GDP Growth 0.08 0.26** -0.17 -0.11
Lagged Index of Procurement Prices 0.33*** 0.33***
Median Inflation in Developing Countries 0.63*** 0.56*** 0.67***
Lagged Relative Price of Food 0.73*** 0.74***
Lagged Rural Wages 0.07
R2 0.00 0.02 0.28 0.71 0.76 0.773
Number of observations 44 21 37 37 43 41
* p<0.1; ** p<0.05; *** p<0.01
Note: 1. Model 2 is for the period 1993-2013.
2. In models 4, 5 and 6, dummies are included for the years - 1978, 1989, 1993, 1998.
Indian Inflation 2008-2013 – What Happened ?
Actual and Forecast CPI inflation: Model 1
15 Surjit Bhalla Feb 2014
0
2
4
6
8
10
12
14
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
CPI
Predicted CPI
Indian Inflation 2008-2013 – What Happened ?
Actual and Forecast CPI inflation: Model 2
16 Surjit Bhalla Feb 2014
-10
-5
0
5
10
15
20
25
30
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
CPI
Predicted CPI
Indian Inflation 2008-2013 – What Happened ?
Agricultural Growth: Role of Rainfall
17 Surjit Bhalla Feb 2014
Agricultural Output Growth: Rainfall
Variable
Model
Dependent Variable: Growth in Agricultural Output
1950 - 2013 1950 - 1981 1983 - 2013
Rainfall Index (June - September) 11.02*** 11.13*** 11.24***
Lagged Rainfall Index (June - September) -10.88*** -12.35*** -8.88***
Constant 2.62*** 2.33*** 2.97***
R2 0.58 0.55 0.68
Number of observations 63 31 31
* p<0.1; ** p<0.05; *** p<0.01
Indian Inflation 2008-2013 – What Happened ?
Agricultural Growth explained by Rainfall, 1950-81
18 Surjit Bhalla Feb 2014
-20
-15
-10
-5
0
5
10
15
20
1950
1951
1952
1953
1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
GDP Agriculture 1950-81
Predicted GDP Agriculture 1950-81
Indian Inflation 2008-2013 – What Happened ?
Agricultural Growth explained by Rainfall, 1983-2013
19 Surjit Bhalla Feb 2014
-10.00
-5.00
0.00
5.00
10.00
15.00
20.00
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
GDP Agriculture 1982-2013
Predicted GDP Agriculture 1982-
2013
Indian Inflation 2008-2013 – What Happened ?
Impending Decline in Inflation: CPI and WPI: Monthly (saar) 2007-2014
20 Surjit Bhalla Feb 2014
-20
-10
0
10
20
30
40200701
200706
200711
200804
200809
200902
200907
200912
201005
201010
201103
201108
201201
201206
201211
201304
201309
201402
WPI
CPI
Indian Inflation 2008-2013 – What Happened ?
Impending decline in Inflation: “Predicted” GDP Deflator
21 Surjit Bhalla Feb 2014
-15
-10
-5
0
5
10
15
20
25
30
200701
200706
200711
200804
200809
200902
200907
200912
201005
201010
201103
201108
201201
201206
201211
201304
201309
201402
Indian Inflation 2008-2013 – What Happened ?
Thank You
22 Surjit Bhalla Feb 2014