High Inflation in India – A Threat to Growth and Development? A2 Macro – January 2014

Indian Population Population still rising but more slowly

Growth and Inflation in India Inflation in India is among the highest in the Group of 20 leading economies

Causes of high Indian inflation High rates of food price inflation Fast pace of wage inflation Weak currency (rupee) which makes imports even more expensive Supply bottlenecks – energy blackouts Failure to lift productivity in farming Expensive fuel and fertiliser subsidies leading to high fiscal deficits Wheat and rice bought by the state at artificially high prices to appease large farmers Lack of intense competition at retail level

Indian Rupee v US $ Indian rupee has been falling consistently against the US dollar since late Good news for exporters perhaps but India is a net importer of food and energy. And a lot of corporate India has taken loans over the past decade in foreign currency – debts harder to repay!

Consequences of high inflation in India Competitiveness Harder for Indian businesses to sell their goods and services abroad, risk of FDI moving to other countries Higher inflation expectations can cause currency weakness Investment Uncertainty about future costs and prices Businesses are more reluctant to invest in new projects Pressure for wages to rise causing higher unit labour costs Inequality and social unrest Regressive effects of rising food and energy prices Poor tend to hold a larger proportion of their savings in cash, they are the worst hit by accelerating prices

Three Key Indicators for India India needs to import crude oil, machinery and many other raw commodities

Combating the stagflation risk Monetary Policy – Higher policy interest rates – Proposal to introduce an inflation target of 4% Fiscal policy – Scaling back extensive system of farm subsidies Structural reforms – Increasing competition in utilities and retail – New measures to attract inward FDI – Reforms to lift productivity in rural areas – Huge priority is address poor infrastructure

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