Indian Inflation 2008-2013 What Happened ? Surjit S Bhalla ... · Indian Inflation 2008-2013 – What Happened ? Actual and Forecast CPI inflation: Model 2 Surjit Bhalla Feb 2014

Indian Inflation 2008-2013 – What Happened ?


Surjit S Bhalla Oxus Investments

New Delhi, Feb 2014

Feb 2014 1 Surjit Bhalla


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


What determines inflation in India?


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


Determinants of High CPI Inflation


•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


Inflation: India Vs Developing Countries


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


Inflation (CPI) and Fiscal Deficit of India


-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


RBI Inflation Expectations: Explained by What?


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


RBI expected Inflation and current WPI – Related till 2013


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


UPA social engineering: Terms of trade: Agriculture to Non- Agriculture Prices


-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


Relative Price of Food: Up, Up and Away


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)


CPI And Procurement Prices


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


Models of CPI inflation: Significance of Lagged Procurement Prices


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.


Actual and Forecast CPI inflation: Model 1


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


Actual and Forecast CPI inflation: Model 2


-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


Agricultural Growth: Role of Rainfall


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


Agricultural Growth explained by Rainfall, 1950-81


-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


Agricultural Growth explained by Rainfall, 1983-2013


-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


Impending Decline in Inflation: CPI and WPI: Monthly (saar) 2007-2014


-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


Impending decline in Inflation: “Predicted” GDP Deflator


-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


Thank You


Documents

Indian Inflation 2008-2013 What Happened ? Surjit S Bhalla ... · Indian Inflation 2008-2013 – What Happened ? Actual and Forecast CPI inflation: Model 2 Surjit Bhalla Feb 2014