Column: Puzzle of high CPI inflation

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SummaryOnly one factor—rise in minimum support prices for food grains—explains most of the sustained high inflation

There is something strange going on with the Indian macro-economy, especially with inflation. Zyfin’s latest inflation estimates for the GDP deflator for the period October 2012-September 2013 is at a 6.7% rate. GDP growth for the same period is expected to be at a low 4.7%. CPI inflation, the new preferred measure of inflation at RBI, was above 10% in October. There are frightening stories about vegetable inflation, onion inflation, etc, being upwards of 50%. Depressing growth and escalating inflation—what is going on?

The most common explanation (more in the nature of an excuse) for high inflation in India is to take recourse in the high international inflation in 2008, and the subsequent expansion of deficits around the world. But that was a one-year explanation for inflation in the developing world—except India! As the accompanying table shows, Indian CPI inflation has ranged between 8.4% and 12.4% in the last six years. It is not as if this high inflation has gone unnoticed by the experts or RBI. Each year there has been a new explanation for this persistence of inflation. Some of the popular candidates: high fiscal deficits, excess demand (then why is growth so low?), pricing power of Indian corporate (then why is non-food inflation contained?) the emerging middle class eating protein-rich food (then why did cereal prices go up so much?), and rupee depreciation (shouldn’t the cause be the other way?).

Then, there have been explanations as to why inflation should be going down. In case you have forgotten, there is the claim that food output will grow strongly and be at record-highs this year. In the last three months, the rupee has appreciated by more than 10%, but CPI inflation has not declined—indeed has gone higher. And of course there has been the 400-odd basis points' increase in repo rates by RBI; yet each year, and after each increase, CPI inflation has edged higher, and from a high base!

It is true that some food price increases (e.g., onions ) have defied weather, or economic logic, but the entire food chain doing so is stretching both logic and imagination. How does one reconcile record food output with the literally spiraling inflation of food? The Congress party does this stating that its policies have engineered growth in the rural areas, and inclusive growth at that.

If incomes in the rural sector are booming, then incomes in

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