Inflation in India: Docile or Defiant?

Executive Summary

ASSOCHAM study finds that inflation was structural in nature rather than being episodic. Farm prices are less responsive to the RBI’s monetary policy whereas manufactured goods prices were found to be more responsive to the policy. Manufactured goods prices are showing new dynamics: a) Highest price rise in primary and upstream products b) A moderate rise in intermediate goods prices c) Least hikes in prices of finished and consumer products In the light of these features and trends in inflation, ASSOCHAM suggests four pronged anti-inflationary package. These includes  Structural Correction for Structural Inflation: This calls for a comprehensive action plan for the farm sector, involving among other measures, a programme for a “Horticultural revolution” for increasing productivity of fruits and

vegetables, fish and poultry.  Controlling form inflation is a joint responsibility of the union Government and RBI. Only monetary policy adjustment will not correct such trend price rises.

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 Hence, RBI need not raise policy rates every time form prices are rising, as analysis shows farm price are not responding to monetary policy changes.  Manufactured good inflation is showing for greater responsiveness to monetary policy changes. RBI should concentrate more on controlling these prices  Going into the disaggregated and Sectoral price behavior of manufacturing goods, we find the dynamics of change is more in upstream industries because of shortages.  We suggest that upstream and intermediate goods prices rise should be contained by raising their production within the country. This will also have major implications for the current account.

 Hence, a Low-interest regime encouraging first investment for capacity creation in industrial sector could be the most effective way of containing spikes in