Inflation fell continuously under the first Modi government, has been rising since then and is expected to fall again

The current CPI series starts from 2011-12 which means we have inflation numbers from 2012-13 onwards. Annual inflation in 2012-13 was 10.1%, which is the highest it has been in the current series. To be sure, if one looks at older inflation numbers, 2012-13 is not the peak inflation in India. The CPI Industrial Workers series (base year 2016) shows that inflation in 2012-13 (10.4%) was lower than 2009-10 (12.4%) and the number was higher in past years. While inflation started declining from 2013-14 onwards, it fell sharply under the first Narendra Modi government which assumed office in May 2014. By 2018-19 CPI had fallen to just 3.4%, after which it reversed course. Even if RBI’s forecast of 2023-24 inflation coming at 5.2% comes true, the current government will face the 2024 general elections with a much higher inflation than when the 2019 polls were held.

See Chart 1: annual inflation

This is in keeping with the international commodity price cycle

While CPI is meant to capture price movements in consumption basket of the average Indian household and is very different in composition from the Wholesale Price Index (WPI), which is a proxy for producer prices in India and includes no services at all, its long-term movement seems to be in sync with the international commodity price cycle. This becomes clear if one looks at indicators such as the Bloomberg Commodity Index (B-COM) and the price of India’s crude oil basket (COB). B-COM is a weighted index of commodity prices which includes energy, grains, industrial and precious metals and agricultural raw materials. Both B-COM and COB were at much higher levels when India’s CPI inflation was in double digits. They were on a declining trajectory during the term of the first Modi government and reversed course in the period after, barring a sharp fall in the immediate aftermath of the Covid-19 pandemic. While the pace of increase rose sharply after the Russia-Ukraine war, prices have started coming down once again. This underlines the primacy of international prices in driving India’s domestic inflation.

See Chart 2: B-COM and COB

Although ironical, the blue-collared workforce was better off during the peak inflation period

One of the biggest arguments advanced against high inflation is that it erodes the income of the workers by bringing down real wages. In a country like India, where an overwhelming share of workers are in the unorganized sector and do not have indexation protection against inflation, this argument is believed to be stronger. While there is no high frequency data on wages for the Indian economy, monthly rural wage data is often believed to be a good proxy for blue-collared workers’ earnings in the economy. An analysis of real rural wages (adjusted using CPI-rural) shows that real wages were growing at a faster rate in the first half of the last decade including when inflation was significantly higher than what they are now. This raises a question whether the recent spike in inflation could have been worse if the working class had a higher bargaining power to index wages to inflation like in the first half of the last decade. What is noteworthy is the fact that the weakness in rural wages predates the current phase of monetary tightening which began in May 2022. This means that it is not monetary policy but something else which has lowered the bargaining power of blue collared workers in the recent period. This whodunit is a more interesting question than the trajectory of headline inflation numbers in India.

See Chart 3: Annual growth in real rural wages in India