Kundu hi, Ramgopal; Kallu u, Si a Reddy
A icle
In la ion dynamics in India: A s uc u al iew
PSL Qua e ly Re iew
P o ided in Coope a ion wi h:
Associazione Economia ci ile, Rome
Sugges ed Ci a ion: Kundu hi, Ramgopal; Kallu u, Si a Reddy (2024) : In la ion dynamics in India: A
s uc u al iew, PSL Qua e ly Re iew, ISSN 2037-3643, Associazione Economia ci ile, Rome, Vol. 77,
Iss. 311, pp. 469-491,
h ps://doi.o g/10.13133/2037-3643/18448
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ol. 77 n. 311 (Decembe 2024)
In la ion dynamics in India: A s uc u al iew
RAMGOPAL KUNDURTHI, SIVA REDDY KALLURU*
Abs ac :
The ecen unp eceden ed global in la ion has ocussed
a en ion on he supply side in la ion dynamics. The Indian
in la ion episodes, howe e , ha e been la gely associa ed
wi h supply sho ages and, on a e age, emained ele a ed
h ough he las ou decades, wi h di e en policy phases
gene a ing, a bes , mixed esul s. This pape explo es he
Indian in la ion dynamics h ough a s uc u al pa adigm,
analysing ac o s such as sec o al g ow h imbalances and
adminis e ed p ices. The s uc u al ac o s a e obse ed o
explain a signi ican pa o he in la ion, hus sugges ing
he need o go e nmen ac ion on logis ics managemen
in he sho e m and s uc u al e o ms in he long un.
Kundu hi: Gokhale Ins i u e o Poli ics and Economics,
email: amgopal.kundu [email p o ec ed]
Kallu u: Gokhale Ins i u e o Poli ics and Economics, email:
si a eddykallu [email p o ec ed]
How o ci e his a icle:
Kundu hi R, Kallu u S.R. (2024), “In la ion dynamics in
India: A s uc u al iew”, PSL Qua e ly Re iew, 77 (311), pp.
471-491.
DOI: h ps://doi.o g/10.13133/2037-3643/18448
JEL codes:
E3, E5, Q11
Keywo ds:
mone a y policy, in la ion, sec o al imbalances,
adminis e ed p ices, MSP, CPI
Jou nal homepage:
h p: //www.pslqua e ly e iew.in o
I hink we now unde s and be e , how li le we unde s and
abou in la ion.
(Je ome Powell, 2022)
A he Eu opean Cen al Bank (ECB) Cen al Banking Fo um in 2022, he discussions on mone a y
policy amongs he majo cen al banks (CBs) o he wo ld we e cen ed a ound he cu en
unaway in la ion and how he CBs can handle he same. The o um admi ed ha supply shocks
make he cu en scena io comple ely di e en om he ela i ely low in la ion en i onmen o
he p e ious ou decades amongs he de eloped coun ies (DCs). The ailu e o he s anda d
models as ools o policy was also highligh ed. And, despi e he esol e o b ing down in la ion
i espec i e o wha i akes, he limi a ions o CB policies in add essing supply side in la ion we e
clea ly admi ed (Powell, 2022).
P ice s abili y is impo an o a oid disincen i es o sa e s, ad e se edis ibu i e e ec s on
he lowe income sec ions, and uncompe i i e exchange a e e ec s. The hype -in la ion scena ios
wi nessed in he pas ha e also made all he CBs wa y o any gene al hike in p ice le els and ha e
igge ed p omp eac ion. Howe e , i may be poin ed ou ha mos o he high in la ion
scena ios wi nessed in India we e d i en by supply side e ec s (please see sec ion 1.4 below). Bu
* The au ho s would like o hank wo anonymous e e ees o hei help ul commen s on he manusc ip .
A icle
470 In la ion dynamics in India: A s uc u al iew
PSL Qua e ly Re iew
he policy o ien a ion has been along he lines o he same models and amewo k ha se ed he
DCs well in hei low in la ion scena io o ou decades bu ha a e now being ques ioned
(Powell, 2022). I is pe haps high ime ha he policy o ien a ion in India shi s om demand
managemen o supply managemen and ha solu ions should be sough and highligh ed e en i
hey a e ou o each o he adi ional mone a y policy pu iew. Wi h his backd op, his pape
p oposes o examine he Indian in la ion dynamics in he con ex o s uc u al issues and he
policy implica ions he e om. The es o he pape is s uc u ed as ollows. Sec ion 1 add esses
he in la ion dynamics in e ms o In la ion measu emen s, long- e m ends, and some
obse a ions he eon; he mone a y policy con ex is à is he in la ion goal and he heo e ical
unde pinnings o he policy a e also b ie ly examined. Sec ion 2 discusses he s uc u al and o he
issues in unde s anding he na u e o in la ion. Sec ion 3 p o ides he empi ical modelling and
da a. Sec ion 4 discusses he empi ical esul s and policy implica ions. Sec ion 5 concludes.
1. In la ion dynamics in India and he policy con ex
1.1. In la ion measu emen s
The main indices ollowed o gauge in la ion in India a e he Wholesale P ice Index (WPI)
announced by he O ice o he Economic Ad ise , Minis y o Comme ce and Indus y, and he
Consume P ice Index (CPI) announced o he u al, u ban, and combined se ies by he Cen al
S a is ical O ganisa ion. The new CPI combined is a ailable since 2012. In addi ion, he Labou
Bu eau announces he CPI o indus ial wo ke s (CPI-IW) sepa a ely. O hese, he WPI is
b oade -based and includes o e 700 indi idual commodi ies, including in e media e
commodi ies o e 4 main ca ego ies and 55 sub-ca ego ies. The CPI ocuses on consume goods
and se ices and has abou 465 indi idual commodi ies o e 6 ca ego ies. The widely ollowed
p ac ice is o compa e he yea -on-yea (YoY) pe cen age changes announced e e y mon h.
Wi hin he o e all indices, he sub-ca ego ies o in e es o he WPI a e he ood a icles (WPI-
FA), uel, and manu ac u ing; o he CPI, hey a e he o e all index and CPI-Food. The weigh ages
and he base yea o he indices a e changed o e ime. In o de o add ess he di icul ies posed
by he di e ences in he base yea s and he weigh ages, pe cen age changes a e used o gauge he
a iables. In pa icula , he combined CPI announced since 2012 has e y simila weigh ages o
he CPI-IW o 2001 and, acco dingly, CPI-IW could be used o longe - e m compa isons (RBI,
2014b). P io o he adop ion o lexible in la ion a ge ing (FIT), he WPI was he p e e ed me ic
o gauge in la ion. The FIT amewo k, s ipula ing a CPI a ge o 4% (wi h a lexible band o +/–
2%) was adop ed in he i s bi-mon hly Mone a y Policy S a emen o he Rese e Bank o India
(RBI) in Ap il 2014 (RBI, 2014a). This was o mally legisla ed in 2016.
1.2. The ends in he indices
Using backwa d splicing and he YoY pe cen age changes on he mon hly da a, indices o di e en
base yea s we e combined o p oduce con inuous se ies. In addi ion, he annual da a has been
compiled as a e ages o e he mon hly da a in each yea . To highligh he linkages be ween he
measu es, g aphical ep esen a ions o he impo an ca ego ies o in la ion a e p o ided in
igu es 1-3. (i) Mos in la ion measu es ha e a e aged on he highe side o he FIT a ge o he
las se e al decades. (ii) The e is a e y close co ela ion be ween CPI-IW-Food and WPI-FA (wi h
a co ela ion coe icien o 0.9) and be ween CPI-IW and CPI-IW-Food (wi h a co ela ion
R. Kundu hi, S.R. Kallu u 471
PSL Qua e ly Re iew
coe icien o 0.95). A la ge pa o his can be explained by he ac ha ood i ems occupy abou
46% weigh age in he CPI-IW (and also in he new combined CPI ha is he a ge o FIT). (iii) The
co ela ion be ween he o e all WPI and he CPI-IW is no as s ong as he wo ela ions
men ioned abo e (wi h a co ela ion coe icien o 0.5). This dynamic could be impo an , as WPI
consis s o many manu ac u ing i ems while CPI-IW is domina ed by ood i ems. (i ) In he pos -
e o m pe iod, ba ing he wo majo episodes o he 2008 c isis and he ecen pandemic-cum-
Uk aine c isis, WPI on he whole has been ela i ely on he lowe side. Fo example, he WPI
a e aged 4.5% be ween 1997 and 2021, while he CPI-IW a e aged 6.7% in he same pe iod. ( )
CPI-based in la ion had been ela i ely highe and mo e pe sis en .
Figu e 1 – Annual a e age in la ion, CPI-IW s CPI-IW-Food
Figu e 2 – Annual a e age in la ion, CPI-IW s WPI-FA
0
5
10
15
20
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
2022
CPI-IW CPI-IW-Food
0
5
10
15
20
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
2022
CPI-IW-Food WPI-FA
472 In la ion dynamics in India: A s uc u al iew
PSL Qua e ly Re iew
Figu e 3 – Annual a e age in la ion, CPI-IW s WPI All
Sou ce: he Hand Book o S a is ics, ables 227, 228 and 235, Rese e Bank o India.
1.3. Mone a y policy con ex and in la ion pe sis ence
Rela ed li e a u e in he Indian con ex has ex ensi ely co e ed a ious pe iods o in la ion. Mos
o he academic and policy esea ch has ended o look a in la ion in he con ex o mone a y
policy. Acco dingly, we p o ide a b ie imeline o he mone a y policy phases and he incidence
o in la ion.
So a , ou phases o mone a y policy ha e been seen in India. Fi s , he policy o he p e-
e o m pe iod (1947-1991) was la gely an inwa d-looking con olled economy wi h c edi
a ioning and adminis e ed p ices and in e es a es. Second, om 1985 un il 1998, a policy o
mone a y a ge ing was adop ed, wi h b oad money (M3) as he a ge , based on he empi ical
e idence o a s able demand unc ion o money (Ranga ajan, 1997), subs an ia ing he
exogenei y hypo hesis o he money supply. This amewo k p oduced “a mixed esul ,” wi h he
a ge achie ed in 4 ou o 13 yea s; howe e , “ he e was no pe cep ible imp o emen in he
in la ion a e” (Mohan y and Mi a, 1999). This can be seen in he ac ha he WPI a e aged 8.3%
om 1980-1981 o 1998-1999 (ending in Ma ch), while he CPI-IW a e aged 9.6% in he same
pe iod. The gene al consensus o ha pe iod was ha he in la iona y p essu es we e c ea ed by
excessi e iscal de ici s and he mone izing o he same (P asad and Khund akpam, 2003;
Khund akpam, 2008; Gula i and Saini, 2013). And he compulsions o he poli ical economy o ced
comp omise solu ions (Goyal, 2014). Inc easing globalisa ion and g ea e capi al in lows, coupled
wi h he de elopmen o inancial ma ke s, ha e shi ed he policy emphasis om quan i a i e
adjus men s o p ice adjus men s. Acco dingly, new ope a ing ins umen s o open ma ke
ope a ions (OMO) and he epo a e ha e been gi en mo e emphasis as policy ools. And, despi e
he “ easonable s abili y o he money demand unc ion” (Mohan y and Mi a, 1999), a single
a ge o b oad money was ound inadequa e o he RBI o espond o he apid de elopmen s in
he inancial and global ma ke s. Thus, a shi was made in he mone a y policy amewo k
-9
-4
1
6
11
16
21
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
2022
CPI-IW WPI-All
R. Kundu hi, S.R. Kallu u 473
PSL Qua e ly Re iew
owa ds a mul i-indica o app oach. This app oach was gene ally seen as success ul in con aining
in la ion and p omo ing g ow h un il abou 2008-09 (RBI, 2014b).
While in la ion was subdued om 1999-2000 o 2005-2006 (wi h a WPI a e age o 4.8% and
a CPI-IW o 3.9%), he nex eigh yea s ( om 2006-2007 o 2013-2014) again wi nessed high
in la ion (wi h a WPI a e age o 6.7% and a CPI-IW o 9.2%). The in la ion o 2007-2014 a ac ed
a lo o a en ion om academics and he policy make s alike and, acco dingly, a numbe o s udies
ha e looked closely a his pe iod. The deba es and discussions o his pe iod seem o ha e
culmina ed in he RBI shi ing i s mone a y policy amewo k o ha o FIT. Subsequen o he
adop ion o FIT, he in la ion measu es had dipped below long- e m a e ages, be o e spiking up
again on he supply issues igge ed by he Co id-19 and he Russia-Uk aine wa .
1.4. In la ion: causal ac o s
Some o he hemes ha ha e been explo ed in he con ex o Indian in la ion dynamics,
pa icula ly a e 2006, a e as ollows. Goyal (2014) classi ies supply shocks as domina ing he
in la ion while demand shocks domina ed ou pu . The ulne abili y o in la ion o supply shocks
was highligh ed by se e al au ho s, such as Goka n (2010a), Banda a (2013), Chand (2010), Nai
and Eapen (2012), and SBI (2022). While ood in la ion was admi ed as he domina ing aspec o
o e all in la ion, i is in e es ing o no e ha he easons a ibu ed o he same included cos -
push ac o s and wage in la ion h ough Maha ma Gandhi Na ional Ru al Employmen Gua an ee
Ac (MNREGA) (Bha acha ya and Gup a, 2015), highe u al demand (Mohan y, 2010, 2011), and
changing income, consump ion ac o s, and p o ein demand (Goka n, 2010b). Howe e , in a
disagg ega ed analysis o 12 commodi ies, Nai and Eapen (2012) ound li le e idence o suppo
he popula iew o a secula shi in consump ion pa e ns owa ds high- alue ag icul u al
p oduc s. The ole o adminis e ed p ices was also men ioned as con ibu ing o in la ion, hough
e y ew s udies seem o ha e o mally used his as an explana o y a iable. We discuss his opic
in mo e de ail in sec ion 2.
1.5. Theo e ical unde pinnings o he policy
The mains eam mac oeconomics has accep ed he pa adigm o he New Keynesian Phillips Cu e
(NKPC) amewo k. This is he ounda ion o he popula dynamic s ochas ic gene al equilib ium
(DSGE) model, “[…] which is he wo kho se model o he analysis o mone a y policy a majo
cen al banks” (RBI, 2014b). These models a e based on a ional expec a ions, op imising
beha iou , clea ing ma ke s, and nominal igidi ies ha allow he non-neu ali y o mone a y
policy. In he simple e sion, i consis s o h ee basic ela ionships: (i) a Phillips Cu e linking
in la ion posi i ely o he ou pu gap (ac ual ou pu less po en ial ou pu ) and a ional ( o wa d
looking) in la ion expec a ions, (ii) an in es men -sa ing (IS) ela ion ha links he ou pu gap o
i s own expec ed o wa d alue and nega i ely o he in e es a e gap ( he nominal a e less he
expec ed in la ion a e less he na u al a e o in e es ), and (iii) a mone a y policy eac ion ule
(Taylo , 1993) ha speci ies he sho - e m nominal in e es a e as a unc ion o he ou pu gap
and he in la ion gap (in la ion expec a ion less a ge ed in la ion) and an exogenous policy shock.
This subs i u es o he e s while LM cu e. Gi en his amewo k, in la ion a ge ing can be
achie ed by minimising a quad a ic loss unc ion ha is equal o a summa ion o u u e alues o
he ou pu gap and in la ion. In he case o s ic in la ion a ge ing, he ou pu gap a iable will
ha e a ze o weigh and, in he case o lexible in la ion a ge ing, he ou pu gap will ha e a non-
ze o weigh (RBI, 2014b).
474 In la ion dynamics in India: A s uc u al iew
PSL Qua e ly Re iew
Howe e , he consensus amewo k has been some imes ques ioned on i s assump ions and
applica ion o he eme ging ma ke s. Ne e heless, he pa adigm s ill h i es, possibly on accoun
o i s “cogni i e cap u e” o NKPC o e he en i e s eam o academia, mains eam economis s,
ad iso s o he go e nmen , jou nal publica ions, ci a ions, e c., ha seems o en ench his
pa adigm and igno e “he e odox pe spec i es” (Nachane, 2018). In pa icula , he heo y based
on expec a ions has been c i icised o being a “bi s and pieces” app oach and a “boo s ap heo y”
being a “week eed” (Goodha , 2021); also, o being “ ei ied” in o a “ eali y ha e e yone knows”
bu wi h minimal di ec e idence wi h no examina ion o al e na i es (Rudd, 2021). A e he
global inancial c isis (GFC) o 2008-2009, he policy o in la ion a ge ing by he DCs came unde
c i icism. I s success seems o ha e come h ough a s uc u al dynamic o cheap labou (Goodha ,
2021) and a “benign economic en i onmen ” (Beckwo h, 2014). The GFC u ned he a en ion o
he b oade inancial s abili y ha includes p ice s abili y, asse p ice in la ion, and mac o
p uden ial no ms. O he au ho s ha e poin ed ou ha he in la ion a ge ing may ha e ac ually
wo ked in he opposi e di ec ion, o p o iding o e all inancial s abili y (Beckwo h, 2014;
Ch is iano e al., 2007). In he Indian con ex also, a yea be o e adop ing he FIT egime, he RBI
had highligh ed he need o expand he policy manda e om p ice s abili y o mul iple objec i es,
including inancial s abili y, p ice s abili y, and so e eign deb sus ainabili y (RBI, 2013).
Wi h espec o eme ging ma ke s, he amewo k poses u he issues as i has e ol ed ou
o he de eloped ma ke s wi h a ocus on agg ega e demand, ini ially he sho age o i and need
o go e nmen ac ion o push o he same and, la e , he inadmissibili y o s e ching demand
beyond a na u al ull employmen le el. By and la ge, he supply side has been aken as gi en and
some hing ha would adjus . A e eshing admission o his e ec has come in he ecen pas
om he high ci cles o cen al banking (ECB Cen al Banking Fo um, 2022; Powell, 2022).
I onically, despi e a long his o y o s uc u al igidi ies, he Indian mone a y policy has swo n by
he same amewo k and pe haps no gi en su icien impo ance o he s uc u al aspec s ha
needed o be add essed o achie e a low in la ion en i onmen . Gi en he o egoing, his pape
a emp s, in he nex sec ion, o look mo e closely a he s uc u al issues in he con ex o he
Indian economy.
2. The s uc u al issues in he economy
2.1. Sec o al imbalances
In he con ex o de elopmen economics, i had been ecognised ha in la ion dynamics can be
qui e di e en in he de eloping coun ies as compa ed o he de eloped coun ies (Basu, 2003).
Kalecki (1995) obse ed ha , in he p ocess o de elopmen , i ag icul u al supplies a e inelas ic,
in la iona y p essu es will build up and hence he e is need o he ag icul u e and indus y o
g ow in a balanced manne . Simila ly, Kaldo (1976) ecognised he impo ance o he balanced
g ow h be ween sec o s as impo an o non-in la iona y g ow h. He sugges ed ha he e ms o
ade o he p ima y sec o need o be a ou able, as commodi y ma ke s we e seen as p ice
sensi i e while indus ial p ices a e adminis e ed and hence no ma ke clea ing in na u e.
In he ligh o he o e whelming e idence o supply-side na u e o in la ion in India,
Balak ishnan and Pa ameswa an (2019) ques ion he in e p e a ion o high in la ion as a di ec
measu e o o e hea ing o he economy. I is no necessa y o he supply o p o ide a nega i e
shock in o de o igge in la iona y p essu es, bu an imbalance o sub-op imal g ow h in
ag icul u e can also ac as igge . In a si ua ion o s uc u al imbalance, he e could be in la ion
R. Kundu hi, S.R. Kallu u 475
PSL Qua e ly Re iew
wi h o wi hou economic expansion, based on he ype o shock. They empi ically concluded ha
“NKPC is a poo p edic o o In la ion in India” and ha a s uc u al model wi h ela i e p ices and
ou pu s explains he Indian in la ion be e .
Table 1 p esen s he long- e m g ow h a es o he main sec o s in he Indian economy. The
pe iods a e g ouped co esponding o he espec i e mone a y policy egimes. The annual
pe cen age g ow h a es o he whole pe iod, which a e help ul o unde s anding he clea end,
a e also p esen ed in igu e 4.
Table 1 – Long- e m sec o al a e age g ow h a es (% pe annum)
Pe iod
Ag icul u e
Manu ac u ing
Se ices
GDP
1951-1952 o 1984-1985
2.7
5.3
4.5
3.9
1985-1986 o 1998-1999
3.2
6.0
7.0
5.6
1999-2000 o 2013-2014
3.2
6.8
7.6
6.4
2014-2015 o 2021-2022
3.5
6.0
5.7
5.3
Whole pe iod:
1951-1952 o 2021-2022
3.0
5.9
5.7
4.9
Sou ce: he Hand Book o S a is ics; able 3, Rese e Bank o India.
Figu e 4 – Sec o al annual g ow h a es (% pe annum)
Sou ce: he Hand Book o S a is ics, Rese e Bank o India.
-13
-8
-3
2
7
12
17
1951-52
1953-54
1955-56
1957-58
1959-60
1961-62
1963-64
1965-66
1967-68
1969-70
1971-72
1973-74
1975-76
1977-78
1979-80
1981-82
1983-84
1985-86
1987-88
1989-90
1991-92
1993-94
1995-96
1997-98
1999-00
2001-02
2003-04
2006-07
2008-09
2010-11
2012-13
2014-15
2016-17
2018-19
2020-21
Sec o al G ow h Ra es (% p.a.)
Manu ac u ing Se ices Ag icul u al Sec o
476 In la ion dynamics in India: A s uc u al iew
PSL Qua e ly Re iew
I is clea ha he “Hindu a e o g ow h” o 3% pe sis ed in ag icul u e o e he decades,
hough manu ac u ing and se ices ha e shi ed hei ajec o y a e he 80s. The ola ili y in he
ag icul u al sec o (including o es y and ishe ies) is e y high as compa ed o ha o he
manu ac u ing and se ices sec o , highligh ing he o me sec o ’s dependence on he aga ies
o he monsoon. Since 1991-1992 he e ha e been eigh occasions whe e ag icul u al g ow h has
been nega i e and a couple o mo e occasions whe e i was ma ginally posi i e. Tha means ha ,
on a e age, we ha e a d op in ag icul u al ou pu a leas once in h ee yea s. In he pe iod whe e
in la ion a ac ed a lo o a en ion, iz., 2002-2003 o 2015-2016, he manu ac u ing and se ices
sec o g ew a an a e age o 8.1% and 7.8% pe annum (p.a.), while he ag icul u al sec o g ew
a 2.9% p.a. wi h ou yea s o nega i e g ow h and one yea o ma ginally posi i e g ow h. Thus,
he supply shock was o 5 ou o 14 yea s. The si ua ion is wo se when g ow h is conside ed in
he Ag icul u al P oduc ion Index alone; his shows 13 occasions o nega i e g ow h since 1991-
1992 and 7 yea s o nega i e g ow h be ween 2002-2003 o 2015-2016. As a complemen o hese
g ow h di e en ials, we look a long- e m a e age in la ion di e en ials be ween he ood sec o
and o he s in able 2. The pe iods a e g ouped oge he as pe he high- s he low-in la ion yea s.
Table 2 – Annual a e ages o in la ion componen s
Yea s
CPI-IW
o al
CPI-IW
ood
CPI-IW
non- ood
WPI
o al
WPI
ood
WPI
manu ac u ed
1982-1983 o 1998-1999
9.3
9.5
9.1
7.7
9.4
7.2
1999-2000 o 2006-2007
5.0
4.1
6.0
5.2
4.8
3.9
2007-2008 o 2015-2016
8.7
9.9
7.7
5.0
9.5
3.9
2016-2017 o 2022-2023
5.2
4.3
5.8
4.9
4.2
3.9
1982-1983 o 2022-2023
7.5
7.4
7.5
6.1
7.5
5.3
Sou ce: he Hand Book o S a is ics, Rese e Bank o India.
P ima acie, i appea s ha he high in la ion episodes we e all cha ac e ized by he s onge
in luence o ood in la ion. As men ioned abo e, he di e en ial sec o al g ow h a es seem o
con ibu e o his phenomenon. In pe iods o nega i e g ow h a es in ag icul u e, his imbalance
becomes much mo e p ominen . Essen ially hen, in such pe iods he issue becomes whe he he
economy has excess demand o a sho age o supply. Viewed om he pe spec i e o excess
demand, he sugges ion was o keep he mone a y policy s ance igh o a conside able leng h o
ime (Anand e al., 2014). Simila ly, ci ing he ole o expec a ions, in la ion a ge ing and
“agg essi e and p e-emp i e policy ac ion” we e ecommended (Pa a e al., 2014). A s uc u al
a gumen , on he o he hand, would ocus on b idging he sho ages as he p incipal heme o
policy a he han cu ailing demand and incomes.
R. Kundu hi, S.R. Kallu u 483
PSL Qua e ly Re iew
Table 7 – Reg ession esul s o annual da a
Va iable
Coe icien
-s a is ic
CPI_IW (–1)
0.2314
1.6912*
MSP
0.0934
0.9981
MSP (–1)
0.2283
2.6068**
AGR_PTION (–1)
–0.1425
–2.4539**
CALL_RATE
0.3438
2.6446**
CALL_RATE (–1)
–0.1682
–1.1864
C
2.2880
2.1709**
Adjus ed R-squa ed
0.48
Log likelihood
–84.75
F-s a is ic (p ob)
7.14 (0)
Du bin-Wa son s a
2.03
No e: ***, ** and * ep esen 1%, 5% and 10% le el o signi icance.
The coe icien s o he s uc u al a iables o Ag _P ion (–1) and MSP (–1) exhibi ed expec ed
signs and a e s a is ically signi ican . Al hough MSP o he same pe iod also had he co ec sign,
i was no s a is ically signi ican . The Wald es o MSP and i s i s lag showed ha hey a e
join ly also s a is ically signi ican . I is no able ha he call a e was no s a is ically signi ican ,
al hough o he con empo aneous a iable i had he expec ed posi i e sign. The CPI-IW’s on lag
was also s a is ically signi ican a 10% le el. These esul s sugges ha such ine ial in la ion is
s emming om s uc u al ac o s ha could no be amed ia demand managemen . The model
sa is ied he diagnos ic checks o esidual au o-co ela ion, he e oskedas ici y, and s abili y,
including Ramsey ese es and he CUSUM squa es es ( esul s a ailable on eques ).
4.2. Model based on qua e ly da a
In o de o delinea e he s uc u al impac , i any, a e he e o m pe iod, we a emp o model a
simila speci ica ion based on qua e ly da a, s a ing om he qua e ending June 1997 o Ma ch
2023. Qua e ly a e age g ow h a es o he CPI_IW, Non_ag _ag , MSP_Uni o m, and qua e ly
a e age Call_ a es we e used as he a iables, as explained in sec ion 4, abo e.
As shown abo e, he imbalance e m (Non_ag _ag ) and Call_ a e we e I(0), while he CPI_IW
and MSP_Uni o m we e I(1). Acco dingly, we employ he ARDL (au o- eg essi e dis ibu ed lag)
model de eloped by Pesa an e al. (1996, 2001) o he long- un ela ionships based on qua e ly
da a, in iew o i s abili y o gene a e unbiased es ima es o he long un e en when a ew o he
eg esso s a e endogenous and i does no equi e all a iables in he same o de o in eg a ion,
i.e., I(0) o I(1). The ARDL p ocedu e consis s o wo s ages. Fi s , he long- e m ela ionship is
es ima ed as ollows:
𝛼(𝐿, 𝑝)𝑦𝑡= 𝐴0+∑𝛽𝑖
𝑘
𝑖=1 (𝐿, 𝑞)𝑋𝑖𝑡 + 𝜇𝑡 (2)
484 In la ion dynamics in India: A s uc u al iew
PSL Qua e ly Re iew
whe e: 𝐴0 is a cons an ; 𝑦𝑡 is he a ge a iable, iz., CPI-IW; 𝑋𝑖𝑡, is he ec o o eg esso
a iables, iz., Non_ag _ag , Call_ a es, and MSP_Uni o m; and 𝛼(𝐿, 𝑝) and 𝛽(𝐿, 𝑞) a e polynomials
o o de 𝑝 and 𝑞 o he lag ope a o 𝐿; 𝜇 is he e o e m. The long- un ela ionship is es ed wi h
he F-Bounds es , o he join signi icance o all he explana o y a iables. I a ela ion is obse ed
by ejec ing he null o no long e m ela ion, he sho - e m e o co ec ion e m is es ima ed,
speci ying he speed o co ec ion, as ollows:
∆𝑦𝑡= ∆𝛼0+∑𝑎𝑗
𝑝
𝑗=1 ∆𝑦𝑡−𝑗 +∑ ∑ 𝛽𝑖𝑗
𝑞
𝑗=1
𝑘
𝑖=1 ∆𝑋𝑖,𝑡−𝑗 − 𝛾𝐸𝐶𝑡−1 + 𝜇 (3)
and 𝐸𝐶𝑡= 𝑦𝑡− 𝑎 − ∑𝑏
𝑖
𝑘
𝑖=1 𝑋𝑖𝑡, whe e ∆ is he i s di e ence ope a o , 𝑎𝑗, and 𝛽𝑖𝑗 a e he sho -
un dynamic coe icien s, and 𝛾 measu es he speed o adjus men .
We expec a posi i e sign o he coe icien s o he a iables MSP_Uni o m and Non_ag _ag .
The call a es could exhibi a posi i e sign in he ini ial lags, as he policy eac s o in la ion;
howe e , wi h subsequen lags i is expec ed o be nega i e, as he demand adjus men s a e
expec ed o coun e ac he p ice changes. Fo es ima ing he lags, he o de o 7, 3, 4, 8 ( o he
CPI_IW, Non_ag _ag , MSP_Uni o m, and Call_ a e) was chosen based on AIC c i e ia. We obse e
ha , as wi h he annual da a, he qua e ly da a shows ha MSP and imbalance e ms g ange
cause he CPI-IW, while he he CPI_IW g ange causes he imbalance e m. The esul s o he
es ima ed ARDL (7, 3, 4, 8) a e shown in able 8.
1
Table 8 – Long- e m esul s o he ARDL model wi h qua e ly da a
Dependen a iable: CPI-IW
Va iable
Coe icien
-s a
CPI-IW
—
—
MSP_Uni o m
0.61
4.80***
Non_ag _ag
0.28
2.35**
Call_ a e
–0.91
–2.47**
R-squa ed
0.91
Du bin Wa son
1.99
F-Bounds es
10.25***
No e: *** and ** ep esen 1% and 5% le el o signi icance.
The Wald es s con i m join signi icance o Non_ag _ag and MSP_Uni o m coe icien s a he
1% le el. Wi h espec o Call_ a es, he join signi icance o he coe icien s is jus abo e he 5%
1
In iew o he RBI in e en ions in he exchange a e, go e nmen in e en ions in oil p ices, and ou emphasis on
domes ic s uc u al a iables, we ha e no conside ed he in e na ional a iables in he model p esen ed. Howe e , we
also an an al e na e model, including he a iables o exchange a e and in e na ional oil p ices, iz., USD/INR and
CLc1, measu ed in e ms o pe cen age change yea -on-yea , on he mon hly da a, a e aged o e he qua e s, so as o
be consis en wi h he o he a iables. Al hough he adjus ed R^2 imp o es ma ginally om 0.89 o 0.90, he
coe icien s hemsel es a e no s a is ically signi ican (excep o he CLc1 change a iable a he 10% le el in he 8 h
lag, wi h a e y low coe icien ). The esul s o he al e na e model a e a ailable on eques .
R. Kundu hi, S.R. Kallu u 485
PSL Qua e ly Re iew
le el. Howe e , he Wald es o he coe icien s o he i s i e e ms o Call_ a es is no
s a is ically signi ican . Only he lags o 5-8 qua e s a e join ly signi ican . This is in line wi h he
mains eam explana ion o in e es a es e ec ing he CPI only indi ec ly and a e signi ican lags.
Based on he signi ican F-s a is ic, we ejec he null (o no ela ionship). Acco dingly, he e o
co ec ion is es ima ed wi h he esul s shown in able 9.
Table 9 – Sho - e m coe icien s om he e o co ec ion es ima ion
Dependen a iable: Δ CPI-IW
Va iable
Coe icien
-s a
Cons an
1.76
6.19****
Δ CPI-IW
Δ CPI-IW (–1)
–0.01
–0.12
Δ CPI-IW (–2)
0.16
1.97*
Δ CPI-IW (–3)
0.05
0.77
Δ CPI-IW (–4)
–0.39
–5.84***
Δ CPI-IW (–5)
0.1
1.46
Δ CPI-IW (–6)
0.18
2.57***
Δ MSP Uni o m
0.01
0.32
Δ MSP Uni o m (–1)
–0.08
–1.62
Δ MSP Uni o m (–2)
–0.13
–2.72***
Δ MSP Uni o m (–3)
–0.08
–1.62
Δ Non_ag _ag
0.03
2.09**
Δ Non_ag _ag (–1)
–0.01
0.12
Δ Non_ag _ag (–2)
–0.05
–3.18***
Δ Call_ a e
–0.06
–0.54
Δ Call_ a e (–1)
0.26
2.16**
Δ Call_ a e (–2)
0.1
0.76
Δ Call_ a e (–3)
–0.01
–0.11
Δ Call_ a e (–4)
0.26
2.42**
Δ Call_ a e (–5)
0.24
2.82***
Δ Call_ a e (–6)
0.29
3.61***
Δ Call_ a e (–7)
0.17
2.20**
ECT (–1)
–0.25***
R-squa ed
0.65
F-s a is ic
10.25***
No e: ***; **, and * ep esen 1%, 5%, and 10% le el o signi icance.
486 In la ion dynamics in India: A s uc u al iew
PSL Qua e ly Re iew
The sho - e m coin eg a ing equa ion was he e o e es ima ed o be:
D(CPI_IW)=1.76–0.25*(CPI_IW(–1)–(0.61*MSP_UNIFORM(–1)+0.28*NON_AGR_AGR(–1)–
0.91*CALL_RATE(–1))) (4)
The model sa is ied a ious diagnos ic checks o esidual au o-co ela ion,
he e oskedas ici y, and s abili y, including he Ramsey ese es and he CUSUM squa e es .
These, along wi h he model i s ac uals and esiduals, a e p o ided in able A1 in he appendix.
Based on he coe icien s, he sensi i i y o he CPI-IW o MSP and imbalance e ms can be
es ima ed. Fo example, an inc ease in he MSP Index o 8% (wi h he ini ial CPI-IW a 5% and he
imbalance e m a 4%) would lead o a spike in he CPI-IW o 65 basis poin s. Wi h an unchanged
imbalance, he call a es need o be aised o abou 9% o coun e ha e ec . In addi ion, as
men ioned abo e, he join Wald es o he ini ial i e e ms o call a es is no s a is ically
signi ican . Any in la ion con ol h ough in e es a e managemen would hen mean a la ge
adjus men ha would wo k pe haps wi h signi ican delay.
4.3. Policy implica ions: excess demand o supply sho age?
F om he abo e analysis i appea s ha he s uc u al a iables unde discussion ha e a
signi ican explana o y powe o he consume in la ion. The all in he CPI a e he adop ion o
FIT could e y well be explained by he all in commodi y p ices and by a s uc u al model a he
han he NKPC model (Balak ishnan and Pa ameswa an, 2021). As poin ed ou ea lie , he WPI
was al eady alling and in nega i e e i o y, e en a he ime o FIT adop ion. By adop ing a
amewo k ill-sui ed o he economy, in la ion had been desc ibed as an excess demand si ua ion
a he han a supply sho age si ua ion. This is conside ed e y impo an , as he solu ions ha
a e o e ed a e ailo ed acco dingly. In e es a e managemen seems o wo k only wi h
signi ican lag and, going by he sensi i i y no ed abo e, he g ow h sac i ice i en ails could sh ink
incomes o he mos ulne able uno ganised sec o and squeeze hei demand o subsis ence
le el.
4.4. Ag icul u al e o ms
The ac ha supply side issues domina e in la ion is acknowledged, e en in mains eam
mac oeconomics, bu i is la gely side-s epped as some hing ha is no in he con ol o cen al
banks. In ac , he p esc ip ion om IMF o RBI economis s has been o keep he mone a y policy
agg essi e (Pa a e al., 2014) and igh e o a longe pe iod (Anand e al., 2014), possibly o
compensa e he slow e ec o in e es a es on he o e all economy. This appea s o be he policy
s ance as well, despi e mone a y policy ha ing a limi ed impac on he CPI e en i non- ood
in la ion is con olled h ough in e es a es (Mish a and Roy, 2012).
The s uc u al heme needs o be made he cen al agenda in he d i e o ein in in la ion. A
beginning may ha e been made in his di ec ion, going by a ew ecen s a emen s om o icial
ci cles in his ega d on ood in la ion and a m e o ms (Sub amanian and Sha ma, 2022), and on
in e es a e managemen alone being ine ec i e o con olling in la ion (Si a aman, 2022).
Recen ly, we ha e also seen enewed e o s o manage sho - e m logis ics h ough bu e s ocks
and ex e nal ade.
R. Kundu hi, S.R. Kallu u 487
PSL Qua e ly Re iew
In spi e o he go e nmen ’s sho - e m supply managemen e o s om ime o ime, i is
impe a i e o co ec he s uc u al imbalance o add ess he p oblem in he long e m. Clea ly,
Indian ag icul u e has no wi nessed he kind o e o ms ha we e done in 1991 in he
manu ac u ing and se ices sec o s. In all majo c ops, Indian p oduc i i y is signi ican ly below
he leading na ions in he espec i e c ops and e en below he wo ld a e ages (GOI, 2022, pp.
236-237). The low p oduc i i y and unsus ainable inpu -in ensi e p ac ices ha e been well
documen ed (see Chand, 2019, and RBI Bulle in, 2022). The MSP sys em should ac as a empo a y
suppo o c ops ha need encou agemen because o sho ages and highe alue a he han o
he poli ically expedien ones, whe e he e is al eady excess p oduc ion. The e is an u gen need
o c op di e si ica ion away om wa e - and e ilize -in ensi e c ops and adi ional ce eals
such as suga , ice, and whea o highe nu i ional ce eals, pulses, and oilseeds. The subsidy
mechanism and he p ice incen i es need o wo k in his di ec ion. Fu he , he e is need o expose
he sec o o compe i i e p essu es and p i a e in es men s o imp o e e iciency. Acco dingly,
he e is a need o e ec i e ood managemen s a egy, in es men s in s o age o bu e s ocks,
in ol emen o he p i a e sec o , and echnology-led g ow h (Chand, 2010). In sho , o “a
second g een e olu ion ocussed on he ag icul u e-wa e -ene gy nexus, making ag icul u e
mo e clima e- esis an and en i onmen ally sus ainable” (RBI Bulle in, 2022).
5. Summa y and conclusions
We ha e a emp ed o delinea e he dynamics o in la ion in India. The empi ical e idence had
poin ed ou he dominance o supply side ac o s, in pa icula he ood supply, h ough di e en
mone a y policy egimes. While he WPI has a e aged much less a e he e o ms o he 90s, he
CPI-IW had emained s ubbo nly high. The NKPC and he in la ion a ge ing amewo k ocus on
he demand side, while ea ing supply issues as shocks (and by implica ion, no inhe en ly
s uc u al). This does no appea o desc ibe he Indian economic scena io well. The s uc u al
ac o s a e obse ed o p o ide, quali a i ely and empi ically, an equally i no mo e impo an
explana ion o he in la iona y p essu es in he economy. In he con ex o ecu ing supply
sho ages, i is inapp op ia e o add ess in la ion h ough a p ism o excess agg ega e demand,
because o he wel a e implica ions o he income sac i ices. The in la ion con ol ocus should
he e o e be o add ess hese igidi ies in he ood sec o h ough logis ic managemen in he sho
e m and s uc u al e o ms in he long un. The cen al bank should emphasise he limi a ions o
such demand managemen and he need o de elopmen o he ag icul u al sec o as he main
ocus o las ing success in aming in la ion.
Appendix
MSP Index cons uc ion
The MSP p ices o he 15 c ops and c op ca ego ies we e aken as base da a. The WPI weigh s
(base 2012) o he 15 c ops agg ega ed 5.59127% in he WPI. This agg ega e was no malised o
100. The indi idual weigh s in he WPI we e hen aken as a p opo ion o he agg ega ed
no malised weigh o 100 [e.g., ice wi h a weigh age o 1.43052 was con e ed o an MSP weigh
o 25.58489 (1.43052/5.59127*100)].
488 In la ion dynamics in India: A s uc u al iew
PSL Qua e ly Re iew
The da a o 1989-90 was chosen as he base o he MSP calcula ion, as MSP p ices we e a ailable
o all he 15 ca ego ies o c ops in ha yea . The indi idual p ices o 1989-90 we e no malized
o 100 and subsequen p ices we e con e ed o an index o each c op. (e.g., he MSP o ice o
1990-91 was 205 as compa ed o 185 o 1989-90. Thus, he index o MSP o ice in 1990-91
wo ks ou o 110.8108 (205/185*100). The indi idual index hus calcula ed is mul iplied by he
MSP weigh age (23.58489) as abo e o cons i u e i s weigh in he o e all MSP Index. Thus, o
1990-91 he con ibu ion o ice o he agg ega e MSP Index was 28.3508
(25.58489*110.8108/100). The summa ion o all he con ibu ions p o ided he o al MSP Index
o ha yea . The yea -on-yea change is hen cap u ed as he pe cen age change in he index.
P ocu emen da a was no used o weigh ages, as he adminis e ed MSP essen ially se s a loo
and p ocu emen ypically happens i he ee-ma ke p ice ends o be below he MSP. The p ice
ca ego ies and he p ices a e aken om he RBI Hand Book o S a is ics, ables 25 and 26. The
indices we e ex ended backwa ds un il 1980-1981 by assuming epea ed p ices o he yea s in
which hey we e no announced (so ha he change in MSP would ha e been ze o o hose yea s
o hose pa icula commodi ies).
Table A1 – Diagnos ic checks – ARDL – qua e ly da a
B eusch-God ey se ial co ela ion LM es :
Null hypo hesis: No se ial co ela ion a up o 1 lag
P ob
F-s a is ic
0.3471
P ob. F(2,68)
0.7079
Obs*R-squa ed
0.9703
P ob. Chi-squa e(1)
0.6156
He e oskedas ici y es : B eusch-Pagan-God ey
Null hypo hesis: Homoskedas ici y
P ob
F-s a is ic
1.4071
P ob. F(25,70)
0.1337
Obs*R-squa ed
32.1077
P ob. Chi-squa e(25)
0.1549
Scaled explained SS
12.1433
P ob. Chi-squa e(25)
0.9854
Ramsey RESET es
Omi ed a iables: Squa es o i ed alues
Value
d
P ob
-s a is ic
1.5468
69
0.1265
F-s a is ic
2.3925
(1, 69)
0.1265
Likelihood a io
3.2723
1
0.0705
R. Kundu hi, S.R. Kallu u 489
PSL Qua e ly Re iew
Figu e A1 – CUSUM squa e es
Figu e A2 – Residuals; and ac ual s i ed
Re e ences
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0
1
2
0
4
8
12
16
10 20 30 40 50 60 70 80 90 100
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490 In la ion dynamics in India: A s uc u al iew
PSL Qua e ly Re iew
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14(1), pp. 127-156.
Basu K. (2003), Analy ical De elopmen Economics: The Less De eloped Economy Re isi ed, Camb idge (MA): MIT P ess.
Beckwo h D. (2014), “In la ion Ta ge ing: A Mone a y Policy Regime Whose Time Has Come and Gone”, Me ca us
Resea ch, A ling on (VA, USA): Me ca us Cen e , Geo ge Mason Uni e si y. A ailable online.
Bha acha ya R. and Gup a A.S. (2015), “Food In la ion in India: Causes and Consequences”, NIPFP Wo king Pape , no.
2015-151, June, New Delhi, Na ional Ins i u e o Public Finance and Policy. A ailable online.
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