The Indian Economy: Dealing with Inflation

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Case Details:

Case Code : ECON020
Case Length : 12 Pages
Period : 2006-2007
Pub Date : 2007
Teaching Note :Not Available
Organization : -
Industry : -
Countries : India

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This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.

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"As far as inflation is concerned, we are adopting a multi-prolonged strategy that will yield results soon."1

- Dr. Manmohan Singh, Prime Minister of India, in February 2007.

"The main instrument that the Finance Minister has used in the budget is fiscal controls which will show results in three months. Fiscal deficit at 3.3% of GDP is the lowest in 25 years. But price controls are measures which should be left to the market to decide."2

- Dr. Amit Mitra, Secretary General, FICCI 3, in March 2007.

"The current rate of inflation is not as high as 2000-01. The (then) Government took 12-18 months to moderate inflation rate in 2000-01. Inflation spurts in the past have been moderated and we are confident of moderating the current rise. We will continue to take fiscal, monetary and supply side steps to moderate inflation rate."4

- P. Chidambaram, Finance Minister of India, in March 2007.


In early 2007, in India, the inflation rate, as measured by the wholesale price index (WPI)5, hovered around 6-6.8%, well above the level of 5-5.5% that would have been acceptable to the Reserve Bank of India (RBI), the country's central bank.6 On February 15, 2007, the inflation rate reached a two-year high of 6.73%. In the past7, the main cause of high inflation in India used to be rises in global oil prices. However, in early 2007, the chief component of the inflation was the increase in the prices of food articles - caused by increased demand as well as supply constraints. According to analysts, the increased demand was due to high economic growth and increased money supply, while stagnant agricultural productivity was behind the supply constraints. 

Apart from the rise in prices of food articles, fuel and cement prices too recorded high increases. The Government of India (GoI), together with the RBI, took several measures to contain inflation. For example, the RBI increased the Cash Reserve Ratio (CRR)8 and repo rates9 in an effort to check money supply; the GoI reduced import duties on several food products and cut the price of diesel and petrol.

The RBI also chose not to intervene when the Indian Rupee rallied against the US Dollar between March 2007 and May 2007. The decision not to intervene was based on the idea that a stronger Rupee would bring down the cost of imports, which, in turn, would help reduce domestic prices of goods. Though the measures taken by the GoI were targeted at inflation, some analysts feared that some of these measures, especially the ones leading to higher interest rates, might induce recession in the Indian economy. There were others who felt that letting the Rupee rise would not only have a negative effect on the bottom lines of companies that earn a substantial percent of their profits from exports, but also impact the long-term competitiveness of Indian exports.

The Indian Economy: Dealing with Inflation - Next Page>>

1] “India Tries to Allay Fears as Inflation Hits 6.73%,”, February 16, 2007.

2]  Hassimran Singh, “Opinion Divided on Price Spiral,” The Economic Times, March 02, 2007.

3]  Federation of Indian Chambers of Commerce and Industry, founded in April, 1927, acts as a forum for government industry interface. It has a nation-wide membership of around 1,500 corporates and over 500 chambers of commerce and business associations. It has instituted professional committees on all segments of the economy. (Source:

4]  “Inflation will be Moderated: Chidambaram,”, March 06, 2007.

5]  The Wholesale Price Index (WPI) is the index that is used to measure the change in the average price levels of goods (both agricultural and industrial) traded in the wholesale market (compared to the base year 1993-94). In India, the WPI is taken as the indicator of the rate of inflation and includes in all 435 items.

6]  “Not Just India, Inflation on Run Worldwide,”, March 28, 2007.

7]  India witnessed inflationary trends in 1973-74 due to a combination of drought in various parts of the country, the effects of war, and the oil crisis. Between 1979 and 1981, the inflation rate was high (11%) again due to drought and a sharp increase in oil prices. In 1991-92, the inflation rate crossed 13%, mainly due to financial mismanagement; oil prices too increased in this period.

8]  The portion (expressed as a percent) of depositors' balances banks must have on hand as cash. This is a requirement determined by the country's central bank.

9]  The central bank sells securities to commercial banks and agrees to repurchase it at a specific date and at a pre-agreed price. Through this operation, commercial banks are effectively borrowers of funds to finance further purchases of securities, and pay an interest to the central bank. This rate of interest is referred to as repo rate. The reverse repo rate is the rate commercial banks earn on funds that they lend to the central bank. Some central banks use repos and reverse repos in government debt as part of their money market operations. (Source:


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