Double-digit inflation for a year: 6th spell since 1953 & 1st in 25 years

In March this year, India completed 12 successive months of double-digit wholesale price inflation (WPI inflation). This is the sixth occasion when inflation has remained over 10% for a year or longer, and it came more than a quarter of a century after the last such episode — between March 1994 and May 1995.

Three of the episodes happened before the early 1980s, a period of volatile inflation, while the fourth was caused among other things by the devaluation of the rupee in 1991-92 in the wake of a forex crisis. The analysis of past data, which is available since April 1953, shows that earlier spells of double-digit inflation for a year or more had different causes, ranging from droughts and wars to currency devaluation and major global commodity price shocks.

Also, the high dependency on food and other imports (India got 82% of the population and 75% of the cereal production of the undivided country), plateauing agricultural yields in the 1950s and frequent droughts left policymakers with very little leg-room to manoeuvre through the price rise menace in the early decades of Independence. Independent India saw its first extended spell of double-digit WPI inflation in the 11 months between April 1956 and February 1957.

In a 2010 speech, Deepak Mohanty, then RBI executive director, linked this spell to a drought and a decline in agricultural output for two consecutive years. This was the pre-Green Revolution period, when yields had stagnated and there was no price support from the government. The second spell was the seven months between August 1964 and February 1965. The year 1965 saw the double whammy of drought as well as war with Pakistan. Next was a 21-month-long episode between March 1966 and November 1967.

Like the previous year, 1966 too was a drought year and also saw a devaluation of the Indian rupee, which made imports more expensive. India’s longest spell of double-digit inflation happened between October 1972 and March 1975. This was immediately after the 1971 war with Pakistan and the 30-month episode saw a drought year in 1972 and the first global oil shock in 1973.

The next major episode was the 26 months between July 1979 and August 1981. This was also caused by the oil shock after the Iranian revolution, the Iran-Iraq war and the drought in 1979. In the early liberalisation period of the 1990s, the rupee was again devalued making imports expensive.

The 21 months between Nov 1990 and July 1992 saw WPI inflation remaining stubbornly in double digits. The next over-a-year-long stretch of douible-digit inflation happened between March 1994 and May 1995 which Mohanty in his speech attributed to the hike in administered prices, shortfalls in cash crop production, high fiscal deficit and large monetary expansion.

After May 1995, India had not had even six successive months of 10% plus inflation till the latest unbroken run. Although there is a sudden rise in oil prices after the Russia-Ukraine war, WPI inflation has been at double-digit levels from well before the war.