India has come a long way ahead to become an industrialised nation in the past decade (2000-2010). The key to India’s standing amongst the industrialised nations is its growth story (GDP growth). And for a country growing rapidly, inflation tends to be slightly on the higher side. There is inevitably a tendency for domestic prices to catch up with international prices. This thus boils down to higher inflation rates.

 

Sighting the above, India’s policymakers have now accepted the fact that the country's fast-growing economy will have to live with a spike of up to 2% in the annual headline (i.e. WPI) inflation rate. Thus now, this will translate into a new normal or comfort range of 6% – 7% for the headline inflation, thereby putting an end to the decade- old norm of 5% for the headline inflation.

 

India’s Chief Economic Advisor, Mr. Kaushik Basu commenting on the new inflation range said, “We will probably have to live with a little higher inflation. When a country grows very rapidly, there is inevitably a tendency for domestic prices to catch up with international prices. We know from purchasing power parity calculations that Indian prices are about a third to a fourth of those in industrialised nations. If, over the next 30 years, we are going to break into the bottom ranks of industrialised nations, there will inevitably be a bit of catch-up on prices. This could mean an additional 1.5-2% inflation per annum, which we will have to get used to as a concomitant of rapid growth.”

 

At PersonalFN, we believe that the head line inflation has always been a concern with the policymakers - be it the RBI (Reserve Bank of India) or the Finance Ministry. India’s fast growing pace will inevitably attract higher inflation going ahead and thus adopting a new normal range for the inflation rates would be in the economic interest of the country. However, adopting a higher range of inflation is no harm but the efforts to curb down the spiralling inflation should not be compromised otherwise it could have a detrimental impact on the growth of the Indian economy. Personal FN’s expectations on the headline inflation have been modest - i.e. in the range of 6.50% - 7.00% by fiscal year end.

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