ECON/020

IBS Center for Management Research

The Indian Economy: Dealing with Inflation

This case was written by Sachin Govind and Barnali Chakraborty, under the direction of S.S.George, IBS Center for
Management Research. It was compiled from published sources, and is intended to be used as a basis for class discussion
rather than to illustrate either effective or ineffective handling of a management situation.

2007, IBS Center for Management Research. All rights reserved.

To order copies, call +91-8417-236667/68 or write to IBS Center for Management Research (ICMR), IFHE Campus, Donthanapally,
Sankarapally Road, Hyderabad 501 504, Andhra Pradesh, India or email: [email protected]

www.icmrindia.org
 ECON/020

The Indian Economy: Dealing with Inflation

“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, FICCI3, 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.
INTRODUCTION
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.

1
“India Tries to Allay Fears as Inflation Hits 6.73%,” www.industryweek.com, 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: www.ficci.com)
4
“Inflation will be Moderated: Chidambaram,” www.timesofindia.indiatimes.com, 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,” www.financialexpress.com, 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.

1
 The Indian Economy: Dealing with Inflation

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.

WHAT IS CAUSING INFLATION?

Inflation is the rise in prices which occurs when the demand for goods and services exceeds their
available supply. In simpler terms, inflation is a situation where too much money chases too few
goods (Refer Exhibit I to know more about inflation).
In India, the wholesale price index (WPI), which was the main measure of the inflation rate
consisted of three main components – primary articles, which included food articles, constituting
22% of the index; fuel, constituting 14% of the index; and manufactured goods, which accounted
for the remaining 64% of the index (Refer Exhibit II for the weightages of different
commodities in the WPI). For purposes of analysis and to measure more accurately the price
levels for different sections of society and as well for different regions, the RBI also kept track of
consumer price indices10 (Refer Exhibit III for the rates of inflation based on different indices
between 2001 and 2006).
The average annual GDP growth in the 2000s was about 6% and during the second quarter (July-
September) of fiscal 2006-2007, the growth rate was as high as 9.2%. All this growth was bound to
lead to higher demand for goods. However, the growth in the supply of goods, especially food articles
such as wheat and pulses, did not keep pace with the growth in demand. As a result, the prices of food
articles increased. According to Subir Gokarn, Executive Director and Chief Economist, CRISIL, “The
inflationary pressures have been particularly acute this time due to supply side constraints [of food
articles] which are a combination of temporary and structural factors.”11
Slow agricultural growth was a major area of concern. In the 2000s, there was hardly any growth
in agricultural production. The Green Revolution12 had significantly increased agricultural output
efficiency in the 1970s and early 1980s; however, agricultural yields and productivity levels had
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: http://glossary.reuters.com)
10
Consumer Price Index or Retail Price Index is an inflationary indicator that measures the change in the
cost of a fixed basket of products and services, including housing, electricity, food, and transportation.
(Source: www.investorwords.com)
11
Shalini S. Dagar, “Why the Inflation Rate is Rising?” p 18, Business Today, March 11, 2007.
12
The Green Revolution is a term used to describe the transformation of agriculture in many developing
nations that led to significant increases in agricultural production between the 1940s and 1960s. The
introduction of high-yielding varieties of Indian seeds after 1965 and the increased use of fertilizers and
irrigation are known collectively as the Indian Green Revolution.

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 The Indian Economy: Dealing with Inflation

stagnated since then. Analysts attributed this to the myriad problems faced by the agriculture
sector. Soil fertility levels were declining and with excessive use of pesticides and deforestation
leading to soil erosion, the situation looked grim. There was also a drop in the groundwater level
across the country. With further addition of land for agriculture appearing to be impossible, experts
commented that the country had no choice but to initiate a “Second Green Revolution” if it did not
want high inflation to become a permanent phenomenon.
Although India was one of the world‟s largest producers of foodgrains, inadequate distribution links
and poor storage and processing capacity have led to a huge amount of food grains getting wasted.
Agricultural investment had also fallen from 1.9% of the GDP in 1990-91 to 1.3% in 2003-04.13
Agriculture contributed to 21-22% of GDP but accounted for just 5.7 % of the total investment (as
of 2004).
Analysts suggested that to achieve growth in agriculture, the supply side constraints had to be
removed. The support system had to be reoriented to improve productivity and incomes of farmers,
especially the small and marginal farmers. There was also an urgent need for restructuring
agriculture with new technology and investment. Irrigation needed to be given priority. Analysts
also suggested that in order to improve soil quality, the government needed to restructure fertilizer
subsidies so that farmers did not favor one type of fertilizer (nitrogenous) over others (phosphatic,
potassic, sulfuric, and micronutrients).
The annual rate of food-price inflation was 10% in January 2007, compared with 7.6% in January
2006. In the same period, the price of wheat had risen by 12%. While several economists said that
the increase in prices of food articles was the main reason behind the recent inflation, others also
gave weightage to global factors. For example, lower harvests of wheat, especially in Australia and
Brazil, had resulted in lower supply of wheat to the international market, which led to an increase
in the world price of wheat. This global trend put pressure on the domestic price of wheat. Some
analysts were of the view that global prices of wheat had begun to put pressure on domestic prices
because the government was unable to build up enough buffer stocks, with which it could have
suppressed any speculative activity. The inability to build adequate buffer stocks was partly
because of the low minimum support price (MSP) offered by the government and partly because
corporates like Cargill were able to lure farmers with higher prices.
Similarly, the price of edible oils went up by 43% between January 2006 and January 2007. According
to the advance estimate released by the Agriculture Ministry, the total oilseed production in November
2006-October 2007 was expected to be 23.3 million tons compared to 28.0 million tons in the previous
year. This decrease in output level meant higher imports of edible oil. However, the international prices
of edible oils, especially palm oil, were increasing. The fact that palm oil was increasingly being used
to produce bio diesel was contributing to the upward movement in its prices. Global palm oil prices
were expected to continue to remain high. India imported around 3.8 million tons of palm oil annually,
meeting around one-fourth of its edible oil requirements. Therefore, the increase in international prices
of palm oil would have a significant impact on domestic prices.
The prices of pulses increased by 25.4% between January 2006 and January 2007. In the 2007-
2008 budget, P. Chidambaram (Chidambaram), the Finance Minister of India, admitted that there
was “stagnation in the production and productivity of pulses”.
Apart from agricultural commodities, prices of manufactured products also increased.
The rise in money supply also contributed to the inflation. In 2006-07, the annual growth rate of
money supply was 22.1%, much higher than the 15-15.5%14 that the RBI had projected in the
beginning of the fiscal year. Between April 2006 and January 2007, the RBI had purchased 12.6
billion in US Dollars, which added around Rs. 565.43 billion to the domestic monetary base.15 The
immediate effect of this action was increased liquidity.

13
Shankar Aiyar and Puja Mehra, “Why are Prices Rising?” p34-45, India Today, March 5, 2007.
14
“Give YV Credit: Borrowing Dips,” www.economictimes.indiatimes.com, March 17, 2007.
15
Ajay Shah, “What RBI Wants,” www.business-standard.com, April 04, 2007.

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 The Indian Economy: Dealing with Inflation

While some economists argued that economic growth was one of the main reasons for inflation,
the comment in the Economic Survey of 2006-2007 that “troublesome inflation need not be [the]
price to be paid for high growth” provided support to others who felt that appropriate policies, both
monetary and fiscal, could keep inflation under control without affecting growth.

MEASURES TAKEN

In late 2006 and early 2007, the RBI announced some measures to control inflation. These
measures included increasing repo rates, the Cash Reserve Ratio (CRR) and reducing the rate of
interest on cash deposited by banks with the RBI. With the increase in the repo rates and bank
rates, banks had to pay a higher interest rate for the money they borrowed from the RBI.
Consequently, the banks increased the rate at which they lent to their customers. The increase in
the CRR reduced the money supply in the system because banks now had to keep more money as
reserves.
On December 08, 2006, the RBI again increased the CRR by 50 basis points to 5.5%. On January
31, 2007, the RBI increased the repo rate by 25 basis points to 7.5%. On the same day, in an effort
to control inflation, the central bank announced an increase in the bank rate16. Increase in the bank
rate led to an increase in the prime lending rate and thus increased the cost of borrowing. This step
was expected to induce firms and individuals to reduce expenditure. Again on February 14, 2007,
the RBI increased the CRR to 6%.
On February 15, 2007, the GoI cut the price of petrol by two rupees (or 4.5%) per liter and diesel
prices by one rupee (or 3.2%) per liter. Petrol now retailed at Rs. 42.85 and diesel at Rs. 30.25
(Delhi prices).
On February 28, 2007, the GoI cut import duties on cooking oil, cement and other products and
banned trading in futures for tur dal (Red gram), urad dal (Black gram), wheat, and rice, in an
effort to lower prices and reduce speculation. It decreased the import tariff on wheat to zero.
However, as the international price of wheat was higher than the domestic price, there was no
significant increase in the quantity of wheat imported.
The budget also saw the government raising taxes, including increasing the education cess from
2% to 3%, on all products and services covered under excise, customs, and service tax, and on the
income of individuals and corporates. The government also upped spending on the social sector,
with health and education receiving most of the increased outlay.
On March 30, 2007, the RBI increased the CRR to 6.5% and the repo rate to 7.75 % (Refer
Exhibit IV for changes in the CRR, the repo rate and the bank rate between 2001 and 2006).
The high price of cement was a matter of grave concern for the GoI. Since cement was an essential
requirement for the creation of infrastructure, controlling the price of cement was high on the list
of priorities for the GoI. Immediately after reducing the import tariff on cement, the GoI
introduced incentives for encouraging the use of fly ash, a cheaper alternative to limestone, in the
production of cement. The GoI also assured long-term coal supplies to cement manufacturers in an
effort to help control their costs.
The Finance Minister announced a series of duty cuts in the 2007 budget. Import duty for non-
agricultural products was brought down to 10%, from 12.5%.17 “The prices are rising because
supplies have not kept pace with demand in a fast-growing economy and we are trying to see

16
The bank rate is the rate that a central bank charges on the loans and advances that it extends to
commercial banks and other financial institutions. It is a tool that a central bank uses for short-term
purposes. Any revision in the bank rate is a signal to banks to revise deposit rates as well as the prime
lending rate (PLR). (Source: www.centralbankofindia.co.in)
17
Ruth David, “India Hikes Spending, Cuts Tariffs to Fight Inflation,” www.forbes.com, February 28, 2007.

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 The Indian Economy: Dealing with Inflation

where these supply gaps are coming from. If need arises imports will be made more flexible,”18
said Kamal Nath, Minister of Commerce. The same month, the GoI set up a monitoring cell to
“keep a daily watch on the price situation” and provide “support to state governments on matters
concerning inflation”.
The Rupee had started appreciating against the US Dollar from November 2006. By March, 2007,
the exchange rate of the Rupee against the US Dollar was 43.14. Several analysts were of the view
that the RBI had let the Rupee rise so as to control inflation (Refer Exhibit V for the exchange
rate of the Rupee against the US Dollar from 1998 to 2007). The rationale was that a stronger
Rupee would make imports cheaper and this could increase the supply of goods and bring the
prices of goods down.

SOME PERSPECTIVES

The RBI‟s and the government‟s response to the inflation witnessed in 2006-07 was said to be
based on „traditional‟ anti-inflation measures. However, some economists argued that the steps
taken by the government to control inflation were not enough.
Analysts argued that increasing repo rates and CRR rates would have a limited effect on money
supply because India‟s huge foreign exchange inflows meant that corporates, especially the large
ones, would still have many options to secure capital. On the other hand, they felt that small and
medium enterprises (SME) would be adversely affected by the increase in interest rates. Therefore,
this would result in dampening GDP growth rather than the inflation rate. And since SMEs
accounted for a major share in employment, higher interest rates were likely to affect employment
as well.
Some economists described the cut in diesel and petrol prices as “belated” and unlikely to control
inflation.
There were also criticisms against the strategy of strengthening the Rupee to control inflation.
Crude oil (33% of total imports), gold and gems (14% of total imports) and electrical and non-
electrical machinery (17% of total imports) were the top three items on India‟s imports list.19
However, of the three, only the price of crude oil had a significant impact on inflation. The price of
petrol could also be adjusted by reducing duties, without changing the exchange rate.
Analysts opined that the strategy of strengthening the Rupee to control inflation might hurt
exports. The negative effect of the appreciation of the Indian currency was already being felt in
some sectors. For example, Indian textiles were starting to lose out to textiles from Bangladesh.
Between August 2006 and April 2007, India‟s textile exports to the US declined by 12% while
those of Bangladesh increased by 6%. The competitiveness of the Indian textile industry vis-à-vis
the Bangladeshi textile industry witnessed a decline due to Rupee appreciation on the one hand
and the depreciation of the Taka during the period on the other. The appreciation of the Rupee also
affected producers in other sectors. SMEs accounted for more than one-third of all goods exported
from India and also provided direct employment to 15 million workers. The appreciation of the
Rupee was expected to affect employment in export-related units.
RBI Governor Y V Reddy was also aware of the fact that the appreciation of Rupee was only of
limited utility in the fight against inflation. He said, “In some ways the effect of the currency
appreciation is to make imported goods cheaper. (But) if the demand goes up, is it going to solve
your inflation problem?”20

18
“India Tries to Allay Fears as Inflation Hits 6.73%,” www.industryweek.com, February 16, 2007.
19
Ajit Ranade, “Hitting Exports to Curb Inflation is a Bad Idea,” www.business-standard.com, April 19, 2007.
20
“Rising Rupee Not a tonic for Inflation, Warns Dr. Reddy,” www.indianexpress.com, April 26, 2007.

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 The Indian Economy: Dealing with Inflation

RK Dhawan, Chairman, Federation of Indian Export Organization, Northern Region, argued in

favor of a dual exchange rate21 as a solution that would control inflation without adversely
affecting the Indian export industry. He said that a fixed exchange rate could provide
competitiveness to the exporters and a floating exchange rate could be applied to imports.22
In early 2007, the RBI referred to hoarding of food grains by large corporates as one of the reasons
for the upward movement in prices. The RBI said, “Concerns have been expressed that some of the
corporates may be hoarding food grains...”23 On February 23, 2007, the central bank even asked a
group of non-banking finance companies to give details of their exposure to borrowers (companies
and individuals) engaged in the purchase of food grains.
Some economists questioned the government‟s decision to ban futures trading, as they did not
believe that this had any impact on prices. For example, the average price of urad dal was around
Rs. 3000 per quintal in January 2007 and one month after trading in futures of the pulse was
banned, its price did not see any significant reduction. Similarly, the price of tur dal and rice
remained unchanged. Anupam Mishra, the Director of the Forwards Markets Commission, said,
“The futures market provides a platform for price discovery and risk management. It is nothing but
a forecast of likely demand and supply and prices at a future point of time. It does not impact
prices.”24
However, analysts who supported the ban on future trading cited the example of wheat. Wheat
prices started to fall soon after the government banned trading in wheat futures. The government
did not want to be seen to be acting in haste on the issue. Therefore, in the 2007-2008 budget,
Chidambaram announced the government‟s intention to form an expert group to study forward
trading in commodities and its impact on prices.
Some analysts suggested raising the tax rate on the highest income groups as well as bringing
agricultural income into the tax net. According to them, this step would bring down demand and,
consequently, inflation.
According to some analysts, the index used in India to measure inflation was inaccurate. While
most other major economies used a CPI, which indicated the change in price levels at the
consumers‟ end, India used a WPI. The stated reason for not using the CPI as an indicator of
inflation rate was that in India, the information relating to consumer prices was difficult to compile
and this resulted in a time lag in reporting numbers. Another criticism against the WPI was that it
did not include services, which usually formed a major part of consumers‟ expenditure. For
example, the weight for rent is quite high in the US CPI basket, however rent does not figure at all
in the Indian WPI. Also, since the WPI reflected the change in price levels against those in 1994,
the inflation rates could be overstated or underplayed. In an indication that the government
officials too were aware of the drawbacks of the index, the Office of the Economic Adviser,
Department of Industrial Policy and Promotion, in the Ministry of Commerce, decided in May
2006 to revise the WPI by changing the base year to 2000-01. The new index was to include over
1,200 items so as to more accurately measure the rate of inflation. The Department was also to
incorporate best practices from other countries.

21
Dual exchange rate is a system of maintaining both fixed and flexible exchange rates in the market. The
two exchange rates are used in different situations, either in exchanges or evaluations, as mandated by the
government. Argentina adopted a dual exchange rate in the beginning of 2002.
22
RK Dhawan, “Dual Exchange Rate System is the Need of the Hour,” www.financialexpress.com, April
19, 2007.
23
“RBI Moves to Prevent Hoarding of Food Grains,” www.blonnet.com, February 23, 2007.
24
“Ban on Future Trading of Farm Produce,” www.iksian.com.

6
 The Indian Economy: Dealing with Inflation

OUTLOOK

Several analysts were of the view that the RBI could have handled the 2006-07 inflation without
tinkering with the interest rates, which according to them could slow down economic growth.
Others believed that high inflation was often seen by investors as a sign of economic
mismanagement and sustained high inflation would affect investor confidence in the economy.
However, the inflation rate in emerging economies was usually higher than developed economies
(Refer Exhibit VI for inflation rates in some developed and developing countries). Given the
fact that India was an emerging economy with huge potential, investors did not seem too worried
about the inflation rate. However, a continued increase in inflation levels had the potential to
undermine investor confidence.
Some analysts opined that as the rise in prices was more due to the supply constraints in
agriculture, the fiscal and monetary measures of the GoI and the RBI might be adequate in the
short run, but in order to tackle inflation in the long run, the GoI would have to address supply side
problems. The Finance minister seemed to share the same view. Chidambaram said, “While fiscal
steps will have some immediate impact, monetary side will take some time to transmit into the
system. Supply-side is indeed a durable answer to inflation. More wheat, more rice, more sugar,
more pulses, more oil seeds is [the] durable side.”25

25
“Put Social responsibility before Tax Concessions: Chidambaram,” www.hindu.com, March 9, 2007.

7
 The Indian Economy: Dealing with Inflation

Exhibit I
A Brief Note on Inflation
Inflation is defined as “the overall general upward price movement of goods and services in an
economy,”26 usually measured by the Consumer Price Index, the Producer Price Index, or/and
Wholesaler Price Index. Inflation is undesirable because it adversely affects some sections of
the population, and creates instability. Inflation can be classified as: “open” inflation and
“suppressed” inflation. Open inflation is where prices rise but the government does not
intervene. In suppressed inflation, the government fixes the prices of certain goods but does not
tackle underlying factors – so that the effects of inflation are felt but not seen.
The common causes of inflation are increase in money supply, excessive credit creation by
commercial banks, increased government expenditure, deficit financing, changes in the price
levels in foreign countries and shortages in agricultural production. Inflation affects the
economic, social and political life of the people. So there is a need to control inflation, while
aiming for sustainable economic growth.
Inflation is generally controlled through monetary and fiscal measures. Inflation can be
controlled by regulating the direction of credit. For this, the central bank could use both
quantitative and qualitative techniques. The bank rate may be increased, reserve ratios may be
raised and securities may be sold in the open market. Monetary policy can help in the expansion
of productive sectors of the economy.
Increase in taxes and reduction in public expenditure are other important instruments to combat
inflation.
Compiled from various sources.

26
Source: www.investorwords.com

8
 The Indian Economy: Dealing with Inflation

Exhibit II
Weightage of Different Commodities in the WPI
Commodity Weightage
Primary Articles Food articles 15.40%
Non-food articles 6.15% 21.55%
Fuel & Power Minerals 0.48%
Coal mining 1.75%
Mineral oils 6.99%
Electricity 5.48% 14.7
Manufactured Food products 11.54%
Products
Beverages, tobacco and tobacco products 1.34%
Textiles 9.80%
Wood and wood products 0.17%
Paper and paper products 2.04%
Leather and leather products 1.02%
Rubber and plastic products 2.39%
Chemicals and chemical products 11.93%
Non-metallic mineral products 2.52%
Basic metals alloys and metal products 8.34%
Machinery and machine tools 8.36%
Transport equipment and parts 4.30% 63.75
Source: www.india.seekingalpha.co.

9
 The Indian Economy: Dealing with Inflation

Exhibit III
Rate of Inflation in India
WPI CPI-UNME* CPI-IW* CPI-AL* CPI-RL*
2001-2002 3.6 4.3 5.1 1.1 1.3
2002-2003 3.4 4.0 3.8 3.2 3.1
2003-2004 5.5 3.9 3.7 3.9 3.8
2004-2005 6.5 3.8 3.6 2.6 2.6
2005-2006 4.4 4.4 4.7 3.9 3.9
2006-2007# 5.0 6.6 6.3 7.2 6.9
*UNME: Urban Non- Manual Employees, IW: Industrial Workers, AL: Agricultural Laborers, RL: Rural
Laborers. # April 2006-December 2006.
Source: www.indiabudget.nic.

Exhibit IV
Changes in CRR, Repo Rate and Bank Rate: 2001- 2006
Date Change
October, 2001 CRR reduced to 5.75% from 7.5%; bank rate reduced to 6.5% from 7.0%
June, 2002 CRR reduced to 5%
October, 2002 CRR further reduced to 4.75%, Repo rate reduced to 5.5% from 5.75% and
bank rate reduced to 6.25%
April, 2003 Bank rate reduced to 6%
September, 2004 CRR hiked to 5%
October, 2005 Repo rate hiked to 6.25%
January, 2006 Repo rate hiked to 6.5%
December 2006 CRR hiked to 5.5%
Compiled from various sources.

10
 The Indian Economy: Dealing with Inflation

Exhibit V
Indian Rupee-US Dollar Foreign Exchange Rate
One US Dollar in Rupees
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
January 39.39 42.55 43.59 46.61 48.35 47.96 45.46 43.62 44.20 44.21
February 39.01 42.53 43.65 46.56 48.72 47.75 45.27 43.58 44.23 44.02
March 39.57 42.52 43.64 46.65 48.77 47.68 44.97 43.59 44.34 43.14
April 39.70 42.80 43.68 46.79 48.94 47.39 43.89 43.64 44.82 40.87
May 40.47 42.86 44.08 46.95 49.02 47.11 45.18 43.41 45.20
June 42.37 43.21 44.76 47.04 48.98 46.70 45.50 43.52 45.89
July 42.61 43.36 44.84 47.18 48.79 46.22 46.06 43.43 46.37
August 42.84 43.50 45.77 47.17 48.62 45.96 46.32 43.55 46.45
September 42.58 43.60 45.97 47.75 48.46 45.85 46.05 43.85 46.01
October 42.39 43.55 46.43 48.05 48.39 45.40 45.74 44.76 45.36
November 42.43 43.46 46.82 48.04 48.29 45.55 45.03 45.63 44.73
December 42.59 43.52 46.78 47.93 48.15 45.57 43.85 45.56 44.48
Source: www.economagic.com.

Exhibit VI
A Comparison of Inflation Rates in Some Countries in 2007

Inflation Rate (Consumer Price Index)

Country
(as on March 2007)
European Union 2.2%
United States 2.5%
United Kingdom 2.8%
Australia 3%
China 3.3%
India 6.6%
Bangladesh 7.2%
Pakistan 7.7%

Compiled from various sources.

11
 The Indian Economy: Dealing with Inflation

References and Suggested Readings:

1. Rising Rupee Not a Tonic for Inflation, Warns Dr. Reddy, www.indianexpress.com,
April 26, 2007.
2. Ajit Ranade, Hitting Exports to Curb Inflation is a Bad Idea, www.business-
standard.com, April 19, 2007.
3. R K Dhawan, Dual Exchange Rate System is the Need of the Hour,
www.financialexpress.com, April 19, 2007.
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25. www.cia.gov.
26. www.economagic.com.
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28. www.indiabudget.nic.

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