Salient features of measuring, interpreting and addressing Indian inflation

The paper reviews the calculation of Indian wholesale and consumer price indices and suggests improvements in the light of past experience and international best practices. It confirms that food inflation has been the driver of domestic inflation. The paper studies the recommendations of the Urjit Patel Committee and comments that monetary policies predominantly focussed on inflation targeting may not necessarily be effective in India where inflation and inflationary expectations, compared to developed countries, are not that driven by excess demand. A number of shortcomings in storage, distribution and supply bottlenecks are also relevant. The paper also suggests that the efficiency of price discovery mechanisms including those that are relevant for the financial sector need to be improved to enhance the effectiveness of an explicit inflation targeting regime. In this context, the paper lists the approach taken by a few prominent central bankers to inflation targeting post the widespread financial-economic meltdown of 2008. Indian inflation has been sticky and based on past experience the paper recommends a multiple-target approach and closer coordination between fiscal and monetary authorities.