Fear of Large Numbers

How not to think about inflation

01 January 2012
ECHOSTREAM
ECHOSTREAM

A CERTAIN VIEW OF HISTORY, beloved by the Victorians and the Edwardians, made much of the significance of particular dates—history by the numbers, with a few years remembered for their momentous events (and always for just one) while all the others are relegated to obscurity. Unsurprisingly, this sort of list-making still flourishes in our schools, where one might be forgiven for thinking that nothing of note happened in India between, say, 1707 (“Death of Aurangzeb”) and 1757 (“Battle of Plassey”). Along similar lines, for modern Indian schoolchildren, the year 1974 figures as an “important date” because of the nuclear “device” detonated at the insistence of that Bangladesh-liberating, Pakistan-splitting only-man-in-the-cabinet, Indira Gandhi.

But 1974 was noteworthy for another reason, and one that children are unlikely to be memorising: through the entire year, the country’s inflation rate was never lower than 20 percent. September 1974, in fact, was a “record month”: inflation as measured by the wholesale price index touched 33.3 percent. (In other words, prices were a full one-third higher than a year earlier.) Perhaps it should come as no surprise that Mrs Gandhi, never less than shrewd, chose that particular year—when the average Indian was earning essentially the same pitiful amount as he had done a year earlier (as was typical in those years of anaemic growth) while paying at least 20 percent more for his meagre purchases—to set off a bomb and whip up the jingoist fervour so beloved of embattled politicians.

If this was the gambit, it seems to have worked, because one rarely hears talk of the fact that 1974 marked the worst inflationary episode in the history of independent India—even worse, though only slightly, than the only comparable period, between 1979 and 1981, when wholesale price index inflation remained in the double digits, often above 15 percent, for more than two years. Looking back today, in the midst of another sustained period of high inflation that began in mid-2010 and has continued for roughly the past 18 months, one sees both similarities and contrasts: as in 1974, the present spell of inflation has taken place against the backdrop of a global spike in crude and commodity prices and a period of economic weakness in the developed world. But in many other ways, today’s crisis looks very different from the one an earlier Mrs Gandhi had faced: inflation has peaked at around 11 percent and mostly remained in the high single-digits, which would have represented a trough in either earlier cycle. At the same time, the average Indian now sees his or her purchasing power double roughly in a decade; under the growth rates that prevailed between 1965 and 1979, doubling per capita GDP would have taken a century.

Saugato Datta is an economist at ideas42, a research and design lab that applies behavioral economics to social problems. He also writes on economics for the Economist and Mint.

Keywords: inflation inflation rate economy India food prices political debate economic growth
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