Tuesday, August 23, 2011

Relation of Inflation with the Central Governments in India

One day I was wondering why inflation always become such a big issue whenever Congress party comes to power at the centre. To find the inherent reason, I search on the Internet for the consumer price index (CPI) over a period of 42 years, i.e., from 1969 to 2011. CPI shows how much the prices of commodities change during the time. It forms the basis for inflation. The graph below is obtained from a standard website on Economics. Along the vertical axis (Y-axis) we have rate of inflation and along the horizontal axis (X-axis) we have the time line from 1969 till August 2011.

There are some important periods of time that should be noted in this graph.

First is the great positive peak followed by a negative peak around 1975. This period represents the national instability in the country which occurred after the Indo-Pak war. The Congress government initiated policies such as poverty removal which was highly mismanaged. When the opposition parties started targeting the Congress government, the then Prime Minister, Mrs Indira Gandhi imposed a financial emergency which lasted from 1975 to 1977. During this period, a lot of trade and business restrictions were put in place which seriously restricted trade and business, and led to a negative growth of the country.

Next is the period from 1978 to 1980. We can clearly see the inflation of the country going down to less than 5%. During this period, the government was headed by Janta party. For the first time after independence, the nation had a non-Congress party holding the power. After Janta Party fell in 1980 and Congress came into power again, we can clearly see the inflation again shot up above 10%.  A period of high inflation continues till June 1998. Suddenly we see a drastic jump to zero during 1998. This point represents the beginning of BJP/NDA government at the centre. For the entire duration of 6 years in which they ruled, we see a relatively stable inflation rate of around 5%, which is very much bearable for a developing country like India. Suddenly, we see that this inflation gains a positive momentum from January 2005. It is very simple to guess. The Congress government came to power. In its full swing, the time is reverted back to pre-liberalisation era and the inflation is again floating higher than 10%.

Is this a policy of congress government to contain “Aam Aadmi” (Common Man) with high inflation. Is high inflation the strength of Congress government to rule India for the past 64 years. If it is so, then the Congress government surely needs an appreciation as the party which clearly knows how to rule a country.

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