Inflation And The 2014 National Election

Q: Why was the Congress Party reduced to 45 seats in the 2014 national election?

A: Because inflation in the last two years of the UPA-2 government was almost 10%.

[Note: CPI inflation was measured only from 2012 onwards - till then only WPI inflation was measured]

In 2008, WPI inflation started increasing (due to high oil price). In 2009, it dropped due to the global recession caused by the 2008 American Financial Crisis (AFC). But the drop was temporary - it started increasing again and averaged 9.5% in 2010-2011. The RBI increased the repo rate gradually from 4.75% to 8.5% during this period. But throughout these two years, the repo rate remained below the WPI inflation - and hence the real interest rate remained negative during these two years. From 2012 onwards, we have the CPI inflation - which is a better measure of the inflation that people/consumers actually face (as compared to WPI which is faced by the firms/industries). CPI inflation started off in 2012 January at an already high value of 7.65% and went on to increase further. By the time the national election came in 2014 April, it averaged 9.7% over 27 months. This means a price increase of 23% in just over 2 years - which is massive. For the middle class, inflation is an irritation. For poor people (who are the majority in India) it is more than an irritation: those who eat 3 meals a day have to eat 2 meals a day and those who eat 2 meals a day have to eat 1 meal a day. Therefore poor people overwhelmingly voted against the Congress Party in the national election and reduced it to 45 seats.

Why was the RBI not more aggressive in increasing the repo rate to control inflation? Answer: In the context of the 2009 global recession, the UPA-2 government wanted to keep the Indian economy's growth rate high - which meant not increasing the interest rate too much.

Cut to today. WPI inflation increased rapidly in the first half of 2021 from 2.5% to 13%. Now it is at 14.5%. CPI inflation was below 6% (the upper limit of the RBI's target) till 2022 January. But as happened exactly 10 years ago, the high WPI has started pulling up the CPI. As a result, CPI inflation is now at 7.8%.

And what has been the RBI's response? While the WPI inflation averaged around 13% from mid-2021 onwards, it kept the repo rate at just 4%. This was to increase the growth rate of the Indian economy which was devastated by the Covid-19 crisis. Sounds familiar? Yes - this was exactly the thinking of the UPA-2 government in 2010-2011. And we know what happened next.

Moral of the story: If the Prime Minister wants the BJP to avoid the Congress Party's 2014 fate, he must tell the Finance Minister and the RBI Governor only one thing: "Screw growth - just focus on reducing inflation".

Addendum: Before 2012, CPI was measured only for industrial workers (CPI-IW). CPI-IW roughly follows CPI. The average CPI-IW inflation for the UPA-2 period was 10.3% - ie, a price increase of 60% over 5 years. It reached a peak of 16% in 2010 January. By the way:

1. Average CPI-IW inflation for the 5 years of UPA-1 was 6.1%.

2. Average CPI inflation for the 5 years of Modi-1 was 4.35%.