As the world economy has begun to stabilize in the aftermath of the global crisis, inflation has re‑emerged as a major concern particularly in the fast‑recovering developing economies. The rise in global prices of commodities, such as oil, food, industrial inputs and metals has been compounded by domestic factors that include both demand side pressures, a corollary to the recovery in the domestic economy, and supply side constraints.
The ten‑year average headline WPI17 inflation was around 5.3% from 2000‑01 to 2009‑10. During 2010‑11, the average inflation of 9.5% was much higher than the decadal rate. While no sector remained unaffected, the primary articles and fuel group witnessed very high levels of inflation. Persistent food inflation is a major challenge. It first surfaced in 2009‑10, partly due to failed monsoons and partly due to demand‑supply gaps, and was accentuated in 2010‑11. Two successive years of food inflation have led to serious supply side concerns. The risk of higher than average inflation continues in 2011‑12 due to an uncertain outlook on international commodity prices and the possibility of the prices of food, fuel, minerals and metals staying firm.18
During 2010 and 2011, the Reserve Bank of India has, steadily and regularly, increased the repo and reverse repo rates to moderate demand side pressures. The Government has also taken measures to contain inflationary pressure. As a long‑term remedy, structural concerns have to be addressed by reducing supply‑side bottlenecks. Thus, maintaining the growth momentum in the economy with price stability is one of the biggest policy challenges that India is facing in recent times.
Measures have also been taken on the trade policy front to moderate inflation by reducing the import duty on rice, wheat, pulses, edible oils (crude), butter and ghee, and edible oils. Import of raw sugar is now allowed at zero duty. Full exemption from basic customs duty has been provided to onions and shallots with effect from 21 December 2010.