Inflation in India: Dynamics, distributional impact and policy implication

• India’s recent experience with inflation has been markedly different from that of the leading economies of the world. It accelerated before the onset of the Covid-19 and has remained elevated for the past five years. • First demonstrate that the inflation model underlying inflation targeting, in India, namely the NKPC, cannot account for the dynamics of inflation. • Inflation in India is well accounted for by a structuralist model relating it to the changing relative price of food and a propagation mechanism based on wage formation. • Discuss the distributional impact and policy implications of a food-price driven inflationary process. Inflation has been a concern for policy makers globally in the past few years, following the onset of COVID-19 and, subsequently, the war in Ukraine. India too has had high inflation during this period, but with a difference. Inflation in India accelerated before the pandemic had set in and has remained elevated since, even as it has declined dramatically in the major OECD economies. This paper investigates the dynamics of inflation in India, provides evidence on its distributional impact and points to what needs to be addressed by policy for it to be controlled .