Inflation in India: 1920-30 vs. Current Scenario (2025-26) A Case-cum-Research Paper with Historical Measurement and Comparative Analysis

 Inflation in India: 1920-30 vs. Current Scenario (2025-26)

A Case-cum-Research Paper with Historical Measurement and Comparative Analysis

 

Abstract

India’s inflation experience reflects two contrasting economic eras: colonial volatility during 1920-30 and modern macroeconomic stability in 2025-26. The earlier period witnessed post-World War I inflation followed by severe deflation during the Great Depression, resulting in rural distress and stagnation. In contrast, the contemporary period is characterized by low and stable inflation supported by monetary policy tools, diversified economic structure, and institutional frameworks. This study examines inflation trends, measurement methods, policy responses, economic impacts, and lessons for managing low inflation. It also analyses how inflation was calculated during the colonial era and compares it with modern Consumer Price Index (CPI) methodology.

 

Keywords

Inflation India, Colonial Economy, CPI Calculation, WPI History, Great Depression India, RBI Monetary Policy, Deflation, Price Index Methodology, Historical Economics, Macroeconomic Stability

 

1. Introduction

Inflation trends reflect economic structure, governance capacity, and institutional maturity. India’s experience during 1920-30 demonstrates extreme volatility under colonial administration, while the current scenario (2025-26) reflects a “managed low inflation” environment supported by central banking and data-driven policy. Understanding these contrasts offers valuable lessons for future inflation management.

 

2. Objectives of the Study

1. To analyze inflation trends in India during 1920-30 and 2025-26.
2. To examine methods used to calculate inflation during the colonial era.
3. To compare policy responses across periods.
4. To evaluate risks associated with low inflation today.
5. To derive lessons from historical deflation for current macroeconomic policy.

 

3. Methodology

• Historical analysis using colonial price series, wholesale commodity prices, and agricultural output trends.
• Secondary data from RBI reports, economic studies, and recent monetary policy updates.
• Comparative analytical framework focusing on economic structure, policy response, and inflation measurement.

 

4. Historical Inflation Context (1920-30)

4.1 Inflation Phase (1914-1920 Background)

• Prices doubled due to World War I taxes, supply disruptions, and military expenditures.
• Inflation affected food grains, textiles, and transportation costs.

4.2 Deflationary Phase (Late 1920s-Early 1930s)

• Global Great Depression reduced exports.
• Agricultural prices collapsed.
• Bengal jute industry faced export contraction.
• Farmers’ real debt burden increased.
• Colonial policies lacked active monetary stabilization.

4.3 Colonial Policy Response

• Currency stabilization under the gold standard.
• Limited fiscal relief or welfare programs.
• Emphasis on balanced budgets rather than stimulus.
• Absence of central bank (RBI established only in 1935).

 

5. How Inflation Was Calculated in India (1920-30)

5.1 Data Limitations

• No nationwide CPI.
• Limited household consumption surveys.
• Regional commodity price series used.

5.2 Primary Inflation Measurement Methods

(a) Wholesale Price Index (WPI-type measures)

• Based on commodity prices (grain, cotton, jute, metals).
• Used by colonial administrators and economists.
• Formula similar to Laspeyres Index:

The price index during the early period was generally calculated using a Laspeyres-type method, where quantities from a selected base year were kept constant and compared with prices of the current year. In simple terms, economists multiplied the base-year quantities of selected commodities by their current prices, added these values together, and then divided the total by the sum of base-year quantities multiplied by base-year prices. The resulting ratio was multiplied by 100 to obtain the price index number. This method helped measure how much prices had changed over time while keeping consumption patterns fixed at the base-year level, which was useful when detailed household expenditure data were limited during the 1920–30 period.

 (b) Cost-of-Living Index for Industrial Workers

• Used in select cities (Bombay, Calcutta).
• Focused on wages, food, rent, and fuel.

5.3 Base Year Concept

• Often pre-war or early-war years used as reference.
• Limited periodic revision.

5.4 Key Limitations

• Rural data gaps.
• Infrequent updates.
• Commodity bias (less focus on services).

 

6. Current Inflation Scenario (2025-26)

6.1 Present Inflation Trends

• CPI inflation projected around ~2–2.1%.
• Repo rate around 5.25%.
• GDP growth forecast around 7.3–7.4%.
  
  

6.2 Drivers of Low Inflation

• Falling food prices.
• Improved agricultural supply.
• Global commodity moderation.
• GST rationalization and supply chain improvements.

6.3 RBI Policy Tools

• Repo rate adjustments.
• Open market operations.
• Liquidity management.
• Inflation targeting framework.
• Forward guidance and projections.

 

7. Modern Inflation Calculation (2025-26)

7.1 Consumer Price Index (CPI) Method

• Basket based on household expenditure surveys.
• Covers food, housing, education, healthcare, transport, services.
• Updated base year periodically.

The Consumer Price Index (CPI) is calculated by assigning weights to different goods and services based on their importance in household consumption. Each item’s price relative—that is, the percentage change in its current price compared to the base year—is multiplied by its assigned weight. These weighted price relatives are then added together, and the total is divided by the sum of all weights. The final result gives the overall CPI value, reflecting the average change in prices experienced by consumers while considering the relative importance of different expenditure categories.

7.2 Data Sources

• National Statistical Office surveys.
• Monthly price collection across regions.
• Digital data and statistical modeling.

 

8. Comparative Analysis

Aspect	1920-30	2025-26
Measurement	Commodity price indices	Comprehensive CPI
Policy Framework	Colonial fiscal control	Independent RBI
Inflation Trend	Spike → Deflation	Stable low inflation
Economic Structure	Agriculture-dominated	Services & industry diversified
Data Quality	Limited	Real-time national data
Policy Tools	Minimal intervention	Monetary policy toolkit

 

9. Economic Impact Comparison

1920-30

• Rural indebtedness.
• Wage stagnation.
• Export sector collapse.
• Low domestic demand.

2025-26

• Consumption-led growth.
• Stable credit markets.
• Predictable investment climate.

 

10. Risks to FY26 Low Inflation

• Global commodity price shocks.
• Climate disruptions affecting food supply.
• Geopolitical trade tensions.
• Currency volatility and imported inflation.
  
  

 

11. Lessons from 1920-30 Deflation for Today

1. Extremely low inflation can increase debt burdens.
2. Agriculture requires price support mechanisms.
3. Export diversification reduces vulnerability.
4. Policy inaction can deepen economic downturns.
5. Data-driven forecasting prevents extreme cycles.

 

12. Discussion: Structural Transformation

• Colonial India lacked institutional stabilization.
• Modern India’s service sector buffers shocks.
• Inflation targeting anchors expectations.
• Financial inclusion stabilizes consumption patterns.

 

13. Policy Recommendations

• Maintain flexible inflation targeting (2–4%).
• Strengthen agricultural price stabilization.
• Invest in climate-resilient supply chains.
• Enhance rural income monitoring.
• Maintain proactive liquidity management.

 

14. Conclusion

India’s inflation journey highlights a transformation from externally driven colonial volatility to institutionally managed stability. The 1920-30 era shows how weak policy tools and data limitations amplified economic distress. In contrast, modern India’s inflation management demonstrates the importance of independent monetary policy, diversified growth, and comprehensive statistical systems. However, extremely low inflation requires careful monitoring to avoid deflationary risks reminiscent of the colonial era.

 

15. Suggested Figures for Your Blog/Research

• Comparative inflation trend line (1920-30 vs 2025-26).
• Inflation calculation methodology diagram.
• Policy timeline: Colonial vs RBI.
• Economic structure comparison chart.

 

16. References (APA Style – Sample)

• Reserve Bank of India Monetary Policy Reports (2025-26).
• Business Standard. (2025). RBI MPC Policy Update.
• Reuters. (2026). India Central Bank Policy News.
• Indian Economic History Studies on Price Indices (Colonial Period).
• National Statistical Office CPI Methodology Reports.