##ly to 8. 0 per cent in the 1980s. india had generally not experienced runaway inflation. on the other hand, the volatility in the inflation rate, as measured by the coefficient of variation, which was fairly high in the 1950s at 4. 4, moved in a narrow band of 0. 4 – 1. 0 in the subsequent decades, thus reducing the inflation - risk premium. the pick up in inflation rate from 1970s onwards reflected the impact of a sharp rise in money supply growth and also partly supply shocks from crude oil prices and crop failures. demand pressures, emanating partly from the widening fiscal imbalances, also contributed to inflationary pressures in the 1980s. the second half of the 1990s was marked by a significant turnaround in the inflation outcome reflecting the improved monetary - fiscal interface. the inflation rate declined from an average of 11. 0 cent during 1990 - 95 to 5. 3 per cent during the second half of the 1990s. the inflation rates since the second half of the 1990s have been, by and large, benign despite sustained external capital inflows and continued surge in fuel prices, mainly attributable to more focused macroeconomic and monetary management and increasing trade openness. during this period, the average inflation rate has been contained at about 5 per cent, which has been significantly lower than that of around 8 per cent in the previous three - and - a - half decades. during 2005 - 06, the average headline inflation rate remained at about 4. 5 per cent and inflation expectations remained well contained despite continued dominance of somewhat adverse supply - side factors. in the recent period, the headline inflation, as measured by the wholesale price index ( wpi ), remained above 6. 0 per cent level during january - march 2007, touching 6. 46 per cent for the week ended march 10, 2007 ; however, the average inflation was 5. 3 per cent during the period april 2006 to march 10, 2007. it is useful to recognise that, historically, the tolerance level to inflation has been low, relative to many developing countries, especially on account of democratic pressures. in this context, i quote from a recent book by sadiq ahmed of world bank titled'india's long term growth experience ', which has analysed the growth experience of india in two phases : from 1950 to 1980 ( phase i ) and from 1980 till date ( phase ii ) 1 : “ on the whole, the ability to contain india's inflation rate at substantially below

given impetus to a sharp acceleration in the per capita gdp growth. for example, during the 1970s, the per capita income in india grew by 0. 6 per cent, which implicitly meant that a person might not see doubling of his income even once in his lifetime. since the 1990s, the per capita income has been growing at an average rate of around 4. 0 per cent, implying that a person ’ s income will double in nearly 18 years. a person with a life expectancy of, say, 72 years could thus see his income doubling at least three times in his adult life. if the current gdp growth rate of around 9 per cent is maintained, a person can hope to see the standard of living multiplying by almost five times in his lifetime. a noteworthy feature of indian growth process over the last one and a half decades has been its stability. this is evident from the substantially lower coefficient of variation of real gdp growth during the post - reform period as compared to that during the pre - reform period, that is, before the nineties. it is also important to note that india's growth is driven by domestic consumption, contributing on an average to almost two - thirds of the overall demand, while investment and export demand are also accelerating. as consumption is less volatile component of demand, this has also contributed to reducing the volatility of gdp. the economy, which withstood the spike in oil prices in recent years, is displaying moderate deficit in current account after a few years of marginal surplus. reflecting the growing competitiveness of the economy, merchandise exports have been growing at an annual rate of over 25. 0 per cent per annum in the last three years, while net invisibles have continued to be strong on account of workers'remittances and software exports. the strengthening of economic activity in the recent years has been supported by persistent increase in domestic investment rate from 22. 9 per cent of gdp in 2001 - 02 to 33. 8 per cent in 2005 - 06 coupled with an efficient use of capital. domestic saving rate has also improved from 23. 5 per cent to 32. 4 per cent during the same period. this was made possible due to improvements in both public and private corporate saving. 2. reining in inflation and containment of inflation expectations the inflation rate accelerated steadily from an annual average of 1. 7 per cent during the 1950s to 6. 4 per cent during the 1960s and further to 9. 0 per cent in the 1970s before easing marginal