- Brief introduction on current inflation scenario.
- Causes of inflation resurgence.
- Indian scenario with impacts on economy.
Resurgence in inflation, when the economy has just acquired an upward tilt but without a self-sustaining strength, does not augur well for India’s economic recovery. Prices of food, fuel and fertilizer are soaring high. Inflationary pressures persist abroad as well – inflation rates in the US and EU exceeded India’s rate last month.
Causes of Inflation resurgence:
Russia-Ukraine war and related economic sanctions have pushed up global prices of oil, commodities, fertilizers, food grains, metals, etc. Consequently, there is a fresh round of disruptions to world trade. Also, Omicron outbreak in China has disrupted global supply due to strict lockdowns in major cities. Adding to woes, the government has steadily passed on higher import costs to retail prices of all fuels, cooking & transport. These have led to overall rise in general prices.
In the new fiscal, with growth expectations lowered and monetary tightening on the anvil, it is debatable how long the fiscal policy can withstand financing pressures of higher food, fuel & fertilizer prices. This can interrupt the upturn in the business cycle, posing serious risks to households & businesses, as both postpone or scale down expenditures. Adding to India’s woes, unemployment remains high, incomes not yet restored to pre-pandemic levels, consumption remains depressed along with a contraction of (-) 6.6% in economic growth last year.
The context of India’s present inflation is different from its own recent past – post 2008 period saw food & energy prices pacing faster but incomes were strongly growing that time, reinforced by expansionary monetary & fiscal policies.
But in this inflation –
- Steep increase in food prices has outpaced the growth in rural wages, squeezing real disposable incomes.
- Food inflation has encouraged households to expect higher inflation in other goods & services. This has dented demand for non-food items allowing postponing or cancelling expenditures.
- Marginal households have reduced consumption and/or shifted to cheaper foods.
- Government’s spending have been impacted to compensate claims for higher food & fertilizer subsidies, drawing resources away from planned spendings.
- Firms are also passing on their raised input costs to final sale prices, pinching the pockets of end consumers.
- Higher costs render many projects unviable, slowing advancement of business investments.
Thus, higher inflation is a drag upon private consumption & investments as well as public expenditures.
Food inflation is mostly amenable to supply-side management – i.e., government interventions to influence prices & quantities of specific items. However, in this global context, it is a magnifying task to contain through export and/or import restrictions. Farmers are too excited by higher market prices and brightened exports prospects after years. Also, the strained financial position does not allow the government to cut fuel duties. India has also to deal with the US monetary policy reversal, wider current account deficit and exchange rate pressures that can exacerbate domestic inflation.
Coupled with below potential growth prospects (RBI cut growth forecast by 60 bps), the many facets of inflation are testing India’s fiscal management.