Stagflation as an economic condition traps an economy in stagnation, high unemployment, and a rising price level. Recently debates have emerged on the “dark shadow” of stagflation which has covered almost all the developing nations. The Indian economy is also not spared from the oscillating pendulum of stagflation.
Economies all around the globe are facing continuous challenges one after the other since the outbreak of the pandemic. The challenges for the decision-makers and the economists have been paramount to other levels. Economic distress impact different economies differently as the functioning structure of nations vary accordingly and so are the impacts of these conditions on them. Priorities have changed, goals are demanding altercations, and end-ground results are not the same anymore.
The covid-19 pandemic was the most contributing ignitor in the whole story. The pandemic toll was not only visible physically in the lives of people, but also it left great shocks for the economies. These shocks have impacted every single individual on this planet differently. It will take years to come to bear the consequences of the outbreak. Supply chains were hit so badly and they are struggling to date to approach back to normal conditions. Supply chains lead to skyrocketing freight charges, thanks to the shooting oil prices. Semiconductor and other raw material shortages too contributed to it. The largest manufacturer in the world, China is still struggling to fight the pandemic in its major export cities. This all leads to a huge mess worldwide in terms of businesses.
This is not the end to it, further the missing piece in the puzzle is the Russian invasion of Ukraine. Russia being the leading supplier of edible and crude oil disrupted the supply-demand tensions once again. The war leads to the imposition of sanctions on Russia which lead to the wiping out of money from the stock markets. The Russian stock markets nosedived by almost 50 percent, resulting in huge losses to investors. This all damaged the economies worldwide along with global food shortages and a massive increase in the inflation rates.
So the background is pretty much clear till now. If we look at the aftereffects of this distress on a developing country like India, then the results are not pleasing at all. India has been witnessing high rates of inflation for the past few months. The inflation rates are trying their best to surpass the maximum bandwidths. The wholesale price inflation has successfully cloaked the double-digit growth. The wholesale price inflation across the country rose to 15.88 percent in May, as per the data released by the Ministry of Commerce & Industry. This is the highest level of WPI since the crisis of 1991, almost 31 years later.
India recorded an annual inflation rate of 7.04 percent for May 2022, which is well beyond the RBI’s bandwidth of 2 to 6 percent. Prices of food rose to 7.84 percent. The Indian rupee touched down all-time low of 78 against the US dollar amid foreign fund outflows. This is when the Federal is still thinking to increase the rates further, firm crude oil prices, and general crude oil strength.
While agricultural growth remained robust, the manufacturing sector contracted due to high input cost pressures and supply-side bottlenecks. The central banks poured in their efforts to contain the ever-rising inflationary pressures. RBI stepped hard to tighten the rates for taming the inflation rates. The RBI in its latest move increased the benchmark policy rate by 50 basis points thereby taking the repo rate to 4.90 percent. However, the real GDP growth forecast for FY23 has been retained at 7.2 percent.
Stagflation risk ahead
The record-high global inflation and aggressive tightening by central banks amid an uneven growth recovery have sparked fears of stagflation. Stagflation becomes a concern when inflation is high in a period of slow economic growth. It is a peculiar economic condition of slow growth, a high inflation rate, high unemployment, and an output gap. It now occupies a permanent place in serious economic discourse. The 1970s saw the global economy, led by the US economy, experience its first bout of stagflation. This situation is becoming quite evident due to the present case scenario.
The World Bank slashed India’s economic growth to 7.5% from the earlier estimate of 8% due to rising concerns about high inflation, supply-side disruptions, and geopolitical tensions. International Monetary Fund (IMF) in its April World Economic Outlook has sharply cut its projection for global growth from 6.1 percent in 2021 to 3.6 percent.
Although RBI in all its MPC meetings ahead aims at applying contractionary policies to bring down inflation in the coming months. RBI has indicated that inflation will remain high throughout the country for this fiscal. Tensions in Europe and the Russian context need to be solved at the earliest. This will redefine the supply chains and foster economic growth and development around the globe. Especially the nations witnessing stalled progress in the last two years.
India is also facing challenges in managing deficits, stabilizing economic growth, controlling inflation, current account deficit, and depreciation of the rupee. The conditions are more or less the same for developed and developing nations. However, India is in a better position to tackle this downturn in a better and more absorbing way. Decisions are required to be taken with the utmost precision and caution keeping the sensitive factors in mind. Growth in the industrial sector and services will give a green signal to investments and increase employment opportunities in the economy. This will result in higher revenue shares which can balance out all the irregularities in the whole scenario. We can hope for these all things to go down correctly to drive the engine of economic growth at its full throttle!!
Author: Bhavsimran Kaur Student of Economics and budding economist in the making.