New Delhi: India is one of the high-risk countries that may face a situation of high inflation and low economic growth in the next two-three years, as per the data analysed by an economic think tank. While the country is facing high wholesale and retail prices for the past one year, several rating agencies and think tanks have downwardly revised the economic growth forecasts for the current financial year that ends in March next year.
This clearly shows that the country’s economy is sliding towards the situation of stagflation – high inflation, and low economic growth. The situation is extremely challenging for an emerging economy such as India as the country was already struggling to shore up its economy which was hit hard by the adverse economic impact of two years of COVID-19 pandemic. There are several factors, including the supply disruptions caused by the Russia-Ukraine war that are pushing the country’s economy towards stagflation.
Factors stoking the risk of stagflation
As per some economists, with double-digit wholesale inflation and near double-digit retail inflation, coupled with sliding economic growth, India may already be in the grip of stagflation. However, it is not difficult to identify the reasons for this tricky situation which poses a serious challenge for Prime Minister Narendra Modi, Finance Minister Nirmala Sitharaman and Reserve Bank Governor Shakti Kanta Das, as the government and the central bank struggle to revive the economy while managing the inflation within the legally mandated comfort zone.
The backdrop for pushing the country’s economy towards stagflation is well known. The first reason is the more than two-year-long global pandemic which created supply-chain disruptions. Secondly, a resurgent and shifting global demand contributed to a strong rise in commodity prices. For example, on average India’s median import prices have risen by nearly 13% and in China, the rise is 20% in the last one year.
Also read: Stagflation: India, other emerging economies, most vulnerable to high inflation, low growth
Finally, the Russian invasion of Ukraine led to a spike in global risk and a sustained impact on the prices of key commodities. According to economists, this relentless increase in commodity prices is a major source of volatility in emerging economies in countries such as India. In such a situation, although commodity exporters will see a boost in their trade balances, consumer prices are rising everywhere and squeezing household incomes.
As a result, the recent uptick in food prices will have a greater impact on emerging markets such as India compared to other advanced economies as emerging economies have a higher share of food, and commodities in general, in their CPI baskets. Moreover, economies such as India and China that import lots of energy, fertilisers, and grain have seen import prices soar.
India imports 85% of its crude oil requirement and its balance of payment is seriously impacted due to the rise in energy prices globally. India is also importing more coal this year at a higher price to meet the increasing demand for electricity. It impacts the country’s economy in two ways. First, due to increased prices of the imported consumer goods and secondly because of reduced economic activities if businesses see their supply chains disrupted or if they simply cannot afford the price rise.
Also read: Tolerance of high inflation was a necessity: RBI Gov
Tackling stagflation
In such a situation, some emerging economies have used fiscal policy to cushion price shocks. The governments also try to control inflation by giving food subsidies that have been proven useful in controlling food inflation. Central banks in emerging economies also use monetary tools such as controlling the liquidity in the system and also by raising the policy rates to tame the inflation. In India, the Reserve Bank has twice increased the repo rate in May and June to cool down the inflation. However, it is difficult for any government or central bank to strike a balance between the need to push the growth while managing the inflation to a moderate level.
