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The Inflation Story
[/vc_column_text][vc_separator css=”.vc_custom_1647339034936{margin-bottom: 30px !important;}”][vc_column_text css=”.vc_custom_1674473358229{margin-bottom: 15px !important;}”]2022, apart from being the year of inception of a new cold war, can also be termed as the era of unprecedented levels of inflation. Among the talks of peace and harmony were also discussions about prices reaching stratospheric levels. In a country like India, it is never too late to talk about inflation. India is a developing country and inflation here has always remained elevated so much so that common citizens have accepted it as a way of life.
Inflation, in simple words, can be defined as the phenomenon of increasing price levels of goods and services, which in turn will decrease the purchasing power of a constant amount of money. A highly liberal monetary policy may contribute to higher inflation rate. One may even say that it is a necessary evil. Apart from the forces of demand-supply, asset prices increase due to inflationary pressure as well. In fact, the inflation level in a country acts as a tacit hurdle rate which investors can use to estimate the attractiveness of an investment proposal.
Some level of inflation exists in an economy at all points in time (barring the phases of recession) and inflation below a threshold level is even considered healthy for the economy. The question is, why inflation beyond a certain level, becomes problematic for the country? The answer lies in the asymmetry of income distribution and wage growth.
As India persevered through the pandemic to stage a recovery, economists were convinced the best letter that most accurately explains the shape of our recovery would be the K-shape. In a K-shaped recovery, large, high-tech firms and firms those employ skilled workers have all benefitted through the pandemic; but, small, low-tech firms and firms who employed unskilled workers have seen their incomes fall and even saw their jobs go away. Against this backdrop, when Russia-Ukraine war broke out, the inflationary pressure exacerbated world-wide. United States was already seeing the negative impacts of enormous printing of currency, and even they decided to shrink their balance sheet, meaning curtailing the supply of US Dollars in the global commerce. This resulted in the value of dollar going up. The effect on India was direct and painful, given most of our imports are dollar-denominated.
The situation worsened when the factory of the world, China, took a backstep in its economical pursuits to curtail the spread of virus domestically. The effect was a disruption in global supply chain and increased cost associated with sourcing raw materials, intermediate goods and/or finished goods from a different country. Let’s not forget all this is happening simultaneously during the Russia-Ukraine war, which had already resulted in energy prices skyrocketing and the effect trickling down to transportation and shipping costs, utilities costs and production costs. What we are currently witnessing is a global slowdown, growth has decelerated, even degrowing marginally.
As the cost to produce and market goods increases, companies pass on this increase to the customers by raising their prices. Volumes of goods and services sold by the companies also decreases due to the principles of microeconomics, and companies resort to job cuts to account for lesser new business coming in and to protect their bottom-line. I am sure you must have heard about big tech companies laying off thousands of their workers in one go. Here’s where customers feel the pinch.
Economists assert that consumption is a function of wages. When your outlook on wage is strong, i.e., when you believe your job is good and that your wages are going to rise over time, then you go out and spend well. So, in a flourishing economy, jobs rise, wages rise, and consumer spend also rises. But in a situation as grim as high inflation period, uncertainty takes over and people become more conservative with their choices. The central bank steps in to increase the incentives for citizens to save more by increasing the interest rate. Interest rates for deposits and loans rise across the board and economic activity slows down.
In India, the workers in the unorganized sector constitute about 93% of the total work force in the country. They do not have contractual obligation with their employers that requires them to be paid an inflation adjusted salary. The growth in their wages is meagre as compared to the fast-rising prices. As a result, they end up spending more, saving less and, consequently, leading a stressful life. A very small fraction of the society is actually unaffected by the level of inflation. This makes it essential for the government to introduce reforms, help organize sectors as much as possible and make sure that wage growth is synchronous with inflation.
The pain point for India is the inflation in food products (primarily cereals, milk and spices). This is not to say that inflation in other components of CPI has not risen above the comfortable zone, but the quantum of increase there isn’t so extreme.
Production of both wheat and rice has been below last year’s levels, according to the government’s estimate. This is also perhaps among the very few times in recent history when output of both the main cereals has seen a drop due to adverse weather conditions. Whole wheat output dropped in 2022 rabi season due to sudden rise in terminal heat, just ahead of the harvesting stage. Rice production dropped in the preceding kharif season due to drought and patchy rains in the main growing states of eastern India — Bihar, Jharkhand, West Bengal and Uttar Pradesh. As a consequence of the drop in production, prices flared up in the domestic market. It was also aided by the acute shortage of wheat in the global markets due to the Ukraine war. Similarly, in the case of rice, too, the weather played spoilsport and drought in eastern India pulled down rice output.
Lately, we are seeing signs of inflation easing. It came down below the Reserve Bank of India (RBI) mandate of six per cent for the first time in 11 months. Food inflation also declined to its lowest level of 4.58 per cent in 12 months. We are looking at some positive pictures with China resuming its trade and commerce activities, Russia indicating to negotiate a deal with Ukraine and also the waning winter months. However, this is a developing situation and stance changes as more data comes in.[/vc_column_text][vc_zigzag][vc_column_text]
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