India's Inflation Story And What Lies Ahead

Since India lifted the lockdown born out of the COVID-19 lockdown in 2020, there has been steep inflation. This seems to be abating, but what lies ahead?

India's Inflation Story And What Lies Ahead
Inflation increased rapidly in India post the COVID-19 lockdown in 2020. Both the central government and RBI took a slew of measures to mitigate its effect.

ALL MAJOR economies saw increased inflation in the post-COVID-19-lockdown era. Supply chains were disrupted across the world and as countries tried to restore normalcy, they implemented such monetary and fiscal policies that could stimulate the economy out of its doldrums.

The supply chain itself faced steep inflation from rising production costs, such as wages, raw material prices, transportation and energy. And in a bid to curb the steep inflation that had arisen from the supply chain problem, most countries, including the US, the UK and India had to resort to injecting stimulus into the economy.

Inflation In India

In India, the retail inflation rate (measured by the consumer price index or CPI) accounts for increased change in the price at the consumer level. This retail inflation dropped to a three-month-low of 6.77 per cent in October compared to 7.41 per cent in September and 7 per cent in October.

The wholesale inflation rate (measured by the wholesale price index or WPI) was down to 8.39 per cent in October compared to 10.7 per cent in September.

Inflation in India was caused primarily due to shockwaves from global trends and was mostly seen in the prices of commodities.

How India tamed its inflation

Both the central government and the Reserve Bank of India took steps to bring down inflation – the government allowed duty-free imports of cooking oil, capped sugar exports, cut excise duty on fuel, doubled fertiliser subsidy and even banned wheat exports.

For its part, RBI increased the repo rate (the cost levied upon public and private banks for borrowing money from the apex bank), which caused banks to increase interest rates on loans and deposits. This is intended to control the supply and demand of goods and services.

But subsiding inflation is accompanied by fears of a new economic recession. So, which way will the winds blow for the world and for India?

Parallels with the Great Recession

The financial events of 2008-09, dubbed the ‘Great Recession’, shook the world like never before since the Great Depression (the economic depression that lasted from 1929 till 1939). And while India, and other fast-growing economies like China and Indonesia, escaped the full brunt of it – instead growing at unprecedented rates, the tremors of the event did affect several individuals and sectors. Hence, there are valid fears about a new recession.

What will it be this time?

When business tycoons such as Amazon CEO Jeff Bezos and economic doyens from various organisations predict a global recession, it makes people sit up and take notice. Seven out of the ten chief economists of the World Economic Forum expect a global recession to be at least “somewhat likely.” They forecast a particularly grim situation for Europe, Latin America and the Caribbean countries and the US.

However, a majority of these economists expect “moderate or higher” economic growth for the South Asian region, while holding similar optimism for employment growth.

This might be because South Asian countries such as India are still at that point where they have had to invest in the economy in such a way that is currently reaping dividends by producing workforces that can be assimilated into the market, thereby improving food and energy security, as well as building resilience, capability and agility in public and corporate governance to respond to the looming fear of recession.

In fact, Niti Aayog Vice-Chairman Rajiv Kumar was quoted saying, "We will still manage to grow at 6-7 per cent in 2023-24." Counterbalancing a global recession  is not easy, but India is poised to see healthy growth – as has been projected by pundits worldwide.

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