High inflation, rising interest rates and a slowing economy, is India heading for stagflation?


The untimely rate hike by the Reserve Bank of India (RBI) in early May was just a taste of the worrisome inflation story in India. April inflation data released on May 12 indicates that the country’s growth is facing several obstacles.

Shortly after the release of inflation figures for May, India’s Finance Secretary TV Somanathan said “the rate of economic growth is likely to slow down if the central bank raises interest rates”, anticipating days difficult for the economy. His concern is similar to what preoccupies governments around the world.

Rising inflation, high unemployment and depreciating currencies have created a vicious cycle that could very well dismantle the fragile recovery that economies have been witnessing in a post-COVID world.

China, the world’s second largest economy, is also struggling. Observers point to an 11.1% year-on-year contraction in its retail sales in April, coupled with a 2.9% contraction in industrial production, were clear indicators that the dragon economy was experiencing the case. classic stagflation.

Stagflation is a state of the economy defined by high inflation, low growth and high unemployment. And India seems to be on the cusp of this incident.


Earlier this month, the US Federal Reserve announced its biggest interest rate hike in more than two decades to control rising prices. He raised the interest rate by half a percentage point, to a range of 0.75% to 1%. Inflation in the United States is at its highest level in 40 years and steeper increases are expected in the future.

April inflation in Germany was 7.40%, its highest in 41 years, and March inflation in the UK was 7%, its highest in 30 years. Italian inflation in April was at 6.2%, its highest level in 31 years.

In its April outlook, the International Monetary Fund (IMF) said: “War-induced commodity price hikes and widening price pressures have led to inflation projections of 5. 7% for 2022 in advanced economies and 8.7% in emerging and developing economies — 1.8 and 2.8 percentage points higher than forecast last January.”


India’s industrial production (IPI) growth remained subdued at 1.9% in March, compared to an increase of 24.2% a year ago, mainly due to the weak base effect. PII growth was 1.5% in January and February amid the third wave of Covid. It was only 1% in November and December of last year. With the RBI expected to raise interest rates by around 50 to 100 basis points over the next few quarters, demand is expected to fall, forcing companies to cut production further.

Sabyasachi Kar, RBI chair professor at the Economic Growth Institute, plays down the fear of high interest rates on growth. “There will be a dampening effect on growth. However, as long as it is limited to reversing the measures taken to deal with the pandemic, the slowdown will be mainly due to fiscal consolidation and its effect on growth. This may not be a very big effect.”

Unlike the West, which is not used to dealing with high rates of inflation, India has brought this phenomenon under control over the past two decades. With 80 crores of its population getting free food grains under the central government sponsored scheme, much of India’s population is sheltered from high food prices.

Similarly, unlike China, India appears to have experienced the worst of the Covid lockdowns which negatively impacted India’s growth.

“India has great human resources and entrepreneurial capital and can grow at a decent pace if the government unleashes the private sector, undertakes deep public sector reforms and does not make major policy mistakes. Interest rates Higher RBIs may have a marginal impact on growth, but there is no likelihood of India going into stagflation,” former finance secretary Subhash Garg said. Finance Subhash Garg.

India recorded a growth of 8.5% in the second quarter of the last financial year, but it slowed down to 5.4% in October-December 2021. According to the Ministry of Statistics and Program Implementation, the India’s GDP growth for FY22 is expected to be 8.9 percent this year.

“We are not in a situation of stagflation at the moment. Growth may be lower than anything previously expected, but it is still likely to be closer to the odd 7 percent. Inflation is high for multiple reasons. There would be some control on that front, but to assume it would quickly revert to the RBI-mandated 4% would be unlikely,” said Devendra Pant, chief economist at India Ratings and Research.


Although things don’t look so bleak at the moment, India’s growth had already slowed before the pandemic. The RBI’s low interest rate regime has allowed the economy to approach the pre-pandemic level of private consumption.

But fiscal expansion coupled with external factors has heated India’s economy, which could wreak havoc. The government has long pushed growth at the expense of small savers, and if prices are not controlled by making capital expensive, there could be an electoral backlash.

Retail inflation in India is at its highest level in eight years. Retail sales inflation in April was 7.79%, down from 6.97% in March. The rise in prices was observed in all major commodity groups. Inflation for cereals and products was at its highest in 21 months, that for vegetables at its highest in 17 months and that for spices at its highest in 17 months. Consumer food price inflation jumped to 8.38%, its highest level in 17 months.

The secondary impact of rising fuel prices has also started to trickle down to other goods and services. Inflation for miscellaneous goods and services jumped to 8.03%, its highest level in 115 months. The category has experienced 23 consecutive months above 6% inflation. Inflation in health services has remained above 6% for the past 16 months. Education inflation hit a 23-month high of 4.12% in April.

To control food inflation, the government banned the export of wheat from the country.

Garg thinks this is one of those bad political decisions that can affect India’s growth.

“From India will feed the world to asking the WTO to allow the export of wheat purchased from the MSP to banning the export of wheat, India’s wheat policy has eerily swirled in a matter of weeks. As a result, farmers will lose the opportunity to get higher prices and FCI will get a lot of wheat from MSP,” Garg tweeted.

For the first time in over a decade, wheat farmers were getting prices higher than the MSP (Minimum Support Price) set by the government, providing higher farm income. Agriculture supports 35 to 38% of the Indian workforce. Agriculture grew by 3.9% in the last fiscal year thanks to a good monsoon. It represents 19% of GVA (gross value added). Exports of agricultural products can fuel the rural economy, creating demand for automobiles, consumer staples and consumer durables.

The latest figures from the IIP reveal just how badly India needs farm incomes to rise. The production of capital goods, which is a barometer of investment, posted a growth of 0.7% in March 2022 against a jump of 50.4% the month of the previous year. The durable consumer goods segment was in the negative zone, posting a decline of 3.2% against growth of 59.9% a year ago. These data sets indicate that the resulting investment and demand recovery has yet to occur. And by stopping exports, the government may have missed out on the opportunity to earn foreign exchange and stimulate consumption.

But inflation exceeded the upper limit imposed by the RBI. The risk of wheat price inflation is not foreseeable in the current scenario.

Contrary to initial expectations, the Russian-Ukrainian war lasted a long time. This wiped out the international market’s supply of crude oil and other commodities like edible oil, coal and metals. India does not want to find itself importing wheat from the international market next year.

If prices don’t come down in the next quarter, things could get worse. Kar warns of runaway inflation leading to extraordinary liquidity tightening by RBI. “If exogenous inflationary shocks persist and the RBI continues to raise repo rates to bring inflation down at all costs, this would certainly hurt the private sector and lead to a significant slowdown in growth.”

India’s trade deficit widened in the first month of the current fiscal year to $20.07 billion, an increase of more than 30% from last year. Barclays estimates that India has a record trade deficit of $250 billion in the current financial year, putting pressure on the economy.

Rohit Azad, who teaches economics at Jawaharlal Nehru University, has a definite view on the challenges facing the Indian economy over the coming quarters. “Absolutely (India can deal with stagflation). Even the last time RBI reacted like this in 2009 and 2011, it led to stagflation. And the reason is quite simple. costs market will not fall due to higher interest rates that is why the process of raising interest rates will have a negative impact on growth we already have a downturn, and if the interest rate is raised further, it would definitely send the economy into a downward spiral,” Azad said.

No one knows how long the Russian-Ukrainian war will last. Inflation could drop significantly in India, if peace between the warring nations is brokered tomorrow, giving the economy the wings it needed to fly in the post-Covid world. But should the situation stay the same or worsen, it would be hard to believe that India can avoid stagflation, which seems to be the fate of many other economies.


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