IMPACT OF COVID 19 ON INFLATION RATE IN INDIA

(Project Submission Towards the Fulfilment of Midterm Examination In The

Subject of Economics)

Submitted by Gayatri Langthasa (1884)

Jwala Ahirwar (1896)
Section ‘A’ Batch of 2025

Submitted to Dr. Chitra Saruparia

Assistant Professor (Economics)
National Law University, Jodhpur

Course B.A. LL.B. (HONS)

NATIONAL LAW UNIVERSITY, JODHPUR

Summer Session
(July-November 2022)
Acknowledgement

We would like to express our special thanks of gratitude to our professor and guide, Dr. Chi-
tra Saruparia, who gave us the golden opportunity to do the project on the topic of “IMPACT
OF COVID 19 ON INFLATION RATE IN INDIA” which helped in doing a lot of research
and acquiring knowledge about new and unfamiliar things.

We would also like to thank ma’am for her enthusiasm, patience, insightful comments, help-
ful information, practical advice and unceasing ideas that has helped us tremendously at all
times in our research and writing of this project. Her immense knowledge, profound experi-
ence and professional expertise in economic research, and the subject matter of economy
have enabled us to complete this research successfully. Without her support and guidance,
this project would not have been possible. We could not have imagined having a better super-
visor for our research project.

Thank you for your guidance

Ever grateful

Gayatri and Jwala

 ABSTRACT

COVID-19 has affected the entire world. India, like other economies have adopted the safest
way of lockdown in order to prevent the pandemic. One of the most critical impact of lock-
down is increase in rate of inflation. Covid-19 has affected the economy in many ways, but
the most tangible outcome is the impact of inflation that has affected each and every person.
Even into the pandemic, Inflation in India did not see it going below 6%. Inflation has been
one of the most burning issue of economics. It is an increase in the prices of daily commodi-
ties over a period. This research paper is an attempt to understand the impact of inflation on
Indian economy during COVID-19, which was already in peril and what are different mea-
surement that has been taken by the Indian government.

Table of Content
 INTRODUCTION AND METHEDOLOGY

Introduction

Research methodology

The research is done to analyse the impact of inflation on Indian economy in general and for
the purpose secondary data and reports are used which are collected from various published
reports, magazines, RBI annual report, research articles and financial and websites.
Statement Of Problem

1. Has there been a change in rate of Inflation due to Covid?

2. What is the cause of Raise in Inflation Rate due to pandemic?
3. How inflation affected Indian economy?
4. What are solutions to manage inflation and what are solutions taken by India?
5. What are the short term and long term management?
Research Questions:

1) What is the change in rate of inflation in India before and after covid 19?
2) What are the long-term policies and measures required to deal with Inflation after covid
19?

What is inflation
General cause of inflation
Inflationary situation before covid 19
Inflationary situation during covid 19
Couse of inflation during covid
its impact on Indian economy
Inflationary situation after covid 19
Measurements to curve inflation
General solutions of inflation
Measurements taken by Indian government to curve inflation
 Short term method
Long term method

INFLATION AND MAJOR CAUSE

“There are forces in the global economy today that are conspiring to hold inflation down.
Those forces might cause inflation to return more slowly to our objective. But there is no rea-
son why they should lead to a permanently lower inflation rate.”

- Mario Draghi (2016)

 V. IMPACT OF INFLATION DUE TO COVID ON THE ECONOMY
AND PEOPLE

1. Loss of Employment

The Covid-19 wave not only resulted in thousands of fatalities but also in a significant loss of
means of subsistence for the informal working class, as seen by the rising unemployment
rate. In the organised sector, the pandemic resulted in job losses and low salaries, and it made
things even worse in the unorganised sector. Even though many jobs have returned, the ma-
jority of workers are either self-employed or employed in the informal sector, and they are
working fewer hours as a result of the decline in the labour market. For Indian households,
the loss of job and income following the lockdown has a significant detrimental impact on
welfare.

2. Discouraging future global investment

India's gross household savings are in danger of declining as households spend from their
savings as a result of stagnant or nonexistent incomes during Covid, depressing future con-
sumption and endangering economic recovery. Because India's consumer market would be-
come more niche as a result of decreased household savings, this could result in a decline in
investor sentiment. For instance, international investors would be reluctant to invest in a mar-
ket where consumers have less discretionary income to spend, which would result in less in-
vestments in new projects and a reduction in job creation.

3. Rise in poverty and hunger

Food inflation spiked to 11%1 in October 2020, but it only slightly decreased to 9.43%2 in
November. India's consumer price inflation already approached the Reserve Bank of India's
prescribed 6% upper limit before the pandemic3, as the nation's economic growth fell to his-
torically low levels.
1 Consumer Price Index number for the month of Oct 2020, Ministry of Statistics and Programme Implementa-
tion http://164.100.34.62:8080/PDFile/Press/PR%20OCTOBER%202020 ( last visited 16th September 2022 at
11:34 pm)
2 Consumer Price Index number for the month of Nov 2020, Ministry of Statistics and Programme Implementa-
tion https://www.pib.gov.in/PressReleseDetail.aspx?PRID=1680570 ( last visited on 16th September
2022 at 11:58 pm)
3 Inflation-Forecast Targeting for India: An Outline of the Analytical Framework, Reserve Bank of India)
https://www.rbi.org.in/scripts/PublicationsView.aspx?id=17393 ( last visited on 17th September 2022 at
12:12am)
After the virus struck India, Prime Minister Narendra Modi abruptly declared a complete na-
tional lockdown, which caused the agriculture supply chain to be disrupted. The surge in food
inflation that India has seen over the past several months is a result of the above.

A persistent increase in food inflation had a detrimental impact on India's poor, as increasing
food costs put pressure on already extremely low earnings and reduced household savings at
a period of general economic hardship in the nation.
This price increase happened at a time when livelihoods and employment were in ruins. Nu-
merous individuals who lost their jobs due to the pandemic and even previously because of
the economic downturn have not been successful in finding new employment. In contrast to
the majority of self-employed individuals, those who do have jobs frequently earn wages that
are much below their prior levels. There is no denying that poverty and hunger have signifi-
cantly increased.

4. More people are being pushed below the poverty line

Economists worry that rising prices during a period of severe economic hardship may drive
poorer individuals to draw from their savings, reducing household financial savings, which
account for a sizable portion of the economy's overall savings, and decreasing future con-
sumption. While the poor are feeling the effects of the economic downturn and are more in-
clined to use their savings, people who make a respectably high income and work from home
are seeing an increase in their savings.
 VI. HOW INDIA HANDLED INFLATION AFTER THE SECOND
WAVE OF COVID-19

The Indian economy is beginning to show indications of recovery from the effects of the sec-
ond wave of the epidemic as a result of increasing targeted fiscal support, monetary policy
measures, and a quick vaccination effort. The most sustainable boost for a long-lasting re-
vival of the Indian economy is to maintain a strong pace on immunisation and swiftly over-
come infrastructural gaps in healthcare throughout urban and rural areas.

India has been resuming its growth since the second part of May, with the total volume of e-
way bills increasing by 37.1% over May and 26% over the previous year in June. Indicators
including port traffic, air traffic, PMI Manufacturing, and services are lagging in recovering
from the second wave's impact, indicating that the economic recovery is uneven.

The central government's steadfast tax collections during the first two months of current fis-
cal year and the continuous growth of capital spending, particularly in the road and rail sec-
tors, bode well for managing targeted fiscal support for the expansion of the economy.
Localized lockdowns brought on by the second wave's inflation spike caused some supply-
side interruptions, which pushed up prices. Future cost pressures would be reduced by sup-
ply-side actions in the markets for pulses and edible oils as well as the progressive unlocking
of states with diminishing caseloads. The southwest monsoon is currently making positive
progress. However, the outlook for inflation is at danger due to growing global commodity
prices, particularly those of petroleum and logistics expenses.

According to the Reserve Bank of India's most recent survey, which was conducted in May,
respondents' one-year ahead inflation forecasts have increased to 10.9% from 10.2% in
March, reflecting in part the uncertainty caused by the severity of the second wave. In light of
these variables, the RBI forecasts that consumer price inflation will be 5.2% in the first quar-
ter of 2021, 5.4% in the second quarter and 4.7% in the third.
 VIII. WAYS TO MANAGE INFLATION

In general, there are two methods for reducing inflation in an economy: monetary policies
and fiscal policies. The Central Bank's monetary policy is the most significant and frequently
employed strategy of controlling inflation. High interest rates are typically used by central
banks as a strategy to control or prevent inflation. The following monetary controls are em-
ployed to keep inflation in check: I open market operations; (ii) cash reserve ratio; and (iii)
bank rate policy. Taxation, government spending, and public borrowing are among the fiscal
tools to control inflation in addition to these monetary policy actions. Additionally, the gov-
ernment may enact protectionist policies, such as prohibiting the export of necessities like
pulses, cereals, and oils to stimulate domestic consumption, cutting import duties to attract
imports, etc.

A) Short term management of inflation due to Covid-19

Inflation is likely to be limited in the near future by three causes. These are listed below:
2. Falling crude oil prices
3. Reduced demand in the aftermath of COVID-19 pandemic
4. Governments efforts to ensure supply of essential items

The cost of oil for consumers has not been decreased by the government. Right now, prices
for gasoline and diesel remain the same. The government is keeping it in reserve to deploy if
inflation rises above acceptable bounds. Furthermore, demand has experienced a significant
decline, which is anticipated to keep prices in check. In addition, the government has actively
started launching supply of necessary food goods through rationing and other means, which is
likely to keep inflation in check. As the supply of goods runs out, the government will permit
a few production facilities to restart their operations as long as they take appropriate safety
precautions. Together, these policies may be able to moderate inflation in the 2020–2021 pe-
riod. It's unlikely that the average inflation rate during 2020–2021 will exceed 5%.

B) Long terms management of inflation due to Covid-19

Depending on how the economy recovers, there may be long-term effects on inflation. Since
consumption won't be kept under control below a certain point, a poor recovery will undoubt-
edly have a negative effect on inflation. Government supply rationing will only be effective
to a certain extent; therefore, maintaining stability in the supply chain would only help to
keep inflation in check.
Three levels of pessimism—moderate, average, and severe pessimistic scenarios of recovery
in 2020–2021—can be taken into account to compute the recovery rate. A single expected
value for the year 2020–2021 is calculated as a weighted product of the likelihood and the es-
timated values of changes in all three circumstances after allocating estimated values for
change in the years 2020–2021 to each of the three situations with an equal probability of
0.33 each.
An average increase of 0.5% per year can be predicted for a robust recovery. A growth of 1%
each year on average can be predicted for a moderate recovery. An average increase of 2%
each year can be predicted for a sluggish recovery. Under these three recovery scenarios, the
following possibilities are possible.

If the recovery is strong, in the year 2024–2025, the inflation rate might rise to 8% from a
level of around 6% in 2020–2021. If the recovery is moderate, the inflation rate might rise to
10% from a level of around 6% in 2020–2021. If the recovery is weak, the inflation rate
might rise to 14% from a level of around 6% in 2020–2021.
 IX. CONCLUSION

The economic expansion of India is severely hampered by the rising inflation. The retail in-
flation rate in India has been consistently high since the fourth quarter of 2019. Only a few
similar advanced and developing market economies, including India, have seen inflation rise
steadily over or close to the RBI's benchmark since late 2019.

India's economy has suffered as a result of the Covid-19 wave lockdowns. The price of food
has been the primary factor driving up inflation so quickly. The disruption of supply chains
brought on by local lockdowns has resulted in higher-than-expected core inflation, which ex-
cludes the cost of food and energy. One of the causes of the sudden increase in inflation is the
cost associated with the ongoing public health issue.

Inflation at the wholesale level increased sharply in March, and it is anticipated that this will
result in higher retail costs, which would ultimately have an impact on household savings
during the Covid-19 issue. Higher oil costs, global inflation, and a narrowing output gap all
contributed to increased inflationary pressure in the first half of 2021.