How Indian economy has performed against global inflation ?
Macroeconomic drivers
“Food and Energy prices driving global inflation….”
The COVID-19 pandemic's aftermath has resulted in a rise in food and energy prices, resulting
in an inflation which has been further exacerbated and the Russian invasion of Ukraine.
During the pandemic due to supply chain disruptions, labour
shortages and falling real wages we witnessed a slump in the
aggregate supply and demand in the global economy.
This lead to an inflation as depicted by the AS-AD model.
Once the economy opened, the pent up demand overwhelmed the supply and this situation the
world faced shortages as well as higher prices. When this demand-side inflation was starting
to fade away the War wrecked economic havoc on global supply.
Commodity prices shot up due to constraints on the supply with the planting season in
Ukraine being limited, industries less willing to purchase Russian oil and concerns over the
fact that the war might disrupt future supply.
Measures taken by India and its effects
1. Employing both demand and supply side policy measures : 29 % increase in capital
expenditure and 12% increase in revenue expenditure during the pandemic. This
controlled inflation at 7%.
o If the government decided to only increase revenue expenditure (something that
other economies did), we would be facing 18-20% inflation rates.
2. According to RBI report the economy will be able to escape the global inflation trap if the
commodity price moderation seen in recent weeks persists together with a reduction in
supply-chain pressures.
3. A lower current account deficit as a percentage of GDP, larger foreign exchange reserves,
and stronger economic growth imply that the Indian economy is in better shape
“IMF's GDP projection for India stands at 7.4 per cent for FY2022-23,
significantly higher than other developing economies…”
IMF’s estimate is marginally higher than RBI’s estimate of 7.2% and India is expected to be the fastest
growing Asian economy owing to the release of pent-up demand. The growth will be further boosted due
to the increase in investment demand. Private investment rose by 70% and new investment
announcements are at an all time high of around Rs 20 trillion.
US inflation spiked to a 41-year high of 9.1% in June, while
India reported retail inflation of 7.01% in June, slightly down
from 7.04% in May and 7.79% in April.
“Not-so-coupled nature of the Indian economy comes to its rescue again..”
India has a large domestic demand and the firms have maintained a healthy balance sheet. Due to this
Indian economy remains decoupled from the global economy to a large extend. Both in the US and EU
due Fed rates and the war, there seems to be high price rises even though unemployment rates remain low.
This makes the issue more entrenched for these countries.
“Finance minister says India’s inflation management better than rest of the
world”
Monetary policies can not affect inflation due to supply shortages and higher food and fuel prices. This
put global economies in a fix. But in India, several supply side measures like slashing import taxes on
some key raw materials and lowered excise duty on gasoline and diesel to arrest surging prices helped.
• Increase in domestic food prices was seasonal.
• Monthly food price index of FAO reached an all time high of 12.6% whereas the average Indian retail
food inflation lower to 7.6% from 8.0%.
Arindam Chowdhury, IIM Shillong