Inflation deals body blow to financial crisis

As we face a stagnation in economic growth, we are also witnesses to rising inflation, as we move into this strange situation called ‘stagflation’. Rarely does any economy reach such a state. The unique situation created by COVID-19 is leading the economy to stagflation.

Developing countries such as Venezuela are already in a state of stagnation due to lack of economic balancing. Venezuela’s economy has been hit hard by falling oil prices, which have forced the currency to depreciate. Venezuela has been going through a period of economic distress since 2016 due to high inflation and stagnant growth.

The potential for stagflation remains worldwide due to the impact that COVID-19 has had on the world economy. The situation in India is no different. The country’s Gross Domestic Production (GDP) is likely to move towards ‘negative growth’ in the current financial year. Various global agencies have predicted a recession of three to six per cent this year. In the 2020-21 fiscal, India will face a financial crisis, which IMF has projected at 4.5 per cent, Fitch at 5 per cent and Citigroup at 6 per cent.

Inflation is on the rise, along with a severe downturn in economic growth. Inflation has already reached 6 per cent. Inflation in June stood at 6.09 per cent. Normally, when economic growth slows down, inflation falls. This is because when growth stops, people spend less. At the same time, we are moving towards rising commodity prices despite declining consumption. This is due to the significant shortage of supply. Inflation in essential commodities, including food, has already been seen.

Supply was affected by low production due to COVID-19. The pandemic has adversely affected the global supply chain. Supply is also declining globally as the world moves towards a trade war with China, which was responsible for the global epidemic of COVID. Restrictions on the import of products from China due to the conflict on the Indian border have adversely affected the availability of cheaper products. Apart from import of products, India is dependent on China for most industries and production materials. Although some industries in India are trying to reduce their dependence on China in terms of production materials, it will take time to see the full effect. China has so far maintained its dominance in the global market by producing more than it needs and supplying cheaply. When China is banned for political and emotional reasons, we must pay the price.

When GDP falls by 6% and inflation rises by 6%, the gap between growth and inflation will be huge. People who are frustrated by the loss of jobs and the leakage of income caused by COVID-19 are also facing inflation. On the one hand, the income of the people is declining and on the other, the need to cut costs as much as possible due to inflation will have a major impact on the economy of our country based on consumption.

At such a juncture, the central government is increasing fuel prices exponentially, which is like pouring oil on fire. Rising fuel prices have led to a sharp rise in inflation. With the international price of crude oil is at $ 40 a barrel, the prices of petrol and diesel are ruling at the highest ever point. The price gap between diesel and petrol has narrowed sharply. The government is pursuing a policy of squeezing people through fuel taxes as other sources of revenue have depleted. The government would not have been able to exploit this product if it had included petrol and diesel in GST-exempt products. As fuel prices rise after the lockdown, the “contribution” from the government to the slowdown of the economy is complete. There does not appear to be any move on the part of the government to recover from the crisis. The warnings and advice of economists fall on the deaf ears of the government.

Another effect of stagflation is that actual savings rate is ‘negative’. SBI, currently the largest commercial bank in the country, offers a one-year fixed deposit rate of only 5.1 per cent. When this interest rate is slashed to 6.09 per cent inflation, the investor loses about one per cent. Investing is done to prevent the value of money from being eaten away by inflation. At the same time, when inflation reaches higher than interest rates, this purpose of investment is thwarted. One of the strange consequences of stagflation is that even when invested, the value of the money leaks out.