Today’s inflationary surge is global in nature and is being felt by most advanced economies (AEs), emerging markets, and developing economies (EMDEs). During the last two years, most Central banks followed easy money policies, with most governments announcing massive stimulus packages, to repair the ravages unleashed by a debilitating pandemic, in the form of COVID. In 15 of the 34 countries classified as AEs by the International Monetary Fund’s World Economic Outlook, 12-month inflation through December 2021 was running above 5%. 2022 has only seen the inflationary tide rising further, globally. While other countries have been reeling from pandemic-induced inflation, India has been keeping inflation largely under control.
Inflation in the US continued to surge in February 2022, pushing the annual inflation rate up to 7.9%. That is the biggest year-on-year leap since 1982 and up from the 7.5% rate reported in January 2022. The annual inflation rate in the Euro Area rose to a record high of 5.8%, up from 5.1% in January.UK’s annual inflation rate rose in January 2022 to over 5.4%, the highest level since March 1992. Netherlands with inflation of 9.7% and Spain with inflation at 9.8% have seen the highest inflation print in over 45 years. In Canada, property prices have hit their highest in decades, rising by over 50% in the last two years, due to which the Canadian government has banned outsiders from purchasing a property.
78 out of 109 EMDEs are today confronting annual inflation rates well above 5%. In India, in contrast, the Modi government has fared much better and has indeed done a very commendable job in containing inflation. While retail inflation was 5.66%, 6.01%, and 6.07% in December 2021, January 2022 and February 2022 respectively, one should not forget that for the better part of 2021, inflation was below 5%. For example, in September, October, and November 2021, retail inflation in India as measured by the consumer price index (CPI) was reined in at 4.35%,4.48% and 4.91%. More importantly, food inflation in these months was minuscule at 0.68%,0.85%, and 1.87%. One must not forget that food inflation as measured by the FAO food price index (FFPI), hit its highest level globally in 2021, the highest ever since 1970.
Why has global food inflation hit multi-decade highs? Droughts, floods,inclement weather in large parts of the world’s food bowls and Central America, Latin America and some major Oilseed producing countries, are the reason for soaring food prices. For example, Ukraine, Argentina, China and Russia, the largest sunflower oil-producing nations,faced inclement weather in the last two years. Ditto was the case with Kazakhstan, Mexico and Canada, amongst the big safflower oil-producing nations. As for palm oil, over 84% is produced by Indonesia and Malaysia combined and besides bad weather which hampered production, both these countries imposed many export restrictions during COVID, further distorting the demand-supply dynamics for Palm Oil importing countries like India. Things in Indonesia are so bad that police have been deployed for a 24-hour surveillance of cooking Oil production and distribution as rising food prices become a key political issue in the country. The Indonesian police task force, intelligence agents and government employees are making sure companies are producing bulk cooking oil as targeted and selling it for below the 14000 rupiah (98 cents) a litre price cap. The less said about Sri Lanka’s traumatising economic crisis, the better. Fuel stations have run dry and even posh neighbourhoods have no electricity for almost 18 hours a day, with rural hinterland suffering from 24 hour power cuts. There is no diesel to run diesel generators either.
A few months back, the United Kingdom faced a situation where its gas stations ran almost dry. Whichever way one looks at it, India under Prime Minister Narendra Modi has managed the economy very well, sidestepping geopolitical upheavals and violent price gyrations in the fuel and food economy that many other countries have been grappling with, unsuccessfully.
In fact, India is even being the good Samaritan and has agreed to extend a one billion dollar credit line to Sri Lanka, so that it can procure essential items, food, and medicines. In February this year, India provided $500mn via a loan facility to Sri Lanka for procuring Petroleum products and tackling its energy crisis. Sri Lanka has forex reserves of barely $2 billion whereas India with over $600bn, has the 4th largest forex reserves globally, after China, Japan, and Switzerland. Hence for ignoramuses to compare India with Sri Lanka, is plain hogwash.
Coming back to inflation, it is pertinent to ask, which two places in India have the highest fuel price? Well, it is Parbhani in Maharashtra, where petrol costs Rs 121.38 per litre and diesel is Rs 103.97 per litre. In Sriganganagar in Rajasthan,petrol is Rs 120.73 and diesel Rs 103.30 per litre. In both the aforesaid States Congress is in power, either directly or via an alliance. In Congress-ruled states, the average petrol price is higher by Rs 18-21 per litre, compared to many BJP-governed states. The reason for this difference is nothing but pure greed on the part of Congress regimes, whereby they refuse to cut VAT on petrol and diesel. So while Rahul Gandhi and his sundry bunch of protesters are crying wolf over rising fuel prices in India, the harsh truth is that Congress-ruled states are milking their taxpayers dry by refusing to cut VAT in any meaningful measure. So much for Rahul Gandhi’s hypocrisy!
Weather-related reasons apart, the pandemic-induced sharp bust-and-recovery patterns produced unpredictable and prolonged supply-side disruptions, leading to supply-side deficits, which in turn led to cost-push inflation. True, as the pandemic receded, demand saw a resurgence but more than “demand pull”, it was “cost-push” inflation that wreaked havoc globally. That Central bankers kept buying bonds indiscriminately and governments kept pumping money into their economies to “pump prime” and resurrect them, only led to more speculative money finding its way into just about everything— gold, oil, bonds, commodities, wheat futures, corn futures, so on and so forth. Inflationary pressures globally, among other things, have been driven also by overheating in the aftermath of significant policy stimulus. Here again, the Modi government’s cautiously calibrated approach to infusing stimulus at the height of the COVID wave has been very effective. In sharp contrast, some of the (AEs), the USA included, unleashed gigantic fiscal stimulus packages, which were not focussed and eventually ended up creating asset bubbles and soaring inflation, with very little attendant benefits.
Another major issue affecting advanced and developing economies alike is global supply chains, which continue to be severely affected by the events of the past two years. Transport costs have skyrocketed. And unlike the Oil-based supply shock of the 1970s, the COVID-19 supply shocks are more diverse and opaque, and therefore more uncertain, as the World Bank’s most recent report suggests.
In EMDEs, currency depreciation (owing to lower inflows of foreign capital and downgrades of sovereign credit ratings) has contributed to inflation among imported goods. And because inflation expectations in EMDEs are less anchored and more attuned to currency movements than in AEs, the pass-through from exchange rates to prices tends to be faster and more pronounced. But again on this count, the Modi government has done a stellar job. Brokerage firm ICICI Direct said that unlike in 2013 when the Rupee depreciated drastically after the U.S. Fed announced monetary tightening, India currently holds the fourth largest forex reserves globally, at over $600 billion and also has a surplus BOP.
In the light of abundant foreign exchange reserves and the strong performance of the Rupee vis-a-vis its global peers, Rupee’s depreciation beyond Rs 78 per US Dollar in the calendar year 2022 is highly unlikely. Rupee in the first week of April 2022 has been pretty steady in a range of Rs 75-76 to the Dollar. The Rupee is likely to face resistance near 78 levels and strengthen back to 72 levels in the coming months, as India seems to be in a better position to withstand any major shock from monetary tightening. India’s forex reserves are equal to about 12-14 months of import cover. Given that the Rupee has enough cushion to withstand external shocks and is unlikely to breach the 78 to a Dollar level anytime soon, imported inflation on account of a depreciating Rupee has been kept in check, and here again, the Modi government deserves kudos for the excellent handling of India’s external economy.
India’s current account balance recorded a deficit of $9.6 billion in the July-September 2021 quarter, as against a surplus of $6.6 billion in the April-June 2021 quarter, but the deficit was mainly due to the widening of trade deficit, with economic recovery kicking in. A major achievement of the Modi government undoubtedly has been reining in the current account deficit (CAD). It is a well-known fact that a higher CAD leads to imported inflation, something the Modi govt has assiduously avoided. In FY18, FY19 and FY20, India’s CAD was 1.8%, 2.1% and 0.9% of GDP respectively. In FY21 India reported a current account surplus (CAS) for the first time in over 17 years. For a fast-paced economy like India, a CAD of 2.5-3% of GDP is not a problem, ideally speaking. However, one needs to be reminded that in FY13, under an incompetent Congress, India’s CAD had snowballed into a dangerously precarious level of 6.8% of GDP, completely destroying India’s external economy and setting the stage for high inflation. Hence Congress has no business lecturing the Modi government on the handling of inflation or related matters.
The balance of payment (BOP) has remained in surplus on strong FDI inflows and a narrower current account balance in the last few quarters. In FY23, even if the trade deficit widens as the economy reopens, strong inflows will keep the current account deficit in check. A fact worth mentioning here is that in 2021, the Rupee depreciated only 1.8% against the Dollar, outperforming its global peers such as Japan’s Yen, South Korean Won, South African Rand and EU’s Euro which depreciated by a far higher level of 11.5%, 9.7%, 8.5% and 7.9% respectively. More the depreciation, more the chances of importing inflation. In fact, it is because the Modi government has managed the current account balance very effectively, that the Rupee has not seen any untoward volatility, which in turn has helped India in reining in imported inflation, despite India being a net oil importer and a net Commodities’ importer.
A rise in risk appetite in the global markets helped the Rupee perform better than its peers. Inflation which largely remained under RBI’s comfort zone in the last one year, helped the Central bank to maintain lower borrowing costs to support the economic recovery and this also contributed to Rupee’s steady performance.
Food accounts for a much larger share of the average household consumption basket in EMDEs, which means that inflation in those economies is likely to prove persistent. Today’s higher energy prices will translate directly into higher food prices tomorrow (through higher costs for fertilizer, transport, and so forth). Food inflation is the most regressive form of taxation as it burdens the poorest, the most. And it is here that the Modi government, reached out to the last mile standing, via the PM Garib Kalyan scheme.
In the absence of global policy options to resolve supply-chain disruptions, the task of addressing inflation is largely left to the major Central banks. While the US is poised to undergo a modest tightening (by historical standards) in 2022, this is unlikely to be sufficient to rein in inflation. The US Federal Reserve’s tendency to do too little, too late is well known. The US and other advanced economies failed to tackle inflation quickly during the 1970s and they ultimately needed far more draconian policies, which led to America’s second-deepest post-war recession, along with a debt crisis. As the old saying goes, “A stitch in time saves nine.” So while the US and large parts of the developed world are likely to grapple with hyperinflation or stagflation, which could further deteriorate into a recession going forward, the timely moves by the Modi government to give over Rs 2 lakh crore worth of cash to farmers via PM-Kisan or say free food and free ration to the needy, collateral free loans to MSMEs via the ECLGS scheme and liquidity support to the contact-sensitive sectors, have all worked wonders.
The writer is an Economist, National Spokesperson of the BJP and the Bestselling Author of ‘The Modi Gambit’. Views expressed are the writer’s personal. The second part of the article will be published next week.