Inflation and Oil: What ails India’s economy?

Will 2020 prove to be a better year for India’s economy?

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Mudhol’s Vittal Tolamatti is laughing his way to the bank, crying tears of joy after he earned a whopping Rs. 92.8 lakh growing onions on his 24 acres of land in the quarter of October – December, reported the Deccan Herald.

But Tolamatti seems to be the lucky one. A Reuters poll of economists has predicted that rising vegetable prices may have had pushed retail inflation to its highest at 6.20% in December for a third straight month, exceeding the Reserve Bank of India’s medium-term target of 4%.

Onion prices went through the roof, soaring tenfold, contributing to the surge in food inflation that has been spiking since March. Products like vegetables, eggs, meat and fish pushed the retail inflation higher.

The National Sample Survey (NSS) recorded a 3.8 percent fall in per capital consumption expenditure for the country, with the decline in rural areas being close to 10 percent; potentially pushing more people towards destitution and undernourishment.

India has been suffering from ‘stagflation’ or ‘recession – inflation’ witnessing a slow economic growth and a high rate of joblessness with unemployment rate being at 7.7 percent in December 2019.

The output of primary goods that include the industries of agriculture, fishing, mining and forestry fell by 6 percent, consumer durables declined by 18 percent, construction and infrastructure output declined by 9.2 percent and the production of capital goods (buildings, machinery, equipment, tools & vehicles) fell by 21.9 percent. However, the output of intermediate goods (partly finished goods used as inputs in the production of other goods) increased by 22.2 percent.

The current inflation, experts say, is caused by the decline in output of several commodities relative to the shrinking purchasing power in the hands of the people, who are spending more money on food items, leaving them with less to spend on industrial and other commodities thus enhancing the already soaring demand deficiency in such sectors.

Now, after the tensions between the United States of India and Iran, the already suffering economy could suffer a shock from the outside, weakening the already shaky economy.

India meets more than 80 percent of its crude oil requirements, importing 4.5 million barrels of oil per day; and since the killing of General Qassem Soleimani lead to an increase in the hike of petrol prices. Currently, petrol and diesel prices are at around Rs. 75.69 and Rs. 68.68 a liter in Delhi respectively.

Higher crude oil prices and the unstable situation means India will have to pay more for insurance of the oil tankers that come to Indian shores. Experts estimate that for every $10 rise in crude oil prices, India will have to end up paying an extra $1.5 billion every month. This will push retail inflation in the country by 0.4 percent transport runs on fuel.

In 208-19, India’s import bill was around $140 billion, the current food inflation and any further increase in oil prices could only end up stoking inflation at a time when the economic growth is at an 11-year low of 5.8 percent.

However, experts believe that India will not face a crude oil shortage if tensions escalate because many countries like Venezuela, Saudi Arabia and other Mediterranean and Middle East countries can ensure supplies to the nation.

With the current economic downturn, India is facing a risk of slipping back into the ‘fragile five’, making it dependent on outside investment to fund economic growth. Slower growth in the construction sector means lesser employment opportunities and lower income. Not only the decline in exports, but also the lower imports due to lower consumption pose a worrying scenario.

Stressed loans have exceeded 12 percent of total lending, food inflation has spiked, core industries – automotive, retail and manufacturing have contracted, consumer expenditure is dwindling and the GDP growth is in the doldrums. Will this turn for the better in 2020? Only time will tell.

(Information sources – Economic Times, India Today, Newsclick)


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