The Indian economy is facing Inflation during the Recession?
Inflation at 6.93% even at GDP record -23.9%
India is a third world country. It does not possess the money or the resources that other countries across the globe enjoy. Then the Indian economy has blossomed in the past and is currently in the top 6 economies in the world. The world is expecting the Indian economy to be in the top 3 economies in the world in half-a-century or less.
COVID-19 has emerged in late 2019 and spread across the globe like wildfire. It has impacted not only developing but also developed countries. Many nations have imposed lockdowns to stop spreading the virus but it has shown adverse effects on the economic activity of the countries.
Restrictions imposed in India have also shown the same output. Very few people are allowed to travel or work. As a result Demand contracts and those without enough labour output for business also shrunk. All these activities make the idle recipe of Recession and it has been confirmed to the GDP data of -23.9%
As an economist, I expected it. As I have talked about it, in my earlier blog, I expect the Indian economy to document a decline of more than 10% to 15%. But presumably, I did not consider it a monumental factor, and that factor is called “inflation”.
The Indian economy was facing inflation from the pre-COVID-19 era. I was expecting coronavirus slowdown might not be able to overshadow it, but at least make a considerable dent. Now the question arises how Indian GDP is falling but inflation is rising. Let’s discuss.
(The data shared in this blog is researched and collected by myself. I have collected data from Mumbai and Mumbai suburbs. I have collected data from 50 families, 7 retail sellers, 2 wholesalers and 5 offices. It took me more than a couple of months to collect and process the data)
Before starting let’s first try to understand what is a recession.
Recession definition
“A period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in GDP in two successive quarters.”
In simple words, the recession is a situation in which an economy registers less economic activities in a period and this period determines the severity of the recession.
We usually do not consider an economy to slow a recession until it sustains it for consecutive quarter i.e. 6 months.
- www.Tradingeconomics.com
In the above graph, it is visible that the Indian economy has been facing a downfall for over a year. Thus we can conclude that the Indian economy is in recession.
In theory, when an economy is going through a recession price of goods and services reduces. There are different factors for it but the main reason is the low demand in the market. Due to the lesser demand suppliers reduce the prices to attract more customers.
In the current economic situation inflation in India is rising.
- Tradingeconomics.com
The CPI index shows a continuous rise in inflation even after New Delhi imposed a countrywide lockdown. Now let’s discuss how India is facing inflation at the time of recession.
Panic buy –
Demand determines the price of goods and services. Higher demand can lead to an increase in the price of goods and services and vice versa. In the current lockdown situation, many Indian families went into a mode of a panic buy and purchased goods in the larger quantity than regular. Which lead to the sudden spike in demand.
This happens due to less knowledge about the actual time frame of lockdown. 50 out of 50 families I have talked with, either have no or very limited knowledge about the lockdown. No one in these families has ever experienced lockdown of this magnitude.
48 families out of 50 have bought groceries that are sufficient for them for over a month and 10 out of 48 have bought groceries for over a quarter. Restaurants and shops closed due to lockdown thus families have bought goods which they usually do not purchase or buy at a lesser quantity.
This panic buy has given suppliers the confidence that people will buy the goods at any price and in large quantity. Thus, the prices of goods are not dropping. The limited supply due to a reduction in labour and vehicles have appreciated value.
Uncertainty of lockdown –
When I spoke with the wholesalers they were expecting lockdown to end in the first month or upcoming month thus they refused to lower the price. New Delhi imposes a lockdown on the country and the extension of it is been usually informed a few days before the end of the current lockdown.
In this scenario, wholesalers have a very limited vision i.e. maximum one month and with no reduction in demand, wholesalers find no reason to cut prices.
Holding on –
The Indian economy was already facing recession for over a year; so many businesses were already running at a loss. When I talked with the people working in the offices they accept that if the goods were not perishable then other than selling it in fewer amounts they like to hold the assets and sell when the price is higher.
Let's understand with an example.
In Nahur, Mumbai the average price of 1BHK flat cost around INR 1 crore ($ 136,022) pre COVID-19 era, but even after economy is fallen the average of the same commodity is around INR 95 lakh ($ 129,220)
This drop is very low, especially when the construction industry is the worst affected industry in the country, with an expected fall in revenue of 15% to 20%
This is just one industry, the same is happening in many industries.
Reduction in Imports –
The Indian economy imports more than it exports. In the import, the bill consists of many essentials as well as raw materials etc. When the import starts plummeting the number of these goods also shrinks which put additional pressure on domestically manufactured goods.
Essential raw material supply is also affecting by restriction, which also contracts output. This situation magnified when the tension between India and China started to emerge.
New Delhi has imposed restrictions on many Chinese manufactured goods. All these affect the quantity in the market and finally on the price of goods.
CPI consists of more than 70% of consumable goods and the recession has a greater effect on other industries than these, Thus CPI is not falling.
These are the few factors. There might be more but I mentioned a few.
Conclusion
Coronavirus recession is a completely new type of recession. It will require a new technique to counter the recession. I feel that the effects of this recession have been amplified by the current situation in the world.
I feel that steps taken by the Indian government might not be sufficient and will require more and innovative way to counter it. Different sectors of the Indian economy have been affected differently and require a unique way to counter it. Hope the Indian government will present a new strategy to counter this recession.
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