Inflation in India is the highest since 2010. The rupee has weakened so much that it now stands at 1 USD = 77 INR. Petrol and diesel prices are in 3-digit figures. As an economy, is India on the verge of a meltdown? Let's learn all in this article.
Understanding Inflation
To compute the inflation, the consumer price index is taken into account and this index comprises the cost of 3 things - Fuel (Petrol, Diesel, and Kerosene), eatables (Wheat, rice, edible oils), and other core items such as clothes and housing. Around 90% of this index is dominated by eatables and core items while 10% weightage is given to fuel prices. Hence, an increase in fuel price does not affect inflation in a big way.
As per RBI standards. the inflation rate should be at 4% with a 2% margin of error for sustainable growth. But if we check India's inflation rates, it has been mostly above 5% in the last five years and this April, it was so high (8%) that RBI had to intervene by increasing the repo rates. So, what does this inflation mean for a common man? Inflation is the rate at which prices increase over time, resulting in a fall in the purchasing value of money. Let me explain this by giving a simple example.
Suppose an item costs ₹1000 in 2022. With an inflation rate of 8%, it will cost ₹1008 in 2023. You decided to keep the ₹1000 in the bank for a year. The bank pays you 4% interest on your deposit so that makes your deposited amount ₹1004 in 2023. But the price of that item is still ₹4 more than what you have now. This difference in ₹4 is the impact of inflation on you.
What if I tell you that the Government and the RBI have the power to curb this inflation. But the Government hardly ever goes all out to control this phenomenon and the simple reason behind it is that higher inflation does have the potential to depict a higher GDP and they can later use this high GDP growth rate to capture more votes. Remember 2010? While the prices of every essential commodity were growing in an uncontrollable manner, the Government at that time was boasting about the high GDP growth achieved. But this practice is not sound for any economy in the long term. This has destroyed many countries such as Venezuela, Sudan, and Zimbabwe.
Why is inflation rising in a rebellious way?
Inflation in a region depends on the game of supply and demand. The price of commodities decreases when the supply increases whereas the opposite happen when demand increases. What will happen if the demand increases and the supply decrease drastically? The prices will skyrocket. This has what has happened in the last 18 months. Covid, the Russia-Ukraine war, and trade wars between different power groups are the reasons behind the disruption of the global supply change resulting in the shortage of key components such as semiconductors, fuel, wheat, and others.
Understanding the falling Rupee
To understand why the Rupee is falling, first of all, we need to understand the relation between the INR and the USD. Nearly a century ago, the whole world adopted that all global trade would take place according to the gold standard. This went fine for some time but it was noted that after the world wars ended, the US was holding around 70% of all the gold reserves which made the USD the strongest currency in the entire globe, and eventually, all world trades started taking place using the USD.
Now, when two firms from different countries engage in a trade, they have to exchange their currencies. If foreign companies are purchasing certain products or services from India, they need to make payments in the INR for that they need to buy INR by exchanging their respective currencies viz. USD, Pound, Yen, etc. This will increase the demand for INR and this, in turn, will increase its value thus making it stronger with respect to the USD. But the Rupee will start falling if the opposite happens.
But there are times when Governments intentionally devalue their currencies and there is a huge advantage when it is done in the right way. Devaluing the INR makes the Indian market more profitable. Let us understand how it takes place using an example.
INR was valued at ₹70 per $1 in 2018. So, if one had to buy an item that was priced at $1000, he/she would require ₹70,000 but now, $1 is valued at ₹77 which translates into ₹77,000 to buy the item priced at $1000. Now, the person who was thinking of buying this item will rethink this decision and will try to look for alternatives in the Indian market.
Is India on the verge of an economic meltdown?
Definitely not! India might be going through some rough patches at the moment, and so does every other country right now, but saying that the Indian economy is failing sounds foolish. We are seeing new unicorns taking birth every now and then, the entire Indian infrastructure is being slowly upgraded. Check the number of airports we had a decade earlier, the number we have now, the number of expressways, the bullet train project, the ease of doing business in the country is improving, and various others. The entire country is undergoing a rapid urbanization movement. We are definitely not on the verge of an economic meltdown.
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Let me know your thoughts on the current economic situation in the comments.