Crude oil and stagflation

Crude oil and stagflation

Subject: Economy

Section: Economic Growth

Context:

Imported inflation, end of easy monetary policy and supply chain disruption has the potential of pushing an economy into stagflation.

Concept:

Stagflation is said to happen when an economy faces stagnant growth as well as persistently high inflation. In other words, the worst of both worlds. That’s because with stalled economic growth, unemployment tends to rise and existing incomes do not rise fast enough and yet, people have to contend with rising inflation. So people find themselves pressurized from both sides as their purchasing power is reduced. The most famous case of stagflation happened in the early and mid-1970s when OPEC (The Organization of Petroleum Exporting Countries), which works like a cartel, decided to cut supply and sent oil prices soaring across the world

A 10 per cent increase in crude oil prices raises wholesale inflation by 0.9 per cent and retail inflation by 0.5 per cent.

Higher prices will reduce this demand. Fewer goods and services being demanded will then disincentivise businesses from investing in new capacities, which, in turn, will exacerbate the unemployment crisis and lead to even lower incomes. Thus leading to Stagflation.

Can the latest spike in oil prices send India into stagflation?

There are various indicators that suggests India is not in stagflation

• Rising consumption demand
• Rising private investment to around 27.9% highest in last one decade
• Risin government expenditure especially the capex
• Rise in trade post covid recovery
• Rise in unicorns startups
• Recovery in manufacturing post covid
• Chances of rise in export post Ukraine-Russia trade blockage

However, it cannot be denied that stagnation is not impossible in near future-

• The average prices will perhaps hover at levels above $100 and as India imports more than 84% of its total oil demand it will lead to imported inflation.
• Since oil is such a basic cost in our economy, this spike will likely ensure that Indians suffer from high inflation. A 10 percent increase in crude oil prices raises wholesale inflation by 0.9 per cent and retail inflation by 0.5 per cent.
• India is facing the most acute unemployment crisis it has seen in the past five decades.
• India will see lower than previously forecast economic growth. It will expand 8.9% in the year ending March, according to data released Monday by the Statistics Ministry.