Explained | Understanding the Economic Crisis: What’s Wrong with the Indian Economy? | Russia-Ukraine War
New Delhi: Indian rupee at all-time low, inflation at highest in over 4 decades, oil prices at unprecedented highs. We’ve all read similar headlines over the past few months. The frequency of such headlines has increased exponentially since the beginning of the Russia-Ukraine war. While this may sound gibberish to us, all of these terms have a direct impact on our pockets. Everything from the food we eat to the cars we drive is influenced by these numbers.Also read – Sensex climbs to over 700 points on open, Nifty Breaches 15,900; IT stocks up
Understand the jargon
The global economy is driven by two factors, supply and demand. Demand is defined as the number of goods and services demanded by consumers in the economy. Supply is the number of goods and services released by producers such as farmers for consumers to purchase. Demand and supply must be matched to keep the economy stable. In economic terminology it says balance. Also read – Gasoline and diesel price today: Check here the latest fuel prices in your city on June 27th
When demand increases faster than supply, fewer products are available for purchase. To buy the product now, more people are willing to pay a higher amount of money. This leads to an increase in the general price level (inflation) and is called demand-pull inflation. Also Read – US GDP Data on G7 Summit: 5 Triggers That Could Guide the Stock Market Next Week
On the other hand, if the supply increases more than the demand, more and more sellers are willing to sell the products cheaper. This leads to a fall in the general price level in the economy.
Another type of inflation is cost pressure inflation. This happens when the price of raw materials increases due to several factors, thereby increasing the overall cost of production. In order to keep their profits intact, producers sell them at a higher price and this translates into higher prices for end users.
What’s wrong with our economy?
Now India is stuck, to say the least, between the devil and the deep blue sea. The country faces both the nature of inflation, the demand pull and the cost spike.
Demand in business has increased after the Covid-19 pandemic. Subdued demand due to movement restrictions has started to recover. However, it takes time for companies to increase the range of goods. This has resulted in higher inflation and more pressure on our pockets.
Various factors play a role on the supply side. The supply chain has been suffering since the outbreak of the Covid-19 pandemic. Semiconductors in particular have been in massive shortages, leading to a rise in the prices of cellphones, laptops and other electronic devices.
The situation was aggravated by the Russia-Ukraine war. Russia and Ukraine are major exporters of important commodities. These include oil, wheat, rare metals and fertilizers. Oil prices have skyrocketed since the eruption. And it is particularly troublesome, since without oil there is no transport. So when oil goes up, the price of all commodities goes up.
Russia and Ukraine, which are among the top four wheat exporters in the world, have also stopped exporting the grain. The effects of this step can be seen on our plates. Companies have increased the prices of flour and other related products.
Other raw materials such as fertilizers and rare metals are also in short supply worldwide. The inflation numbers are proof of that. This has unsettled investors and the stock markets are also reacting negatively.
Who can save us from trouble?
Honestly nobody. The factors behind our problems are widespread. Central banks, in our case the Reserve Bank of India, can largely control demand but not supply. Governments, on the other hand, have limited resources to quickly improve financial conditions.
Unless the war between Russia and Ukraine and other geopolitical tensions eases and a normal supply chain is established, we could continue to experience high prices and economic turmoil. It might not be too encouraging, but at least we now know what the problem is.