Why Inflation In India Will Remain High

Two years ago, when the Covid-19 pandemic gripped the world, developed economies benevolently extended unemployment benefits along with job protection schemes.

- Dr. Rajiv Khosla

This was something that John Maynard Keynes had advocated during The Great Depression of 1929 to avoid the ‘paradox of thrift’ i.e., an increase in savings resulting in a decrease in aggregate demand. Efforts of the governments fructified and a year later i.e. in 2021, this move ushered in the recovery of major economic fundamentals alongwith reduction in unemployment, but with higher inflation. Policymakers termed this hike in prices as transitory and indicted choked supply chains and labour shortage as the main causes.

However, Russia’s attack on Ukraine in February 2022 led to the global shortage of commodities like crude oil, coal, fertilizer, natural gas, sunflower oil and nickel etc. which led to a multi-decade high inflation in the developed world in particular. Gradually, this surge in inflation spiraled and gripped the emerging and developing economies as well. Table 1 indicates how the level of retail inflation has swelled manifold in different countries of the world in the last one year or so. Significant increase in retail inflation can be seen in the context of the United Kingdom and European Union. Interestingly, inflation in Japan that was in the negative zone during Covid–19 has landed into positive territory since September 2021.

Inflation in India