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Is India headed for stagflation? Here's how COVID-19 vaccination coverage is linked

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Stagflation is characterised as slow or stagnant economic growth, accentuated by rising unemployment coupled with high inflation.

Is India headed for stagflation? Here's how COVID-19 vaccination coverage is linked
India’s consumer price index (CPI) inflation has remained above Reserve Bank of India’s (RBI’s) 4 percent target for the last 20 months. For the second straight month after May, inflation rose higher than RBI’s 6 percent upper tolerance limit, although it marginally eased in June.
At 6.5 percent, core inflation (the non-food, non-fuel component of the inflation basket) for May was at its highest in 83 months. Yet, despite being ‘fuelled’ by an astronomical rise in petrol and diesel prices, inflation in India continues to be called “transitory” by the RBI. Is it really so?
Nomura’s India Economist, Aurodeep Nandi told CNBC-TV18 that medium term risks on inflation remain on the upside owing to the ongoing supply-side shocks, squeezed margins of manufacturing and services firms, greater policy tolerance for higher inflation, and elevated inflation expectations.
He added that inflationary pressures have been building since the end of 2019 and apart from episodic bouts of base effect-led moderation, headline inflation has generally remained elevated.
It, therefore, does not come as a surprise that the possibility of India being in a “stagflationary” situation could be real. Stagflation is characterised as slow or stagnant economic growth, accentuated by rising unemployment coupled with high inflation.
According to a Bloomberg report, India is set to overtake the US in the decade starting 2020, with economic growth predicted to accelerate to 7.8 percent. However, this needs to be looked at in the context of some macros for an insight into the state of the economy.
The goods and services tax (GST) collections, after crossing the Rs 1 lakh crore mark for eight months in a row, fell below it in June 2021. Economic think-tank Centre for Monitoring Indian Economy (CMIE) in its June report observed that urban men lost more jobs than women during the second wave of COVID-19, implying a complete loss of livelihood for millions of households. Many of those who got their jobs back or found alternate jobs secured them at lower wage rates. Household incomes have fallen a lot more than employment has, the report added.
Meanwhile, CRISIL’s DK Joshi told CNBC-TV18 that the macro data including auto sales numbers, inflation and the trade data released last Monday suggest some slowdown and expects GDP growth to be sub 6 percent for Q1FY22. However, NITI Aayog Vice Chairman, Rajiv Kumar had on July 11 reiterated that the Indian economy will register double-digit growth in the current financial year.
Siddharth Rathore, an economics faculty member at the University of Delhi wrote in his latest article for ORF that it seems inflation is a mix of transient as well as some durable factors. However, he doesn’t think the economy is on the cusp of stagflation despite an uptick in inflation. He said that stagflation will not occur in this fiscal and added that he expects a growth rate of around 9.5 percent.
Having said so, this growth is on a favourable base effect. If the inflation carries forward to next financial year, the base effect would be sieved off, he said, adding that there may be a possibility that some factors that could aid inflation to revert to the MPC band could be OPEC+ output cut, faster vaccination coverage, which will minimise the burden of out-of-pocket health expenditure, and a good kharif output.
India’s economic growth is now closely linked to the progress made on the vaccination front, which has by far been steeply lower than expectations. A recent report by HSBC Global Research points out that India’s growth is expected to move from an uncertainty-led contraction in the first six months, to a vaccination-led expansion in the later half. This comes against the backdrop of India seeing its seven-day average of vaccination fall to its lowest in three weeks on July 12, at 33.72 lakh.
SBI’s Group Chief Economic Advisor Soumya Kanti Ghosh noted that if India has to mitigate the (economic) impact of a possible third wave of COVID-19, which is expected to reach its peak in the second week of August, vaccination is the only option. A consumption-led strategy in the form of support to households is now integral to revive the economy and will not stoke inflation going forward, he said in a recent article for Hindustan Times.
Banking doyen Uday Kotak echoed the same sentiment by saying that India needs to focus on vaccination in the remainder of 2021, in addition to the structural inflation and job creation.
Political leaders have time and again proclaimed that they intend to vaccinate “everyone” by December this year, however, data from The Hindu shows that India will have to maintain a minimum of 86.5 lakh doses daily to fully vaccinate its entire 18+ population by the year's end.
“If the underlying growth momentum remains fragile, inflation edging close to the upper threshold of the MPC's 2-6% target will create policy conundrums in terms of an appropriate timing for policy normalisation”, says ICRA Chief Economist, Aditi Nayar told CNBC-TV18. However, she added that CPI inflation is past its 2021 peak, and will moderate gradually while remaining volatile in the coming months.