The Indian Economy Is In A “Unique” Stagflationary (Low Growth, High Inflation) Spiral, A Double Whammy of Sorts

Indian Economy
Indian Economy

The Indian Economy is being hit by a “double whammy” of demand destruction due to high inflation and supply-side bottlenecks and stagnating growth, at the same time. Typically, countries experience “slowdowns” due to either low demand or supply crunch and this time is different because India stares at “stagflation” where growth slows down accompanied by persistent inflation. In other words, the present situation is unique in the annals of Indian economic history as both inflation and decelerating growth are being seen at the same time. This is validated by yesterday’s release of governmental data pertaining to the GDP (Gross Domestic Product) growth which showed a continuous slowdown in Q4 2022, with the previous two quarters growing at a slower clip than the earlier quarter.

While the pandemic caused by the Coronavirus was blamed for the FY 2020-21 contraction of around 6.6%, FY 2021-22 was expected to the “rebound” from the lockdowns induced recession. However, FY 22 growth clocked at 8.7%, which comes to lower figures when one accounts for the “low base” of the previous year. The reasons cited for this slowdown range from the “resurgence” of the virus, what with the Omicron variant bringing back some restrictions and more importantly, the Ukrainian war that led to high commodity prices. No wonder India banned the exports of wheat and sugar, just days after promising to “feed the world” if necessary, as a global supply crunch due to the war and the Chinese lockdowns pushed by prices and created scarcity.

Talking about the war, another emerging “threat” to the Indian Economy is the “assured” Russian default by the end of June, which would bring back the painful memories of the year 1991, for those old enough to remember how the “implosion” of the erstwhile Soviet Union impacted India at a time when it was “reeling under” its own economic crisis. Indeed, as our neighbours Srilanka, Pakistan, and Nepal are going through their own crises, it is worthwhile to hark back to the 1990s when the prescient “warning” from MI5, the British Intelligence Agency about all nations being “four meals away from anarchy” should be our guiding force. Moreover, India faces its own “social” and “existential” crisis, again like the 1990s when centrifugal forces were tearing the nation apart.

Perhaps there are some “green shoots” as we peruse the official statistics pertaining to the Indian Economy. For instance, there is much hope for the revival of the manufacturing sector, as Capex (Capital Expenditure) growth is expected, mainly due to the PLI or the Production Linked Incentive scheme announced by the government that incentivizes firms to produce more. However, the Q4 2022 data disappoints by the “contraction” of manufacturing growth raises doubts about the prospects for the Indian Economy in FY 2023. Moreover, the Informal Economy has “shrunk” to almost half of what it was, a worrying development as this segment is where the jobs are. More so, when other data reveal a decline in the workforce participation percentage where more than half of working-age Indians have simply “stopped” looking for jobs, a la The Great Resignation Desi Style.

Indeed, the “jobs crisis” is the “elephant in the room” that the Indian Economy and its planners have to address, lest the nation descends into anarchy and unrest due to “masses” of unemployed youth. Already youth unemployment is at a record 25% which means that one in four of the youth, the much-vaunted Demographic Dividend, is unemployed, raising fears of a Demographic Disaster. On the other hand, India is “shining” in the “glitzy” offices of its services firms, including the celebrated IT (Information Technology) and Financial Services firms. However, the ongoing Unicorn “bubble burst” again stokes concerns about another 2000s style Dotcom bust, that can be a real killer, more so when the K Shaped recovery, talked about by the likes of Raghuram Rajan, risks being “flattened”.

While the virus and the war continue in the background, another risk is the “slow-motion” recession in China, where its Zero Covid induced lockdowns have become the world’s problems as supply chains are clogged, goods pile up at ports, and worse, production halts leading to severe supply-side issues. This is the real “crunch” as such supply bottlenecks cause inflation, which in turn, leads to demand destruction, thereby leading to stagnation. Moreover, the global economy that has been on “steroids” for much of the last two to three decades due to Central Bank “printing presses” is now staring at continuous rate hikes, with our very own RBI or Reserve Bank of India, following in the Federal Reserve’s steps, has raised and promised to raise interest rates.

Economies grow when there is plenty of liquidity leading to demand growth, which leads to asset bubbles, which are then followed by “taper and tighten” policies, that restore “equilibrium“. While this has been the case since the time the Gold Standard was abolished in the 1970s, the last two and half years of the pandemic were characterized by unusually “loose” monetary policies that led to a “glut” of money. The resultant inflation, also caused by the aforementioned Chinese, Russian, and Pandemic factors needs rate hikes. However, the pandemic has also led to job losses and wealth destruction that is stifling demand. This is the “double whammy” that the Indian Economy and indeed, other economies worldwide face, which is perhaps a “once in a Blue Moon” occurrence, just like Covid was a “once a century” Black Swan event.

The biggest threat, by far, is the widening inequality where the rich have become richer, and the poor poorer, largely due to most of the “cheap money” aggregating to the former. This is another demand killer, which when coupled with the asset bubbles, that are bursting now, is a blow to any “recovery”. Even Davos 2022 warned of a “darkening” economic climate, and the “headwinds” are likely for the Indian Economy in the months ahead. Perhaps a “normal” monsoon would “rescue” the economy, though the approaching “perfect storm” due to the factors discussed so far, might negate the hopes from this year’s monsoon. All in all, fasten your seatbelts as we fly into turbulence as everyone and his dog are bracing for a “tough” year ahead.


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