The recovery of the national economy following the onslaught of the pandemic, in a context of abundant financial liquidity and a highly evolving fiscal policy in the large developing countries, has encouraged the rise in commodity prices.
In the current context, where the economic recovery is symmetrical with increasing inflationary pressures, a question that comes to mind is: how are the prices of final consumer goods affected by rising commodity costs, and what impact does this have on a developing middle income country like India? The economy was a car pushing us off the ecological cliff, when it slowed down – people got sicker and impoverished, when it picked up speed – people got into a better force and got richer. So whatever the reason for slowing down the car, to save all the passengers, the accelerator pedal was operated. no one has ever thought of parking for awhile and thinking about a new way to run the world that is good for people and the planet.
Now that we are slowly running out of fuel to run the economy car, people are getting sick and entering stressful conditions under the burden of a slowly decaying economy; our own quiet poison.
At present, the country’s economy faces a serious threat: inflation, especially via the fuel route. In recent days, gasoline and diesel prices have skyrocketed.
According to a report, prices have already passed the Rs 121 per liter mark in the country’s most inland areas. However, recently, with the reduction in fuel taxes by state and central governments, prices have dropped slightly.
The rise in gasoline and diesel prices also has repercussions on the prices of other raw materials via a cascade effect. An upward trend in international crude prices is only part of the story of fuel inflation, as taxes are a big incentive behind the latest levels of fuel prices.
While the situation is already very difficult, any further increase in international crude prices will only make it more precarious. When the prices of goods rise, the incomes and subsequently the profits of private companies also rise.
The influx of capital will allow companies to expand their operations by hiring more employees. When there is inflation in the country, the purchasing power of the population decreases because the prices of basic goods and services are high.
The value of currency units decreases, which has an impact on the cost of living in the country. When the inflation rate is high, the cost of living also rises, leading to a deceleration in economic growth.
So the pandemic, as a fundamental problem, may have pushed the country’s economic situation back to as bad a situation as it was twenty-nine years ago. One would agree that the nature of the discrepancies discerned in the supply of many of these products – be it fuel, vegetables or grains – is a response to fleeting and temporary conditions, of so that their effect would fade over time and not justify any major transpositions of monetary conditions in many emerging countries. However, the current situation is of a very different kind.
This time around, about half of the emerging economies in the world have far exceeded their central banking system’s inflation target, which is the way to end their economy, and in many cases these high rates are amplified by an exchange rate.
It is in these situations that further interludes of soaring prices of products, especially agricultural products, could not only cause consumer prices to rise but also a rapid strengthening of financial conditions which could slow down economic recovery.
(The writer is a Standard-X student at DAV Public School, Unit-8, Bhubaneswar)