The general meaning of inflation is an increase in the prices and a fall in the purchasing value of the money. Inflation is something that comes very natural to India. And with the pandemic looming over our heads, the government needs more and more money to sustain the public. It is said that the government will borrow more money from the reserve bank of India and will inject it into the economy. This basically means that the Reserve Bank of India will print more money. If more money is printed, the value of rupee will go down.
The current situation of the economy is that the government has to feed the people and create relief packages. Since there hasn’t been much productive work in the lockdown, people are not earning money. If the people are not earning money the tax collections will go down. The fiscal deficit that the government has will rise.
The savings of the people is dwindling down to zero. The major issue with the printing of currency is that the amount of savings a person has in their home will lose its value. The real value of money will go down. If inflation goes up, the real value of savings also goes down.
This is an unusual time and a case like this has never come up before. In this case, the demand for higher-level goods has come down and the supply has also reduced because of the supply chain issues.
What the RBI says
According to the Reserve Bank of India, the pandemic will affect the economic activity directly and it will lead to a slowdown in the growth. There will be an impact on inflation. But there will be a slowdown in global trade and growth because of the FDI rules. Various companies were sustained on the basis of investment from China. Now, these companies will also go broke with the new change in the foreign direct investment rules.
A very simple example is given out: the onion prices are quite low right now. This might be because of two reasons.
- The first one is that there is a high production of crops and this is why the price of the crops is at a very normal and low level. Every vendor needs to sell more to sustain themselves. The only business going on right now in the business of selling food items. Every person has come to the streets to sell essential items.
- The second reason is that people do not have enough money to buy vegetables and the price of the vegetables is going down because of a decrease in demand.
Both scenarios are equally scary because they tell us about the adverse economic conditions that can prevail in our economy. The central bank has said that since March, the outlook about inflation has become very uncertain. The crude oil prices have collapsed to such a low rate which has never happened since the past 20 years.
The real scenario will be known once the pandemic is over. The amount of economic impact depends upon how soon the infection will be cured.
People who save money should be careful. The interest rate on fixed deposits went down during the lockdown because the government did not have enough money to cater. And with the injection of money into the economy with the relief package, the value for one rupee will go down. People who have accumulated savings must be careful about when they spend it because, in the next few months, the value of money will reduce. Moreover, with no income right now, people are using up their savings to sustain themselves.
There is only one sector in the economy which is working. Every human needs to sustain themselves which is why the retail segment is working right now. And industrial reports suggest that till the time the lockdown is in action, the retail inflation will keep on going up. This is happening because of the rise in the food prices as seen in the cases of vegetables. In March 2020, food inflation went to 7.8%, and last year it was at 0.7%. Inflation rose in the case of cereals and in the case of milk, it was steeper. There was unseasonal rainfall which led to all this.
The literal meaning of fiscal deficit is having more expenses than the revenue. The current condition of our country points at a very high fiscal deficit which is not right for the country. The government has to spend far more than they are earning. Despite all these people do not have enough money.
It is said that with the coming up of the relief package for the poor people and for the industries, the country‘s fiscal deficit is likely to be doubled to 7.9%. The fiscal deficit is usually around 3% of the GDP. But after taking the cash outflow into account and the recent excise duty hike, the fiscal deficit is bound to rise because of lower revenues and high expenditure.
According to reports, 4.5% of direct impact might be seen and 0.9% of indirect would be seen because of the change in the GDP. The government has also announced that they would be borrowing around Rs 4.2 lakh crore which is 2% of the GDP. The debt which the government is under is increasing since the last nine years.
Economies all around the world have pumped in money into the economy so that the economy can come out of the recession. It is said that more money will be injected because the pandemic is not over yet. But the catch here is that in the United States of America, 10% of the national income was put into the economy as direct cash injection to the workers and their families. This package has been accompanied by monetary stimulus. In India, direct money has not been provided to anyone and half of the money is not accounted for. Till the time there is no transparency in the system, money which has been allocated for a good cause cannot even be traced.
State governments are also very much stern about their fiscal deficit. The government of Maharashtra has increased its fiscal deficit to 5%. The government must inject cash directly into the economy and should release all the pending payments.
Till the time people are sitting at their home, the fiscal deficit will keep on rising.
Fiscal deficit and inflation
There is not one simple relationship defined between the two terms mentioned above. It is also said that the fiscal deficit of above 4% is very problematic.
The fact is that if the deficits are used for investments, inflation can be controlled. But during the current scenario, the additional money will be used for subsidies and to meet the public content. With this inflation will rise. The government cannot spend as much as they want. The fiscal deficit affects not just inflation but also the interest rates. With the coming up of the relief package, the government should have come up with fiscal policy.
We would like to sum up by saying that because of the pandemic going on, the government will most probably inject money into the economy. If the money is injected, the real value of money will go down and inflation will go up. The value of savings will go down because the value of rupee will fall. Food prices are rising right now because they are an essential segment of the economy which is moving ahead. The government needs to take corrective actions at the right time so that a lot of damage is not done.