In response, Bernanke and Blanchard claim that the answer is a combination of the federal government’s stimulus programme and supply-side disruptions that raised prices for consumer products.
However, despite many of the usual drivers of inflation (demand pull or cost-push effects) being relatively minor in scope, compared to drivers of inflation (as analyzed by Bernanke-Blanchard) in more industrially advanced countries such as the US, the UK, and the EU, why did the inflation rate in India remain persistently high?
Source: The World Economic Forum
The response to this can be summed up in five important elements that contributed to and sustained greater inflation in India:
1.High M1 (money supply), which is a component of money supply made up of all liquifiable assets (currency, demand deposits, other liquid deposits, including savings deposits), is contributing to inflation. If you can see the trend clearly, M1 has been increasing since 2020, which has allowed inflation levels to increase over time.
2. Rapid rise in bank loans and credit: Until 2022, there was less of a connection between the state of bank loans, credit growth, and inflation. Prior to the pandemic, bank loans and credit growth levels had generally remained modest, but starting in 2022, this pattern began to alter.
3. Excessive imports (including those of non-fuel/gasoline) and import costs: grasp India’s more recent inflationary spiral requires a grasp of this trend relationship. According to recently released consumer income data, over the past five years (2016-2021), especially during the pandemic, an increase in household per-capita income seen among the richest 20% and the upper 20% led to a significant change in consumption patterns and preferences. Given that these classes’ propensity to spend and consume has increased with income, even while the lowest 20%, middle 20%, and lower middle 20% have had negative income growth, more products and services are being imported.
4. Inflation has increased as a result of low domestic productivity and growth that has driven richer consumption groups to become more dependent on imports: Following point (3) above, a lower GDP growth rate combined with a lower level of domestic productivity has caused the richer income increasing groups to raise their consumption of goods/services via imports, which might be good news for GST revenue flows.
Source: CNBC
5. ‘Greed-flation’ among the wealthier corporate class, which experienced skyrocketing profits during the pandemic years (you observe a direct correlative relationship between inflation rise and per unit profit growth among these corporations), has led to inflation. This is a pattern that has been observed in India, where a small number of businesses maintained extremely high profits throughout the pandemic, and it is consistent with developments in the US, the UK, the EU, and other nations. This has been further discussed by academics like Isabella M. Weber who has shown how ‘greed-flation’ is a real phenomenon that has fueled inflation all across the world.
These macrotrends have played a role in India’s high inflation rate. Widening economic inequality and a rise in consumerism for imports in the United States have made national-level policy interventions more difficult. As a result, the traditional policy tool of correcting for inflation (via monetary policy) will likely become even less effective in the future, as has been seen recently.
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