Making Sense Of Economic Crisis: What Is Wrong With Indian Economy? | Explained

New Delhi: Indian rupee at an all-time low, inflation highest in over 4 decades, oil prices at unprecedented highs. We all have read similar headlines in the past few months. The frequency of such headlines has gone up exponentially since the inception of the Russia-Ukraine war. Even if this might sound gibberish to us, all these terms have a direct bearing on our pockets. Everything from the food we eat to the car we drive is impacted by these figures.Also Read – Sensex Rises Over 700 Points On Opening, Nifty Breaches 15,900; IT Stocks Up

Making Sense Of The Jargons

The global economy is driven by two factors, demand and supply. Demand is defined as the number of goods and services that are demanded by the consumers in the economy. Supply is the number of goods and services that are released by the producers like farmers, for the consumers to buy. Demand and Supply need to be consistent with each other in order to keep the economy stable. In economic terminology, it is called Equilibrium. Also Read – Petrol, Diesel Price Today: Check Latest Fuel Rates In Your City On June 27 Here

If the demand rises more rapidly than the supply, there are fewer products available to be bought. In order to buy the product now, more people are ready to pay a higher amount of money. This leads to a rise in the general level of prices (inflation) and is called Demand-pull inflation. Also Read – US GDP Data To G7 Summit: 5 Triggers That May Guide Share Market Next Week

On the other hand, if the supply rises more than the demand, more and more sellers are ready to sell the products at a cheaper rate. This leads to a fall in the general price levels in the economy.

Another type of inflation is Cost-push inflation. This happens if the price of raw material rises due to several factors and thus the overall cost of production rises. To keep their profits intact, producers sell them at a higher price and this snowballs to higher prices for the final consumers.

What Is Wrong With Our Economy?

Now, India, to say humbly, is stuck between the devil and the deep blue sea. The country is facing both the type of inflations, demand-pull as well as cost-push.

The demand in the economy has been increasing post the Covid-19 pandemic. The muted demand owing to restrictions on movement has started to recover. However, it takes time for the companies to increase the supply of goods. This has led to higher inflation and higher pressure on our pockets.

On the supply side, there are various factors at play. The supply chain has been struggling since the outbreak of the Covid-19 pandemic. Especially the semiconductors have been in massive shortage leading to the rise in prices of mobile phones, laptops and other electronic gadgets.

The situation has been made worse by the Russia-Ukraine war. Russia and Ukraine are major exporters of important commodities. This includes oil, wheat, rare metals and fertilisers. The oil prices have skyrocketed since the outbreak. And it is particularly troublesome as no transportation is possible without oil. So, if oil rises, the price of every commodity rises.

Russia and Ukraine, which are among the world’s top 4 exporters of wheat, have also stopped exporting the grain. The impact of that step can be seen on our food plates. Companies have increased the prices of flour and other related products.

Likewise, other commodities like fertilisers and rare metals are in shortage across the globe. The inflation figures are a testimony to this fact. This has spooked the investors and the share markets are also responding negatively to it.

Who Can Rescue Us From The Trouble?

Quite frankly, no one. The factors behind our troubles are widespread. The central banks, the Reserve Bank of India in our case, can majorly control the demand but not the supply. Governments, on the other hand, have limited means to improve the financial conditions rapidly.

Unless the Russia-Ukraine war and other geopolitical tensions ease up and a normal supply chain is established, we might continue to see high prices and economic turmoil. It might not be too encouraging but at least now we know where the problem lies.