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Why Inflation in India Is Different from Inflation in the US ⭐

Inflation is a common problem across India and the US. Central banks in both the countries are reversing accommodative monetary policy, and increasing rates.

Markets in both the countries too have been declining as fears of a slowdown in the economy, and hampered growth and valuations.

The Fed and the RBI have both got aggressive on rate hikes. They have increased key rates already and have indicated more hikes in the coming meetings.

While there seem to be similarities in terms of the problem, and its redressal, there are key differences which make the potential path very different for the two countries.

For the US, inflation may be a persistent problem, which may last long and dealing with it may cause damage to the economy. However, in India, this problem may be rather transient in nature, and solutions may not leave the economy as damaged. Why?

The Russia-Ukraine trigger

Russia’s invasion of Ukraine triggered a shortage in several commodities - food, metals and energy. Constrained supply, trade restrictions, sanctions and supply chain disruptions have led to a steep increase in the prices of several key commodities, which have fuelled inflation globally.

Some of the critical ones include wheat, corn, edible oils, oil and natural gas. This forms a major chunk of any country’s inflation calculations, and an increase in all of these is bound to hit the baseline numbers hard.

This one is a common factor for both the US and India.

The ones that make the US situation different are:

1. The US has been stimulus-driven

Since the Global Financial Crisis, the Fed has been pumping liquidity into the markets by embarking on a bond buying spree that seemed to last forever. This was coupled with interest rates which were near zero. The liquidity influx allowed for the economy to not just recover, but also thrive; resulting in one of the longest and strongest bull markets.

However, the single largest problem of printing money is inflation. The US had started to face the heat of increasing inflation since last year. Sooner or later, prudence on monetary policy was bound to push rates higher or stop the excess bond buying.

In India, growth was more fundamental in nature. The economy was not being supported or driven by monetary policy stimulus. So when monetary policy reverses in the US, the impact is much larger than it reversing in India.

2. Tight employment market in the US

In the US, the job market right now is super tight. The unemployment rate in the US is at its lowest, there are more people joining the workforce, and the number of job listings aren’t scarce.

Essentially, there are plenty of jobs, and people have a higher bargaining power. This sparks an organic contributor to inflation - wage inflation.

With wage inflation going up, people have higher buying power, and the price of goods and services can go up too.

The situation is the opposite in India. India is grappling with a high rate of unemployment. The job market isn't tight, and there is no underlying wage inflation sparking a further rise in inflation.

3. Fiscal support in India

A lot of the inflationary factors don’t really impact India to the same extent that they do in the US. India has a protectionist agenda towards its citizens, especially farmers. For farmers globally, there are cost pressures in the form of more expensive inputs, packaging and transportation.

In India, fertilisers are subsidised. The increase in the price of natural gas, which has led to an increase in the price of urea is absorbed entirely by the government. Farmers hence don’t feel the pressure of cost increases to the same extent.

Similarly, minimum support prices, subsidised insurance and crop protection, low-cost interest, etc. shift a lot of the burden from people to the government.

Essentially, fiscal policy too absorbs the shock, and takes it off monetary policy.

4. Aggressive fiscal policy

A lot of the growth for India was being driven by an aggressive fiscal policy. Spending on infrastructure, construction, development and other initiatives was driving budgetary expenditure, and supporting economic growth.

With the general elections up in 2024, fiscal spending is likely to remain aggressive. This will lead to relatively faster recovery for India compared to the US, where the economy was more monetary policy driven.

The verdict

Both India and the US are dealing with the same problem - inflation. However, because of differences in fiscal policy, quality of economic growth and the employment situation, inflation for India seems to be more linked to the Russia-Ukraine conflict, than intrinsic factors.

Moreover, while monetary policy tightening will slow both economies down, an aggressive fiscal policy in India is likely to play a role in faster and stronger recovery in India.

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