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Is the general price level of the Indian Economy following the trend of inflation in Sri Lanka?

June 21, 2022

Ever since Sri Lanka got it’s independence from Britain in 1948, for the first time the Sri Lankan government has defaulted in servicing its external debt. This decision has created a series of default in the internal debt repayment of the country. The low forex reserves resulted from less supply of foreign currency and high demand for the same is an outcome of the rigorous lockdown policy in Covid-19 pandemic followed by the Russia-Ukraine war. The pandemic lock down had affected the tourism business of Sri Lanka very badly whereas the war has created a supply chain bottleneck in the consumer essentials like fuel, energy and milk powder. Looking at the economic condition of the Sri Lanka, the IMF had declared the country’s debt situation as unsustainable.

The economic turmoil brought social unrest followed by political instability. In April 2022, the country’s inflation has crossed 29% with a record high for the sixth consecutive time. The petrol and diesel prices had gone up by 92% and 76% since January 2022. In the same period the prices of vegetables and food grains had seen an overall jump of 47%. and the Sri Lankan currency has depreciated by 57% against the US dollar by 22nd May 2022 over the currency value in 1st March 2022. To fight against this inflation the bank rate in Sri Lanka had increased from 9% to 17% and the prime lending rate has jumped from 8% to 19.5 %.

On 4th May 2022, Sri Lankan finance ministry announced that it has $25 million usable forex reserves and the total external debt amounted to $51 billion. So, the country had deferred about $ 7 billion of debt servicing to be paid by 2026.

Due to increasing import bill despite of import restriction of non-essential goods and services, the trade deficit of Sri Lanka widened to $8.1 billion in 2021. In the fiscal year of 2021-22, the remittances and the tourism receipts had been reduced by 22.7% and 61.7% respectively. Now the country faces a fiscal deficit of 13% of GDP against 3.8% of GDP in the previous fiscal year.

The Indian economic situation is now very strong in comparison to the Sri Lankan economy. But some of the economic signals are very similar to that of Sri Lankan economic condition. The oil and natural gas   prices in India has gone up by 20% in the last two months. The WPI inflation in India is in double digit since September 2021. This is the highest ever inflation rate in India after 1991 based on the 1981-82 series of price level.  Increase in the general price level is the topic of concern for the Indian central government. The retail inflation has reached 7.8% by the end of April 2022 because of the ever-rising fuel price in the international market. Following the Keynesian economics, it is evident from the Center for Monitoring Indian Economy (CMIE), the employment in the industrial sector of India has jumped from 14.2 million during August 2020 to 21.4 million by the end of April 2022.

The Russia-Ukraine war has resulted in hike of fuel price, energy price. The chain reaction of the increase in the fuel price is marked in the supply chain disruption and as a result of such a higher inflation is seen in India since February 2022.

Key policy rates from the monetary authority were revised based on the soaring inflation in India. The Repo and the CRR were increased by 0.4% and 0.5% respectively. The key policy rates were showing a down trend since 2015 and were unchanged since May 2020.

India’s current account deficit is widened to $23 billion or 2.7% of its GDP and the fiscal deficit is 6.9% of its GDP in 2021-22 amounts to $ 217 Billion. This is a warning of possible tough time for the Indian economy in future.

Though the changes in the key economic parameters are very insignificant in India compared to that of Sri Lanka, the move warns us to be extra cautious to face a possible economic disaster in next twelve to fifteen months. If the countries like Russia, China, Ukraine and Taiwan can restore peace, then the economic crises of Sri Lanka can be fixed to a large extent. And the possible economic crisis of many such economies like Sri Lanka can be avoided. We are leaving in an open economy exposing ourselves to the spill-overs of globalization of everything, be it employment, production, sports, or war.

Author: Dr. Tushar Panigrahi, Associate Professor - Unitedworld School of Business (UWSB)

Disclaimer: The opinions / views expressed in this article are solely of the author in his / her individual capacity. They do not purport to reflect the opinions and/or views of the College and/or University or its members.

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