Oil Price and Stagflation
- Stagflation is a stagnant growth and persistently high inflation.
- Typically, rising inflation happens when an economy is booming — people are earning lots of money, demanding lots of goods and services and as a result, prices keep going up.
- When the demand is down and the economy is in the doldrums, by the reverse logic, prices tend to stagnate (or even fall).
- But stagflation is a condition where an economy experiences the worst of both worlds — the growth rate is largely stagnant (along with rising unemployment) and inflation is not only high but persistently so.
How does one get into Stagflation?
- The best-known case of stagflation is what happened in the early and mid-1970s.
- The OPEC (Organisation of Petroleum Exporting Countries), which works like a cartel, decided to cut crude oil supply.
- This sent oil prices soaring across the world; they were up by almost 70%.
- This sudden oil price shock not only raised inflation everywhere, especially in the western economies but also constrained their ability to produce, thus hampering their economic growth.
- High inflation and stalled growth (and the resulting unemployment) created stagflation.
Is India facing stagflation?
- In the recent past, this question has gained prominence since late 2019, when retail inflation spiked due to unseasonal rains causing a spike in food inflation.
- India’s GDP growth rate decelerated from over 8% in 2016-17 to just 3.7% in 2019-20.
- However, it was not stagflation as India’s GDP was still growing, albeit at a progressively slower rate.
Expected impact on Indian Economy:
- Russia is the world’s second-largest oil producer and, as such, if its oil is kept out of the market because of sanctions, it will not only lead to prices spiking, but also mean they will stay that way for long.
- India imports more than 84% of its total oil demand. Without these imports, India’s economy would come to a sudden halt.
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