Today, surging high petroleum and LPG gas prices top the list of topics in a conversation. Consumers are having a hard time digesting the steep increase in the cost of essential commodities, which goes up year by year. Unfortunately, inflation saw a new high post-pandemic.
The RBI’s indication to shift the focus towards mitigating the issues posed by inflation is a significant cause of concern. However, this isn’t the first time India has witnessed inflation, and this is a cyclic series of events that provokes action from each pillar of the community that involves government and policymakers.
The past few years gave people experiences that made it reasonable for them to look for wealth creation strategies such as investing in the stock market, buying assets, etc. But it does not come without the possibility of risk, and inflation is one of them. People who are willing to secure their investments in the coming years should comprehend how the continuous rise in retail prices every year could impact the power of an investment.
Inflation’s implications come at a macro level, and people’s hope to gain a decent return on their investment is at considerable risk. For this very reason, financial advisors observe and suggest being watchful of the possibility of inflation occurring in the economy, which would decrease portfolio returns and wealth preservation.
So, let’s understand the brief history of the Indian economy’s struggle with inflation over the years and what the current one signals to all potential investors.
The History of India’s Battle with Inflation
First of all, the concept of inflation determines the issue of reducing the purchasing power of a country’s currency, which means when the price of goods or services tends to rise so high annually that the buyer of those commodities reduces the frequency and units of buying the products. Currently, in the Indian economy, this problem seems to have deepened and reached the limit of the RBI’s predicted rise.
India’s battle with several historical events documented economic crises like Inflation, too, and it began somewhere from when the country took the first breath of its liberation in 1947. The instability in policies and newer regulations kept the country’s currency somewhat submerged as inflation stood at less than 2%.
The nation crossed the 1950s and stood in 1953, which led to a situation of deflation where inflation went down to -12.8% due to higher agricultural output. Before it got under control, it went up again to 13% due to the high demand for goods and commodities.
The Year of the Famine-the 1960s
A country’s ability to mitigate the trauma of inflation is significantly reduced when it witnesses war, bringing us to the 1960s when India fought a war with China and Pakistan in the 60s. War causes the authorities to focus on pouring resources into defense mechanisms rather than stabilizing the economy. Even more so, the famine and food shortages during 1964–67 led to increasing food prices. Overall, inflation in the 60s began with an average of 6%, reaching as high as double digits later and then going down to negative at the decade’s end.
The 1970s were the first time in Indian history that inflation reached as high as 20%. At the beginning of the decade, inflation stood at 7.5%. But as it was the first-time crude oil prices peaked, and the impact was seen on other consumer products, it led to an increase in the inflation rate. Another significant event was the drought of 1979 that lasted till 1980 and led to inflation in the Indian economy. Rajasthan as a state saw major crises as crops withered and food shortages raised the bar for people to buy food commodities.
In the 80s & 90s
With each passing decade, India kept witnessing a rise in the inflationary situation in the economy. So when the government introduced fiscal policies at the beginning of the 80s, the inflation rate stood at 9.2% yearly. It is a given that whenever more currency is printed in an economy, inflation tends to peak, and something similar happened, as the 70s already saw a fiscal deficit of 3.8% of the GDP.
The 80s saw a rise in the fiscal deficit rate, which grew to 6.8%, and for this reason, the central government had to declare the printing of money as a necessary evil. Due to the partial globalization, the current account deficits in the foreign account contributed to the high inflation with an average rate of 9% p.a.
The 90s became a kick to the curb when the fiscal balance deficit and the current deficit increased even more. Hence, the year 1991 was a period of major economic crisis in India. As the decade passed and reached the year 2000, the inflation rate decreased, and that’s because the surplus food crops managed the situation.
The period beyond 2000
The years to come after 2003 witnessed high crude oil prices that reached a new high after the 70s. As a result, the inflation curve had to reach a new high and averaged 10% between 2008 and 2013. Another drought hit the Indian economy, which gave rise to protein-based poultry food items such as eggs, milk, and fish. It was all happening while oil and metal prices kept rising, contributing to inflation.
To protect the economy from even higher inflation, the government implemented several fiscal packages, leading to another situation of fiscal deficits. However, the period between 2014 and 2019 saw a decline in economic crisis due to a new government introducing policies like demonetization and GST on goods.
From the Point of Investment: What to expect in the coming years?
The pandemic caused havoc in the economy, leading to the current situation like increased household commodity prices, food prices, oil prices, etc. In 2020, inflation increased back to 6.6%, and the recent notification from the RBI indicates that there could be a steep increase in inflation by 4-5% by the year 2026. Hence, it is crucial to consider the issues that might arise when planning to invest in several wealth creation schemes.
- Due to rising inflation, the investments made in fixed income schemes would witness a decline in interest rates. Hence, fixed-rate debt investors could expect to incur losses. While the central government would try to manage the situation by implementing monetary policy, it would still lead to losses for people who had fixed income investments in the past.
- The investment or return from equity would solely depend on the level of inflation and its impact on the macro environment. If the corporate sector benefits from its by-product, it could be a good return on investment for investors.
- However, if consumers tend to experience unemployment and the sentiment of fear seems irrevocable, corporate industries might find it hard to surpass the profits of the final product compared to the cost of raw materials. Eventually, the profit from equity would be low.
- Are you planning to invest in a physical asset? Remember that every time there is inflation in the economy, it is directly proportional to the high property and land prices. There are other real estate assets to invest in rather than incurring expenses on physical land, such as REITs and InvITs.
- If you plan to protect your portfolio of investments, it is time to think about investing in gold as an asset. It can generate a good amount of return in the long run. Hence, it would contribute to acting as an excellent risk-adjusted asset.
It is essential to understand the economic scenario before looking to create wealth prospects for the future. Whether investing in property, stock options, or gold, identify a financial advisor who would be cautionary about the inflation situation and guide you towards the best investing option.