Stagflation Concerns in India

What is the issue?

With fast decelerating economic growth and sharply rising inflation, there is a growing talk about India facing stagflation.

What is Stagflation?

Stagflation is a combination of stagnant growth and rising inflation.
Typically, inflation rises when the economy is growing fast.
This is because as people earn more, they become capable of paying higher prices for the same quantity of goods.
When the economy stalls, inflation tends to dip as well.
This is again due to the fact that there is less money now chasing the same quantity of goods.
In contrast, stagflation is said to happen when an economy faces stagnant growth as well as persistently high inflation.
With stalled economic growth, unemployment tends to rise.
Also, existing incomes do not rise fast enough, but people have to contend with rising inflation.
So, people find themselves pressurized from both sides as their purchasing power is reduced.

What were the notable stagflation instances?

The term ‘stagflation’ was coined by Iain Macleod, a Conservative Party MP in United Kingdom.
This came in the context of the UK economy in November 1965.
But, the most famous case of stagflation happened in the early and mid-1970s.
The OPEC (Organisation of Petroleum Exporting Countries), which works like a cartel, decided to cut oil supply.
Resultantly, oil prices went up across the world.
The rise in oil prices constrained the productive capacity of most western economies that heavily depended on oil.
This, in turn, hampered economic growth.
On the other hand, the oil price spike also led to inflation and commodities became more costly.
The net result was lower growth, higher unemployment, and higher price level; in all, stagflation.

What is the current economic scenario in India?

Over the past 6 quarters, economic growth in India has decelerated with every quarter.
In the second quarter (July to September, 2019), the GDP grew by just 4.5%.
In the October to December, 2019 quarter too, GDP growth is likely to stay at roughly the same level.
For the full financial year, the GDP growth rate is expected to average around 5%, which is a six-year low.
Yet, in October and November, retail inflation has went up.
In fact, the October inflation was a 16-month high, and the November inflation, at 5.54%, is at a 3-year high.
Inflation for the rest of the financial year is expected to stay above the RBI’s comfort level of 4%.
So, with growth decelerating every quarter and now inflation rising up every month, there are growing concerns of stagflation in India.

Is India really facing stagflation?

Although it appears so at the first glance, India is not yet facing stagflation.
Growth - India is not growing as fast as it had in the past or as fast as it could.
However, it is still growing at 5%, and is expected to grow faster in the coming years.
It’s growth has not yet stalled and declined.
In other words, year on year, India’s GDP has grown in absolute number, not declined.
Inflation - It is true that retail inflation has been quite high in the past few months.
But, the reason for this spike is only temporary.
It has been caused by a spurt in agricultural commodities after some unseasonal rains.
So, with better food management, food inflation is expected to come down.
The core inflation (inflation without taking into account food and fuel) is still in the safe zone.
Moreover, retail inflation has been well within the RBI’s target level of 4% for most of the year.
So, a sudden spike of a few months, which is likely to flatten out in the next few months, is a premature criterion for the stagflation claims or concerns.

Source: Indian Express