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What is stagflation & is India anywhere close to it?

If stalling growth wasn't worrying enough, the government is faced with rising inflation that reached 5.54 per cent in November and is set to cross the upper band of the RBI's inflation comfort zone in December, according to a Reuters survey.

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Last Updated: Jan 10, 2020, 01.07 PM IST
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India may not have yet entered stagflationary phase as of now.
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Former Prime Minister Manmohan Singh warned that India could be entering a stagflationary phase. The ominous prognostication was made on the basis of a set of dismal economic indicators that have rattled everyone.

Growth stalled to just 4.5 per cent in the second quarter of the current fiscal. Even the first advance estimates projected economic growth at just 5 per cent for the whole year while it estimates the nominal GDP to grow at just 7.5 per cent.

If stalling growth wasn't worrying enough, the government is faced with rising inflation that reached 5.54 per cent in November and is set to cross the upper band of the RBI's inflation comfort zone in December, according to a Reuters survey.

  1. So, what exactly is stagflation?
    Stagflation is the extreme economic situation, a peculiar combination of stagnant growth and rising inflation leading to high unemployment. Generally, rising inflation is a sign of a fast-growing economy as people have more money to spend higher amounts on the same quality of goods. Similarly, when the economic growth stalls, inflation is supposed to go down. And as a result of this stalled economic growth unemployment tends to go up.
  2. Is there an example from the past?
    In the mid-1970s, stagflation was used to describe the period when the United States faced a prolonged slump and high unemployment along with rising inflation. It was mainly on the back of OPEC's decision to cut oil supplies. As a result, the oil prices reached the new heights and hampering productive capacity. The US Fed tried to address the issue by rate cuts and boosting money supply but output couldn't rise much due to low productivity and oil shortage. So, all that extra money just triggered inflation. This peculiar situation gave a second thought to the popular Keynesian philosophy of that time. According to Keynesian philosophy, inflation should have an inverse relationship with unemployment, and an affirmative relationship with economic growth.
  3. Why is it dangerous?
    The situation is dangerous mainly because in normal low growth situation the government or the central bank can provide economic stimulus via higher public spending and cut interest rates. But the catch is that when inflation is already running high, fiscal and monetary stimulus can make it worse as that puts more money in the hands of the consumer.
  4. Is India in a stagflationary phase?
    India may not have yet entered stagflationary phase as of now. The US economic growth between 1973-75 saw five quarters of negative growth and tripling of inflation to be regarded as stagflationary. We may not be in a stagflationary scenario but slowing growth which is a far cry from what India's potential is will pose a risk to government's $5 trillion goal. Come February 1, all eyes will be on the Union Budget as an opportunity to turn the tide for the economy.

Also Read

Stagflation threat looms for former world-beating economy India

Brave New World: Indian economy staring at stagflation; Fed’s balance sheet shrinks

India may be heading for a bout of stagflation: Viktor Shvets, Macquarie

Goldman says stagflation is looming large

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