is India staring at Stagflation?
- 3 ins.ide
- Aug 5, 2020
- 2 min read
by Tanya
Stagflation, inflation, deflation, these all terms are quite similar to hear but imposes a big challenge at times. Stagflation and inflation occur simultaneously at times. So, what do these three terms mean, in economics?
Stagflation & Inflation
Stagflation or recession-inflation is a situation in which the inflation rate is high, the economic growth rate slows, and unemployment remains steadily high.
Inflation is an economic term that refers to an environment of generally rising prices of goods and services within a particular economy. As general prices rise, the purchasing power of consumers decreases.
Economists offer two principal explanations for why stagflation occurs. First, stagflation can result when the economy faces a supply shock, such as a rapid increase in the price of oil. An unfavorable situation like that tends to raise prices at the same time as it slows economic growth by making production more costly and less profitable.
Second, the government can cause stagflation if it creates policies that harm the industry while growing the money supply too quickly. These two things would probably have to occur simultaneously because policies that slow economic growth does not usually cause inflation, and policies that cause inflation do not usually slow economic growth.
The story so far:
The rise in retail price inflation to a nearly six-year high of 7.35% in December has led to increasing worries that the Indian economy may be headed towards stagflation. The current rise in retail inflation has been attributed mainly to the rise in the prices of vegetables such as onions. Still, the steady rise in wider inflation figures over the last few months amidst falling economic growth has led to fears of stagflation.
The likelihood of inflation is low given that crude oil prices have plummeted along with the broader stock market and long-term bond rates. But the threat of stagflation -- the term used to describe an economic slowdown coupled with rising prices -- is real.
Manmohan Singh has cautioned that while India is not yet in stagflation territory, it would be prudent to watch out for increased risks of such an event occurring.
India may not have yet entered the 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 it will pose a risk to the government's $5 trillion goals. Come February 1, all eyes will be on the Union Budget as an opportunity to turn the tide for the economy.
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