What do you understand by stagflation? Discuss the economic risks associated with it. Is India experiencing such a phase? Comment. (15 Marks)

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Answer:

Former prime minister and economist 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. Even Moody’s Analytics, a research arm of ratings agency Moody’s, has said that India has entered into a stagflation phase.

What is Stagflation:

In economics, stagflation, or recession-inflation, is a situation in which the inflation rate is high, the economic growth rate slows, and unemployment remains steadily high.

It defies the normal economic cycle where 

  • Inflation is associated with high economic growth rate, increased employment, increased wages and demands, whereas
  • Deflation or recession is associated with a stagnant economy, high unemployment, low wages and demands.

Economic Risks associated with Stagflation

  • In usual low growth situation, central banks and government try to stimulate the economy through higher public spending and low-interest rates to create demand. As was done by economies post 2008 global economic meltdown
  • However, these measures also tend to elevate prices and cause inflation. 
  • So, these tools cannot be adopted when inflation is already running high, which makes it difficult to break out of the low growth-high inflation trap.

Is India experiencing Stagflation?

Indian economy is said to be amidst a stagflation cycle due to the following indicators:

  • Nominal GDP growth is at a 15-year low, growth in the September quarter slowed for the sixth consecutive time to 4.5%, the lowest since March 2013.
  • Unemployment rate at 6.1% is at a 45-year high as per the National Sample Survey Office’s (NSSO) job survey for 2017-18.
  • Household consumption is at a four-decade low according to “Household Consumer Expenditure in India” survey conducted by the National Statistical Office (NSO).
  • Bad loans in banks are at an all-time high leading to poor lending.

Possible reasons for Stagflation in India

    • Drop in the global demand: Global demand has decreased considerably due to economic slowdowns, protectionist tendencies and trade wars which has affected exports.

 

  • Lingering effects of economic shocks such as demonetisation and GST especially of the informal sector.
  • Policy issues such as effects on the Automobile sector due to BS-VI norms and focus on EV’s.

 

  • Lack of private investment: Due to drop in demand, private investment is discouraged which is leading to stagnation and less capacity building.

Way forwards

India’s fragile economic situation calls for the twin policy actions of boosting demand through fiscal policy and reviving private investment through ‘social policy’ by inspiring trust and confidence in the economic participants in our society.

The slowing down of China’s economy and exports has opened up a large export opportunity for India to fill. India should aim to garner an elephant’s share of this export opportunity through policy interventions and fostering an economic climate of confidence.

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Dr Kamal Kumar
Dr Kamal Kumar
2 years ago

Hi sir kindly evaluate my answer

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Akhil 1234
Akhil 1234
2 years ago

Stagflation is a critical condition in economy which is caused due to the combined effect of inflation and stagnation which is primarly due to rise in unemployment.
Rise in prices consistently for a prolonged period but falling of value of money may be termed as inflation where in chronic economic slowdown primarily due to unemloyment is termed as stagnation. Both the condition are deterrent to the economy of the nation where in concurrent action of the both cause severe issues in economic situation
Risks associated with the same are following
1. Purchasing power reduces as there is chronic stagnation where in prices goes up due to inflation
2. This attributes to the issues of economy in both demand and supply side and cannot be easily tackled by RBI’s inflammation control measures.

In the context of india ,india is facing economic slow down where in growth rate is reduced beow 5% for a prolonged period of time wich reresnts stagnation. Also recently the Index of industrialproduction published by cso shows a severe drop from 6 last year to 3.8 % this year.
The same time retail inflation fell for 5.5% whih is 40month which denotes the onset of inflation.
Hence it may be inferred of onset of stagflation which is a risky economical situation.
Way forwards
Further tax cuts by RBI may boost inflation further andhence more emphasis need to be given in economic reform measures to boost the economy. How ever, it may also be noted that india may be facing a cyclical slowdown and will improve eventually. The inflation of retail market due to increase in food prices may be put under control with fresh produces hitting market. Hence it may be expected to stabilize the current economic situation in india

Akankhya Behera
Akankhya Behera
2 years ago

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sahithya kasiraju
sahithya kasiraju
2 years ago

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