Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Explained: Is India facing stagflation?

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Various keywords mentioned

Mains level : Signs of economic slowdown in the country

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

What is Stagflation?

  • Stagflation is a portmanteau of stagnant growth and rising inflation. The term was coined by Iain Macleod, a Conservative Party MP in UK, who while speaking on the UK economy in the House of Commons in November 1965.
  • Typically, inflation rises when the economy is growing fast. That’s because people are earning more and more money and are capable of paying higher prices for the same quantity of goods.
  • When the economy stalls, inflation tends to dip as well – again because there is less money now chasing the same quantity of goods.

When does stagflation occur?

  • Stagflation is said to happen when an economy faces stagnant growth as well as persistently high inflation.
  • That’s because with stalled economic growth, unemployment tends to rise and existing incomes do not rise fast enough and yet, people have to contend with rising inflation.
  • So people find themselves pressurized from both sides as their purchasing power is reduced.

Why is everyone asking about Stagflation in India?

  • Over the past six quarters, economic growth in India has decelerated with every quarter. In the second quarter (July to September), for which the latest data is available, the GDP grew by just 4.5%.
  • In the coming quarter (October to December), 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% – a six-year low.
  • In fact, the October inflation was a 16-month high and the November inflation, at 5.54%, is at a three-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 murmurs of stagflation.

So, is India facing Stagflation?

Although it appears so at the first glance, India is not yet facing stagflation. There are three broad reasons for it:

GDP hasn’t declined

  • Although it is true that we are not growing as fast as we have in the past or as fast as we could, India is still growing at 5% and is expected to grow faster in the coming years.
  • India’s growth hasn’t yet stalled and declined; in other words, year on year, our GDP has grown in absolute number, not declined.

Food Inflation is predictable

  • It is true that retail inflation has been quite high in the past few months, yet the reason for this spike is temporary because it has been caused by a spurt in agricultural commodities after some unseasonal rains.
  • With better food management, food inflation is expected to come down.

Retail inflation is under control

  • Lastly, retail inflation has been well within the RBI’s target level of 4% for most of the year.
  • The core inflation – that is inflation without taking into account food and fuel – is still benign.
  • A sudden spike of a few months, which is likely to flatten out in the next few months, it is still early days before one claims that India has stagflation.

Back2Basics

Types of Inflation

  • Creeping or mild inflation is when prices rise 3% a year or less.
  • Walking inflation is strong, or pernicious, inflation between 3-10% a year.
  • Galloping inflation occurs when inflation rises to 10% or more.
  • Hyperinflation is when prices skyrocket more than 50% a month.
  • Deflation occurs when there is a general fall in the level of prices
  • Disinflation is the reduction of the rate of inflation
  • Stagflation is a combination of inflation and rising unemployment due to recession
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