From UPSC perspective, the following things are important :
Prelims level : Stagflation
Mains level : Economic slowdown
Economic data released by the government suggest that India may be stepping even closer to stagflation.
- IIP – The Index of Industrial Production (IIP) contracted 3.8% in October against a rate of 8.4% witnessed during the same month last year.
- Inflation – Retail inflation jumped to a 40-month high of 5.5% in November. This is fuelled by a sharp jump in food prices. It might drop as fresh food supplies hit the market.
- Stagflation – Low growth combined with high price inflation is sure to cause headaches for policymakers.
- Growth – Economic growth has declined for six consecutive quarters now. This is one of the longest downturns in recent history.
- RBI’s limitation – Due to inflation raising its ugly head, the RBI is unlikely to cut rates aggressively in the next few months at least.
- More on Fiscal policy – it is entirely up to the government now to find ways to boost growth. The government cannot delay reforms.
- Blaming Monetary policy – The government maintained that the country’s growth rate was held back by the tight monetary policy stance adopted by the RBI.
- Repo rate cut – as the benchmark interest rate was cut five times so far this year, the government can no longer shift the blame on to the RBI.
- Cyclical slowdown – the government is now blaming that the slowdown in growth is merely a cyclical one that will end sooner than later.
- Lack of reforms – the Centre has failed in bringing about major structural reforms to the economy. But for the recent cut in corporate tax rates, the government has not come up with any other significant reform in response to the slowdown.
The root cause of the slowdown
- Low growth along with high inflation raises questions about the root cause of the slowdown.
- Demand shortfall? It has been attributed to a drastic fall in consumer demand.
- Rate cuts didn’t help – Aggressive rate cuts by the RBI cannot stop the continuous slide in growth rate.
- Supply-side is also in deep trouble.
- Economic reforms can lift the potential growth rate of the economy.
- Further rate cuts by the RBI will only add to the government’s troubles by stoking inflation in the wider economy.