Stagflation in India

The term Stagflation was coined by Iain Macleod, a Conservative party MP in the UK. Simply put, stagflation is a situation in which inflation rate is high, economic growth is slow and unemployment remains steadily high. It is because due to stalled economic growth, unemployment tends to rise and existing incomes do not rise fast enough, thus people have to content with rising inflation. People then find themselves pressurised as their purchasing power is reduced.

The most famous case is of the 1970s when OPEC (Organisation of Petroleum Exporting Countries) decided to cut supply, which sent oil prices soaring across the world. On one hand, it was the rise in oil prices constrained the productive capacity of western economies. On the other hand, the oil price spike led to inflation as commodities became costly. The net result was lower growth, higher unemployment and higher price level.

Stagflation in India

Looking at the data over past six quarters, economic growth in India has decelerated with every quarter. The latest data shows that GDP grew at 4.5 percent. The full year GDP growth rate is expected to average around 5%, which is a six year low.
While in October and November, retail inflation has soared. The November inflation at 5.54% is at a three year high and is expected to stay at RBI’s targeted level of 4% for the entire year.

With growing inflation and decelerating growth , the prospects of stagflation appear to be true. However, India is not yet facing stagflation and the reasons include the following.

First, although the economy is not growing as fast as in the past, India is still growing at 5% and is expected to grow faster in the coming year. The growth hasn’t yet stalled and declined.

Second, the retail has been quite high in the past few months, yet the reason is a temporary spike because it has been caused by a spurt in agricultural commodities due to unseasonal rains. With better management, food inflation is expected to come down.

Thirdly, retail inflation has been within RBI’s target level for most of the year. A sudden spike is likely to flatten out in the next months and it is still early to say that India has stagflation.

Topics: GS-III: Economic Growth Development