The country is currently embroiled in a low growth and high inflation conflict which raises the root cause of the crisis. Elucidate.
Published: December 16, 2019
The Economic data released by the government suggests that the country may be heading towards stagflation. As per the Index of Industrial Production (IIP) a figure of 3.8% in October shows contraction, as against a healthy growth rate of 8.4% during the same month last year.
The Industrial output had shrunk by 4.3% in September 2019 and at the same time, retail inflation jumped to a 40-month high of 5.5% in November as a result of sharp jump in food prices. Retail inflation which is targeted by the Reserve Bank of India (RBI) is now in the upper band of the inflation range, but may drop as fresh food supplies follow.
Low growth & High inflation –
This dual conflict is likely a cause of worry for policymakers. The economic growth has declined for six consecutive quarters now, making it one of the longest downturns in recent history. As inflation raises, the RBI is unlikely to cut rates aggressively in the coming few months. The government needs to find new avenues to boost growth and cannot delay significant reforms.
The government for a long time has maintained that the country’s growth rate was held back by the RBI’s tight monetary policy stance. But with the Central bank cutting down on benchmark five times in a year, the government can no longer shift blame on to the RBI.
While the government puts the reason for slowdown in growth as cyclical one that will end soon. Though regardless of the nature of the current slowdown, the Government has fallen short on its promise to bring major structural reforms in the economy.
Except for the recent corporate tax rate cut, the government has not come up with any other major reform to tackle the slowdown. The presence of low growth and high inflation raises questions about its root cause which can be attributed to the fall in consumer demand.
Rate Cuts a solution ?
RBI’s rate cuts happening most of the year have been unable to stop the slide in growth rates. The answer lies in economic reforms to lift the potential growth rate of the economy, as further rate cuts will only add to the government’s troubles by an increasing inflation in the economy.
Model Questions Category: 058 - Indian Economy Issues Relating to Planning