Like the rest of the world, India too has become captive of the ongoing Covid-19 pandemic. The federal government imposed a three-month-long nationwide lockdown in March 2020, which impacted the already ailing Indian economy severely. The economy that was facing severe headwinds since the last two years has now slumped on the back of the pandemic and the lockdown. In this scenario, we came in contact with an economic term, which is new to many; ‘stagflation’.
Till the date, we have heard of economic terms like recession, inflation etc. But nowadays, the new word moving around is ‘stagflation’. What is stagflation? Is India moving towards stagflation? Let us take a close look at it.
What is stagflation?
Clearly, it is understandable that stagflation is the conjunction of two words – stagnation and inflation. To be precise, it can be decoded in simple words like the stagnant and inflated economy.
Let’s make it simpler.
When a rapid upward spike in inflation and a random downfall in GDP (Gross Domestic Product), cause countrywide economic stagnation, unemployment and price hike, the stagflation occurs. This can otherwise be described as a two-edged-sword, slaughtering the economy in every possible way.
The first occurrence of stagflation
In the mid-1970s, a major hike in oil prices across the world stressed many economies with stagflation.
When does stagflation occur?
Stagflation is when a recession and inflation take place together in a country’s economy. It becomes a very risky situation when the economy of a country faces a slowdown, along with low growth and high inflation at the same time; resulting to economic stagnation, unemployment and poor consumer demand with a continuous price hike in the market.
Economists call this situation as stagflation.
Is India facing stagflation?
In one word, yes.
India is currently facing a high rate of inflation.
India’s inflation rate as measured by the Consumer Price Index (CPI) breached the upper band of 6% for the fifth consecutive month at 6.69% in August 2020. One of the major contributors to this rising inflation rate was surging food prices. The food inflation rate registered a growth rate of around 9% in August this year.
Similarly, core inflation excluding food and fuel also remained high at 5.4%, despite the downward demand in the Indian economy. The contraction of the country’s GDP along with the rising inflation rate has ignited the fear of stagflation in the Indian economy.
As per the Monetary Policy Framework Agreement, CPI (Compound) should be 4% plus-minus 2%.
In the first quarter of FY20-21, India has a negative GDP growth rate. Now, it has a target of achieving the GDP to be 0% in this fiscal or in the next one.
Dozen reasons behind India’s stagnation risk
- Industries are not performing well.
- Overall output is down.
- GDP running in the red zone.
- Comparatively higher rate of unemployment.
- With people’s buying capacity has slumped, demand graph across the country going down.
- Affected supply chain across various sectors.
- Poor policy decisions like demonetisation.
- Poor GST implementation.
- Rigidity in monetary policies.
- Indo-China trade tension.
- Investors are wary of investment decisions.
- Lack of skilled workforce.
What could be solution?
In the case of the economic stagnation, the government needs to inject more money in the economic cycle to create investment, create employment, so that the situation gets better. In this process demand will go up, easing the economic flow. But then the supply of the money will fuel further inflation as well.
On the other hand, inflation can be controlled by increasing the rate of interests like, increasing the repo rate, which will discourage people from borrowing, as taking loans will be expensive. But then these expensive loans will further discourage investors to invest in the market. When investing is impacted, it will further cause stagnation. The stagnation may turn into an economic slowdown and increase the rate of unemployment further.
In this case, the government needs to be cautious in this contradictory situation, as dousing one flame ignites another. The flame of stagnation should be targeted first to put out. For that, the regular investments by the government in various sectors like heavy industries, small industries, realty sectors need to be taken care of.
The government has already announced several measures to help the industries across sectors. RBI has announced the rate cuts multiple times in this financial year. The government announced moratorium for the loan repayment, to help the borrowers during the pandemic, encouraging the local businesses across India through its ‘Self-Reliant India’ initiative.
However, despite all the abovementioned steps taken by the government, the Indian economy still faces the danger of the stagflation. There are many other steps to be taken, which are yet to be visible from the government’s side. Also, even if the government shows the goodwill to take care of the stagflation, it will take time to recover.