There is increasing inflationary pressure on the economy. However, Reserve Bank of India (RBI) governor Shaktikanta Das has said that the economy is not inching towards stagflation.
What leads to stagflation?
Stagflation is a situation of an economy facing inflationary pressure simultaneously with stagnation in growth levels. It arises when price levels increase because of a rise in production cost, an outcome of surge in prices of critical inputs, or because of raw material shortages leading to production cuts. It is characterized by slowing economic growth, high levels of unemployment, and rising prices. In the 1970s because of the crude oil shock and with many developed economies experiencing high levels of inflation and increased unemployment they were said to be tending towards stagflation.
What has been the recent trend?
The pandemic has adversely impacted economies world over and India has been no exception. The first two quarters of FY21 saw a contraction, while Q3FY21 and Q4FY21 saw growth levels of 0.74% and 2.53%, respectively. Quarteron-quarter, India started showing signs of recovery and growth has been positive with Q3FY22 growing at 5.4%. Retail inflation has more or less been within the inflation targeting framework of RBI of 4% (+/- 2%). Economies such as the US and the UK have of late been facing inflationary pressures, but India is better positioned with retail inflation at 6.07% in February.
What is the impact of stagflation?
Stagflation results in a dismal economic performance along with increasing price levels. Rising prices means erosion in the purchasing power of people and an adverse impact on household budgets. Also, a cut in production results in lower demand for factors of production such as land and labour, resulting in rising unemployment, thus depriving people of livelihood.
Is the economy inching towards stagflation?
Technically, not yet. However, compared to the pre-pandemic growth rate and a negative growth rate of 6.6% during FY21, the expected 8.3% growth rate during FY22 means only a 1.7% net growth rate. On the other hand, as the current inflation trend is mainly because of an increase in prices of critical raw materials such as crude oil, commodity prices, supply chain disruptions—both domestic and international—the situation is inching towards cost-push inflation. The situation needs to be monitored.
How should the situation be managed?
It might be only right to state that the fiscal and monetary authorities need to keep a close watch and take the public into confidence by explaining the prevailing international and domestic situation. Public cooperation might be sought for rationalizing the use of critical items such as petroleum products. Meanwhile, the government also should work out a long-term strategy in terms of availability of alternative sources of energy.
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