twin-troubles-stagflation

Why is it in the news ?

India Heading Towards Stagflation, with fast decelerating economic growth and relatively high unemployment and sharply rising inflation.

 

What are the Signs of a slowdown in the Indian economy ?

India's long-term growth has slowed as the 3 engines propelling rapid growth -- investment, exports, and consumption are not performing well.

  1. Stagnant Consumption
    1. According to the Central Statistics Office (CSO), private consumption expenditure decelerated to an 18-quarters low of 3.1% in the June quarter.
    2. Low rural wages and high food prices have further harmed the consumption.
  2. Rising inflation
    1. At the same time, retail inflation jumped to a 40-month high of 5.5% in November mainly by a sharp jump in food prices.
  3. Rising unemployment
    1. The unemployment figure is rising, the number of people entering the workforce is declining.
    2. This is also reflected in the declining labor force participation rate.
    3. The Periodic Labour Force Survey (PLFS) of the National Sample Survey Office (NSSO) showed the overall unemployment rate of 6.1% which is the highest in 45 years.
  4. Other factors contributing to the stagflation
    1. The cautionary stand of the central bank.
    2. Lack of structural reforms.

What are the possible solutions at hand ?

  1. Supply-side solutions
    1. One solution to stagflation is to increase aggregate supply (AS) through supply-side policies,
    2. For example, privatization and deregulation to increase efficiency and reduce costs of production.
  2. Structural reforms
    1. Making labor markets more adaptable and responsive.
    2. Liberalize service sectors, boost competition in product and service markets, specific sectors, or improve the overall business environment
    3. Encourage innovation
    4. Improve the quality of public taxation systems
  3. Wage control
    1. Limiting wage increases can break the cycle of wage inflation and help to improve the economic situation.

Conclusion

A sudden spike of a few months, which is likely to flatten out in the next few months, is still early before one claims that India has stagflation.

  • A consistent fall in GDP coupled with rising inflation and unemployment over a long period can only be called a sign of approaching stagflation, prior to that they are merely cyclical and temporary movements.