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.
- Stagnant Consumption
- According to the Central Statistics Office (CSO), private consumption expenditure decelerated to an 18-quarters low of 3.1% in the June quarter.
- Low rural wages and high food prices have further harmed the consumption.
- Rising inflation
- 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.
- Rising unemployment
- The unemployment figure is rising, the number of people entering the workforce is declining.
- This is also reflected in the declining labor force participation rate.
- 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.
- Other factors contributing to the stagflation
- The cautionary stand of the central bank.
- Lack of structural reforms.
What are the possible solutions at hand ?
- Supply-side solutions
- One solution to stagflation is to increase aggregate supply (AS) through supply-side policies,
- For example, privatization and deregulation to increase efficiency and reduce costs of production.
- Structural reforms
- Making labor markets more adaptable and responsive.
- Liberalize service sectors, boost competition in product and service markets, specific sectors, or improve the overall business environment
- Encourage innovation
- Improve the quality of public taxation systems
- Wage control
- Limiting wage increases can break the cycle of wage inflation and help to improve the economic situation.
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.