About Worsening Economic Conditions

Worsening Economic Conditions

Updated on 14 December, 2019

GS3 Economy
worsening-economic-conditions

Context 

Economic data released by the government on that India may be stepping even closer to stagflation

  • Stagflation is a condition of slow economic growth and relatively high unemployment, or economic stagnation, accompanied by rising prices, or inflation
  • It can also be defined as inflation and a decline in gross domestic product (GDP).
  • Stagflation means a simultaneous increase in prices and stagnation of economic growth.
  • Stagflation was first widely recognized after the mid-20th century, especially in the U.S. economy during the 1970's, which experienced persistently rapid inflation and high unemployment.
  • Predominant economic theory at the time could not easily explain how stagflation could occur.
  •  Numerous other theories offer specific explanations for the 1970's stagflation, or stagflation more generally.
  • Since the 1970's, rising price levels during periods of slow or negative economic growth have become the norm rather than an exceptional situation.

About the economic data

Signs of slowdown 

Rising inflation

  • At the same time, retail inflation jumped to a 40-month high of 5.5% in mainly by a sharp jump in food prices. 
  • Retail inflation is now in the upper band of the inflation range targeted by the Reserve Bank of India (RBI) but might drop as fresh food supplies hit the market.

Problems in the Indian economy

  • Economy heading towards stagflation:the presence of low growth along with high inflation also raises questions about the root cause of the slowdown, which has been attributed to a drastic fall in consumer demand.
  • Hawkish stand by the central bank:As per CSO rising of inflation to 5.54 % for the month of November, the RBI, which held rates stable in its recent policy meet,will continue with his cautionary stand.
  • Shifting of responsibility:The government has maintained in the past  “tight monetary policy” stance adopted by the RBI is the root of the problem.
  • Lack of structural reforms :The government has fallen short on its promise of bringing about major structural reforms to the economy. 

Reason for India not facing stagflation 

  • Resurgent GDP:
  • India is still growing at 5% and is expected to grow faster in the coming years.
  •  India’s growth hasn’t yet stalled and declined.
  •  GDP has grown in absolute number, not declined.
  • Temporary inflationary pressure: 
  • Spike in inflation is temporary because it has been caused by a spurt in agricultural commodities after some unseasonal rains.
  •  With better food management, food inflation is expected to come down. The core inflation that is inflation without taking into account food and fuel is still benign.
  • The retail inflation has been well within the RBI’s target level of 4% for most of the year

Way-forward

  • Supply-side solutions
  • One solution to stagflation is to increase aggregate supply (AS) through supply-side policies,
  • For example, privatisation and deregulation to increase efficiency and reduce costs of production. 
  • Structural reforms 
  • Making  labour markets more adaptable and responsive
  • Liberalise 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
  • Address the challenges of population ageing on the welfare state.
  • 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, it is still early days before one claims that India has stagflation.


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