Is the Indian economy staring at stagflation - Background Context
The current retail prices in the country, are almost six-years high i.e. 7.35% (as seen in December 2019). This situation had started ringing bells, experts are worried, if that the Indian economy is in a stagflation situation.
The recent increase in retail inflation has been credited principally to the sudden rise in the prices of onions.
The continuous increase in fat inflation numbers over the last few months surrounded by falling economic growth is incubating the fear of a stagflation situation.
In a scenario, whenever an economy undergoes high inflation and slow or low growth, including a higher rate of unemployment, then such a situation is termed Stagflation.
Unfortunately, looking at India's economic situation is being the sixth quarter in a series of low growth and higher unemployment rate since the year 2018.
In the second quarter (ending September) economic growth is around 4.5%, However, the growth rate for a complete year is expected to be around 5%.
The financial and economic experts have accused the low growth and economic slowdown of insufficient consumer demand for goods and services.
Actually, inadequate consumer demand was considered the main reason behind the low-piece inflation that is prevalent widespread in the Indian economy very recently.
In due course, the government and economic analysts persuaded the Reserve Bank of India (RBI) to lower the interest rates in order to boost demand to a certain extent but this is not the right way of stimulating the economic situation.
As a result, this led to notable resistance between the government and the Reserve Bank of India (RBI), as a result, many top-ranking RBI officials exited (including the RBIs former Governor) from India’s Apex Regulatory bank.
Finally, the Reserve Bank of India (RBI) had cut the top repo rate, standard interest rate, consecutively five times in 2019.
Growth does not Confirm, due to Lowering the Repo rate.
Despite these efforts and cutting down of rates from RBI, the economic growth rate continues to fall steadily.
This unconventional meet of increasing prices and falling growth has economic experts and masses believe that the economic situation of India is heading towards ‘stagflation’.
Core inflation (within RBI’s targeted range) however, excludes the highly volatile items such as vegetables, which otherwise would help others conclude that the Indian economy is in free fall and full-fledged stagflation.
Why is Stagflation could be a Problem?
Firstly, lower economic growth (low growth) could affect people's basic income. Secondly higher inflation could cause a decrease in people’s buying power and lower their standard of living, as they can afford only basic things.
Economic experts, who believe and understand that the current slowdown is due to insufficient consumer demand, advise more spending by the government and eventually by the Apex regulatory bank (RBI) to restore and revive the Indian economy.
This economic deadlock situation is not as easy as it seems, Stagflation binds the limbs of government and central (regulatory apex) banks from making any counter steps towards the economic situation.
The inflation rate of the retail segment is currently above RBIS’s targeted rate of 2% to 6%, it seems the central bank (Reserve Bank of India) is less likely to intervene in the economic situation any time soon.
The reason, the intervention of the government and central bank to restore the economic situation could be fatal, is because injecting fresh money (quantitative easing) into the market either by cutting standard interest rates or by any other unorthodox means, might lead to a further increase in retail prices and take things from bad to worse.
Inflation could also rise from government activities such as deficit spending (spending more than revenue) funded by the central bank.
The GDP growth rate (for Q1 FY2020) has fallen down to 5%, due to growth in private consumption and the rate of investment dropping below 5%.
All mentioned things are considered to be unpleasant, whenever the economy, with considerable unemployed resources, is disabled or not operating at its full capacity.
Some Economist proclaims that the economy will be revived by the availability of Easy Credit
Other sets of economists argue that this sudden drop in consumer demand is a key indicator or a forecast for the future event than the primary cause of the recent slowdown of the economy.
Also, they claim inflation from the broader perspective, as calculated and measured through the core inflation figures, is said to be within RBI’s target range.
The Core Inflation in the month of December 2019 was around 3.7%, although the spending by the government and Reserve Bank of India (RBI) will keep the inflation levels within control, they argue.
According to this scenario, it is very natural that spending power or purchase power drops to a certain extent, after the end of the credit boom.
Over the last decade, India’s purchase power or spending power of the consumer was enormous and thus due to the availability of this easy credit line, India’s growth rate was notable for more than 10 years in a row.
However, others do not support the advocacy of a big-spending approach to save the economy from ‘Stagflation’, instead they point fingers at the ‘monetary easing’ that only increased prices and not growth rates.
Hence looking at the current situation about market inflation and failed attempt of ‘monetary easing’ to save economic figures; injecting more money into the market through benchmark interest rates or any other unorthodox means will only bring sorrow and will push the market ahead towards higher inflation and without any economic growth.
Hence the economist suggests, supply-side reform to witness the genuine vertical movement of the economic condition.
Contrary to the ‘monetary easing’, the supply-side policies are related to the rise in productivity and increased efficiency in the economy.
Free-market’ Supply-side policies
Government policies encourage competitiveness and free-market efficiency. e.g. Lower income tax rates, lower power of trade unions, privatization, deregulation, etc.
Interventionist’ supply-side policies
Governments intervention to takeover market depression or failure. e.g. Higher Govt. Spending on communication, transport, education, etc.
Can actually subscribe to lower unemployment, and directly help to reduce the nation's natural rate of unemployment.
Enhance trade and Balance of Payment
This by enabling companies and enterprises more productive, and increase the export capability of the firm. This is important in the context of improved competition.