Advertisement

  • News
  • Columns
  • Interviews
  • BW Communities
  • BW TV
  • Subscribe to Print
BW Businessworld

Decoding Stagflation In India

According to the Centre for Monitoring Indian Economy (CMIE), an independent think tank, the unemployment rate in the country rose up to nearly 8 per cent in December.

Photo Credit : PTI

1496147618_JmVBwE_Rs2000notes-PTI.jpg

The Indian economy, after hitting rock bottom during the last two years, is now on the path of recovery, however, according to several economists, the country is facing stagflation amid rising inflation and unemployment. 

According to the Centre for Monitoring Indian Economy (CMIE), an independent think tank, the unemployment rate in the country rose up to nearly 8 per cent in December, 7 per cent more in 2020.  

The overall macroeconomic situation is in a recovery mode however, the growth is concentrated at the top end, which is a worrying trend, former World Bank Chief Economist Kaushik Basu told news agency PTI.  

Basu said that India is witnessing stagflation and suggested that strong and carefully curated policy interventions are the need of the hour to tackle the situation.

However, Senior Economist at Kotak Institutional Equities, Suvodeep Rakshit said that India does not seem to be heading towards stagflation. Growth is improving and is hindered primarily as a fall out of COVID-19 related restrictions or lockdowns. 

"Over the last couple of years, the government has introduced various supply-side measures which will impact medium to long term growth positively. Consumption could be relatively weaker but the investment cycle could potentially see multi-year benefits. Inflation has been driven mostly by global supply-side issues which have been accentuated by developed economies’ demand uptick. Global supply chain issues will likely persist through much of this year but will normalise towards the end of the year," 

According to the reports, the rising inflationary trends, including the sharp increase in retail inflation last month also contributed to the situation. However, economists expect that these pressures are likely to come down in the upcoming months. 

"Inflation in India is being driven by global commodity prices and supply issues which will continue to percolate to output prices over the next few months. However, the growth-inflation mix is unlikely to move towards stagflation unless consumption and investment both weaken and global price pressures intensify and continue much longer than anticipated," said Rakshit.

Chief Economist at YES Bank, Indranil Pan told BW Businessworld last month that inflation is not yet hurting economic growth in a very significant way. Inflation expectations one year ahead have come down by 60bps as per the latest survey of the RBI. This indicates that the current levels of inflation are not signalling any unhinging of inflation expectations. 

Rakshit also said that inflation should trend lower in 2HFY23 if global supply chain issues are ironed out over the next 6-9 months and food prices remain under control," Rakshit said. 

"If consumption and investment situation both worsen along with global price pressures intensifying further, risks of stagflation will be increasing," said Rakshit while talking about factors that will add up to stagflation. 

Earlier, West Bengal's former finance minister and current chief advisor to Chief Minister Mamata Banerjee, Amit Mitra also speculated that India may be heading towards stagflation due to rising inflation and unemployment. 

However, India's Wholesale Price Index (WPI) inflation moderated to 13.56 per cent in December 2021 due to a decrease in prices of fuel items, with wholesale fuel and power inflation climbing down to 32.30 per cent. 

As per the economists, the government needs to come up with strong policies, infrastructure push, effective monetary policy, widening of the PLI scheme to avoid this situation amid the ongoing COVID-19 pandemic.  

"The government needs to continue to support growth over fiscal consolidation. The budget should continue to focus on increasing capital expenditure and incentivising the same by the states. Large public infrastructure spending has a higher multiplier and can crowd in private sector investments too, especially as corporate and bank balance sheets are in much better positions," said Rakshit.


Tags assigned to this article:
stagflation economy india COVID-19 Omicron indian economy