Finschool By 5paisa


Will India’s Macroeconomic Situation Overcome Stagflation?

By News Canvass | Jan 25, 2022

India’s overall macroeconomic situation is in a recovery mode, but the growth is concentrated at the top end, which is a worrying trend, according to former World Bank Chief Economist Kaushik Basu. Amid the rising inflationary trends, including the sharp increase in retail inflation last month, Basu, who has also served as Chief Economic Advisor to the Indian government during the UPA rule, said the country is facing stagflation and “very carefully curated policy interventions” are required to address the situation.
Basu is a professor of economics at the Cornell university in the United States. While the aggregate economy is growing, “the bottom half of India” is in recession, he said and noted that it was sad the country’s policy over the last few years has been largely focused on big businesses.  “India’s overall macroeconomic situation is in recovery mode. The worry stems from the fact that this growth is concentrated at the top end. He also said the youth unemployment rate in the country touched 23 per cent, among the highest globally, even before the COVID-19 pandemic started. Workers, farmers and small businesses are seeing negative growth, he added. On whether the government should be going for fiscal consolidation or continue with stimulus measures in the upcoming Budget, Basu said the current situation in India is a big challenge to Finance Minister Nirmala Sitharaman and the entire fiscal policy apparatus.

Concepts To Be Known
RecessionA recession is a macroeconomic term that refers to a significant decline in general economic activity in a designated region. It had been typically recognized as two consecutive quarters of economic decline, as reflected by GDP in conjunction with monthly indicators such as a rise in unemployment.

Macroeconomy: Macroeconomics is the branch of economics that studies the behaviour and performance of an economy as a whole. It focuses on the aggregate changes in the economy such as unemployment, growth rate, gross domestic product and inflation.

GDP: Gross domestic product (GDP) is the standard measure of the value added created through the production of goods and services in a country during a certain period. As such, it also measures the income earned from that production, or the total amount spent on final goods and services (less imports).

Professor Basu added
While India’s GDP is estimated to grow 9.2 per cent in 2021-22, Basu said since this comes after a contraction of 7.3 per cent in 2019-20 due to the pandemic, the average growth rate over the last two years is 0.6 per cent per annum. On whether the government should be going for fiscal consolidation or continue with stimulus measures in the upcoming Budget, Basu said the current situation in India is a big challenge to Finance Minister Nirmala Sitharaman and the entire fiscal policy apparatus.

The Indian economy is facing stagflation, which is much more painful and requires very carefully curated policy interventions, he said, adding that 15 years ago, inflation was even higher, close to 10 per cent, but there was one big difference. “At that time, India’s real growth was close to 9 per cent… so, even with the inflation, the average household was becoming better off per capita by 7 or 8 per cent,” he pointed out. According to Basu, what makes the current situation so grim is that the near 5 per cent inflation is occurring over a fall in real per capita income over the last two years.

“Since this is a stagflation situation, the big task is to create jobs and help small business… the task now is to create jobs while at the same time increasing output,” he observed. Retail inflation rose to 5.59 per cent in December 2021, mainly due to an uptick in food prices, while the wholesale price-based inflation bucked the 4-month rising trend and eased to 13.56 per cent last month as per latest official data.

What Is Stagflation?
Stagflation is an economic condition when stagnant economic growth, high unemployment, and high inflation combine. Basically, inflation plus stagnant growth equals stagflation. The term emerged during the 1973-1975 recession.

What Is Inflation?
Inflation is the rate of increase in prices over a given period of time. Inflation is typically a broad measure, such as the overall increase in prices or the increase in the cost of living in a country. But it can also be more narrowly calculated—for certain goods, such as food, or for services, such as a haircut, for example. Whatever the context, inflation represents how much more expensive the relevant set of goods and/or services has become over a certain period, most commonly a year.

What RBI Says ?

“Policy support from all sides is required to gain the momentum of growth,” Reserve Bank of India Governor Shaktikanta Das said this month after announcing a big boost to the country’s quantitative easing programme. “Upside risks to inflation emanate from persistence of the second wave and consequent restrictions on activity on a virtually pan-India basis. In such a scenario, insulating prices of essential food items from supply side disruptions will necessitate active monitoring and preparedness for coordinated, calibrated and timely measures by both Centre and states to prevent emergence of supply chain bottlenecks and increase in retail margins,”

The central bank reiterated its accommodative policy stance with liquidity pumping measures like open market operations and special windows for distressed sectors. Excessive money printing coupled with emerging inflation can result in the dreaded stagflation. The rising threat of stagflation puts RBI in a conundrum. An easy monetary policy would in an ideal situation stimulate the economy by stoking demand. But if slow economic growth is accompanied by price rise, this is a challenge that cannot be addressed by cutting interest rates and quantitative easing and money printing.

If not tomorrow, India might soon be staring at the threat of stagflation and hence, it is imperative for the Narendra Modi government to take note and undertake policy measures before another disaster—this time, economic—hits the country that is already reeling under the pandemic. “I know India’s finance Ministry has enough expertise to design these changes but I do not know if it has the political space to do them,” Basu opined.


View All