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In Brief:

The rise in retail price inflation to a nearly six-year high of 7.35% in December has led to increasing worries that the Indian economy may be headed towards stagflation.

What is stagflation?

  • Stagflation is an economic scenario where an economy faces both high inflation and low growth (and high unemployment) at the same time.
  • The Indian economy has now faced six consecutive quarters of slowing growth since 2018.
  • Economic growth in the second quarter ending September, the most recent quarter for which data is available, was just 4.5%. For the whole year, growth is expected to be around 5%

Reason for Stagflation:

  • Interest rate cuts: In the wake of a slowdown in the economy, to boost consumer demand, the RBI cut benchmark interest rate, the repo rate, five times in 2019. In the second half of 2019, prices of goods began to rise at a faster pace but the growth rate of the economy continued to fall significantly.
  • Rise in Food Prices: The current rise in retail inflation has been attributed mainly to the rise in the prices of vegetables such as onions due to extended rainfall & floods
  • Weak consumer demand: Lack of sufficient consumer demand is cited as one of the reasons for the slowdown in the growth
  • There are three reasons that India is not yet facing stagflation.
    • 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.
    • Retail Inflation spike is temporary because it has been caused by a spurt in agricultural commodities like onions.
    • Core inflation, which excludes items such as vegetables whose prices are too volatile, remains within the RBI’s targeted range

Way to overcome the scenario:

  • Supply-side policies: Government attempts to increase productivity and increase efficiency in the economy.
  • Free-market supply-side policies: involve policies to increase competitiveness and free-market efficiency. For example, privatisation, deregulation, lower income tax rates, and reduced power of trade unions.
  • Interventionist supply-side policies: involve government intervention to overcome market failure. For example, higher government spending on transport, education and communication.
  • Focus on Aggregate Demand: Inflation should not be worried and instead focus should be exclusively on boosting aggregate demand in the economy by spending more on infrastructure and other sectors to boost the economy.

Better Food management to control sudden spikes in prices leading to a rise in retail inflation