Is India heading towards STAGFLATION? From a citizen perspective.
STAGFLATION is like a double-edged sword. Recession on one side, inflation on the other. A single bad move can cost a hefty price on both economic growth and unemployment.
Let’s understand this conundrum by answering 4 questions.
- What is stagflation?
- Why the question of stagflation arises now?
- What leads to this current situation?
- Are there any proven measures to tackle stagflation in countries as magnitude as India?
Before we dive in further, let’s get to the fact that stagflation is a complex economic phenomenon to be measured for economic analysts, and even for governments (sometimes it's hard for governments to realize they were in stagflation until the situation went out of control)
But it cannot be misjudged/left out of our view because of those complex reasons. Basic understanding always helps everyone in tackling the situation better. So I did my part of the research and tried my best to make it understandable for a common citizen in this 10 minutes read.
With that, comes the first question
1. What is stagflation?
In general, economic boom and bust phenomena happen either of Inflation or Recession. Let’s first understand these terms Inflation and Recession to make it clear the path ahead.
Inflation: is the rate at which purchasing power declines or increase in the prices of goods and services.
Example: Inflation rate 5% means, You have $100 today, and buying a cart of groceries. After exactly one year, to buy the cart of the same groceries will cost you $105. It means you no longer get the same amount of goods at the same price after one year. It means no value for the money you saved in your steel almirah 💸 and no value for money your mom kept hidden from you in the kitchen for so long 😉.
Inflation = Value of money drops and Price of goods and services Increases.
Inflation can be caused by factors like demand-pull inflation, cost-push inflation, wage push inflation.
Recession: A significant decline in a general economic activity such as the fall of GDP in conjunction with a high unemployment rate. Recession has a greater impact on industrial production, employment, real income, and wholesale-retail trade, labor.
Recession = The decline in economic activity such as GDP and Unemployment
Now when we observe the above scenarios in general, there is a third one which is a contradictory scenario called stagflation, in which there is a decline in economic activity for a period of usually two quarters with a high unemployment rate and combined inflation.
Stagflation = slow economic growth (stagnation) + relatively high unemployment + Inflation (Rise in prices)
Yes, you got it right, all three at once (Inflation + Recession).
2. Why the question of stagflation arises now?
let me show you some graphs to depict the facts on above mentioned 3 metrics that can be a sign of stagflation.
1.Economic Growth
Recent GDP Data shows -23.9% GDP in Quarter 1 (April-June) of the Fiscal year 2020–2021. It is the worst economic contraction on record.
One thing needs to be observed, if not pandemic it's still on the downward curve from the start of 2016 to pre-COVID.
2.Unemployment rate
Unemployment rate leaped after sudden announcement of lockdown and labour force affected mainly due to pandemic. It again fell to prelockdown level in August, yet it is still not low.
Although rural unemployment rate quite improved due to some policy measures, urban unemployment rate is still at the continuing risk and expected to rise unless taken measures.
3. Inflation rate
started to spike in India from the start of 2019 and continued its upward movement due to further lockdowns, the effect of pandemic and production capacities fell all of sudden, raw material costs increased, etc.,
The Consumer Price Index (CPI) measures the changes in the cost of a basket of goods and services consumed by the average urban household. CPI has a direct relation with inflation and we can observe continuous growth from Jan 2016 to Aug-2020.
Above are some of the core measures to understand the current situation of our economy as a whole which shows both ends of stagflation.
3. What leads us to the current economic condition?
Well, Reasons for stagflation are uncertain, it can be due to poor economic policies made by the government, or a sudden increase in prices of crude oils which affects industrial activities, or an increase in domestic goods and services, or decisions that impact the lives of the labor force.
Story Time: happened in 1973, Global economies recognized the stagflation for the first time ever.
In October 1973, the Organization of Petroleum Exporting Countries (OPEC) issued an embargo against Western countries. This caused the global price of oil to rise dramatically, therefore increasing the costs of goods and contributing to a rise in unemployment. Because transportation costs rise, producing products and getting them to shelves got more expensive and prices rose even as people got laid off.
Coming to our situation, certainly, there are strong series of economic missteps made even before realizing the impacts of one after another.
At the heart of India's consumption and unemployment problems followed by an unprecedented decision of ban of high-value currency notes at the end of 2016 overnight to weak implementation of the GST bill (Yes, Implementation not the actual decision) in July 2017, there said to be many inconsistencies and price reforms in the implementation of GST which created chaos and trust issues in many sectors. The combined loss of airtel, Vodafone idea impacted the telecom sector, Worst ever fall of the Automobile sector (Read this reasons), volatility in oil prices.
In accordance with the above, derogatory statements by decision-makers on every major economic setback itself left consumer and producer’s sentiment in the doldrums.
Is pandemic not the reason for all these? — I agree with the fact that global economies are down at the moment because of the COVID pandemic, but India is at the lowest GDP of G20 economies as per recent reports (chances of provision). Even if we consider reports only till Jan 2019, we are not an exception. It began way back in 2016. At this growth rate india will not be able to reach that $5 Trillion economy even by 2030.
4. Are there any proven measures to tackle stagflation in countries as magnitude as India?
Yes, there are some measures taken by the global economies when the first stagflation occurred in 1973.
Consumer Demand
Consumption makes up about 60% of GDP, half the problems can be sorted here. But there are a lot of factors to consider to increase in demand. To increase in demand is to increase in wages of citizens is a must. to do that government and private sectors have to make a combined effort, and measures to boost liquidity to put more money in the hands of consumers.
“We are really extremely close to a point where we could be dipping into a major recession,” said Abhijit Banerjee, winner of the Nobel prize for economics last year. “The critical problem in the Indian economy is demand. You definitely want to stimulate demand,” he said.
Increase in Production capacity
The government already began taking certain measures to increase production capacities in the home country itself. Like #VocalForLocal, opportunities for manufacturing units to cut costs of their production, tax cuts. we need more such initiatives in action rather than just by words.
For example mobile trade
On a personal note, I am ready to hold my thoughts of having one plus next device or iPhone, is there an Indian alternative to this top-selling? it's easier to stop owning foreign products than owning Indian best alternatives.
India certainly reduced mobile phone imports over the years but it is not resulting in the manufacturing capacity of Indian brands, most of our current measures are to increase assembling units in India which can improve our current employment rate.
As put by Our Honorable Ex-PM Manmohan Singh, Economist, 5 point plan to revive the Indian economy.
“We must recognise new exports opportunities emerging because of America-China trade war. Remember, solutions to both cyclic and structural problems are must. Then only, we can get back to the high growth rate in 3–4 years,” he said.
Easy of doing business should be implemented across the country rather only in major cities like Mumbai, Hyderabad, Bangalore, Chennai.
Decentralization and autonomy of RBI
There is always a difference of opinions between Central banks and governments in almost all countries, but in the end, RBI should hold responsible for financial stability.
To quote our former RBI governor Raghuram Rajan's take on this matter
“The RBI is something like a seat belt. As a driver, the driver being the government, it has the possibility of not putting on a seat belt but of course, if you do not put on your seat belt you get into an accident and the accident can be quite severe.”
Educated and more experienced leaders at the economic front
We need competent and qualified ministers and leaders in every sector to handle every move taken by the government and oppose in view of national interest.
Not all critics by economists are political, the government should be in a position to accept suggestions and reforms that are necessary to improve the quality of decisions.
We, as citizens
We as an individual are major contributing factors in the Indian economy, Be it electing the right leaders and contribute to economic growth by buying more locally made products, improving skill sets, coming up with new business ideas, encouraging and supporting young entrepreneurs, growth in earnings, paying taxes, questioning the government all the time, do not open the doors for false spread of news/information, buy from small vendors whenever possible, Focus on self-health and happiness index.
With that comes the end of the article. Although there are zillions of factors to consider, the above-mentioned metrics are really helpful in understanding the current state of the economy.
Hope this article helps you in understanding something about stagflation, how it occurs, what can be done to revive back to normal.
If yes give it a clap and leave a comment and share, discuss with your friends.
Thanks for reading!
signing off…
