Is India's Economy in Stagflation?
Is the Indian economy in stagflation?
Hell no! According to recent economic analysis, India is anticipated to witness record real GDP growth rates for the upcoming fiscal year (FY: 2022). The current inflation rate is at an historic low of 4%, a significant improvement from the average of around 8% experienced during the Micro, Small, and Medium Enterprises (MSME) era from 2004 to 2014.
Low Inflation and High Employment
The low inflation rate coupled with high wage levels suggests that stagflation is not a current concern. Even though some layoffs have occurred, it is due to societal norms that prioritize emotional reasons over practical considerations, leading to less industrial and economic activity.
However, believing or hoping that stagflation exists solely due to the election of democrats who lack economic knowledge is shortsighted. Analysts suggest that stagflation could be a potential threat, given the historical patterns and the current economic landscape.
Economic Indicators and Trends
The Indian economy has been facing challenges for the past five years. GDP has been showing lower growth rates, and unemployment has increased. Moreover, the cost of goods and services has risen, leading to higher inflation. In 2019, the full budget hopes to address some of these issues, but significant changes are required to address the root causes of stagflation.
Some recent economic measures suggest the presence of stagflationary conditions. The Economic Survey Vol-2 (2021-2022) indicates that the Indian economy is experiencing deflation due to a decline in net aggregate demand, primarily because of the impact of farm loan waivers and the appreciation of the rupee. This scenario is expected to worsen in the short term due to adjustments in the Goods and Services Tax (GST) structure, but improvements are expected in the medium term. The growth rate is expected to hover around 6.5%, reflecting stagnation in growth rates.
Supply and Demand Side Factors
The Indian economy's constraints are mainly supply-side factors. However, in the current scenario, stagnation is primarily due to demand-side factors. The GDP growth is being constrained, and unemployment levels are rising, despite the positive signs in some sectors. This dual impact creates a challenging economic environment, which can push the economy into stagflationary conditions if left unchecked.
The government's actions, including passing legislation to control inflation, and the Reserve Bank of India's (RBI) interventions to control inflation, are crucial in managing these challenges. However, addressing the underlying issues such as supply-side constraints, improving aggregate demand, and fostering a stable economic environment will be key to preventing stagflation.
In conclusion, while the current economic conditions do show some signs of stagflation, proactive measures and policies can mitigate these risks. Regular monitoring and timely interventions will be vital in ensuring the sustained growth and stability of the Indian economy.