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The most important discussion among economists and observers is now regarding the possibility of the Indian economy reaching the pre-Covid level of GDP by end of FY 2021-22. But another equally intriguing question is whether the Indian economy is moving towards stagflation.

What is stagflation? Stagflation came into economic discussions in the1970s when the US economy went into recession. Stagflation refers to a situation when an economy suffers from stagnancy of growth and high inflation. At the same time, a lack of employment opportunities is also present.

Kaushik Basu, Professor of Economics, Cornell University and former chief economist and Vice President, World Bank, was perhaps among the first notable persons who pointed this out last June. He had tweeted, “India’s inflation shows a sharply rising retail inflation at 6.3%, core inflation at 6.5% (highest in 83 months) and wholesale inflation at 12.9%. With growth at record low, this is stagflation. We mustn’t live in denial. All government expenditure should be directed to help small businesses and the poor.”

Recently Amit Mitra, Chief Advisor to Chief Minister, Government of West Bengal and former finance minister of the West Bengal government also called out the issue of stagflation of the Indian economy at the CFO conference conducted by the Institute of Cost Accountants of India (ICAI) at Kolkata.

Why are economists worried about stagflation

In stagflation, both economic stagnancy and inflation persists at the same time. Unemployment also continues unabated. Then how would policy makers deal with it? First, to boost economic growth, both monetary and fiscal policies are needed. The central bank has to increase the supply of money so that investors can get finance at lower interest rates. Additionally, fiscal policies based on increased spending could be taken to increase demand for goods and services in the economy. This would result in further increase in the price level - at least in the short to medium terms. On the other hand, if both the central bank and government of a country take policies to contain inflation then supply of money may be restricted and rate of interest can be increased. Additionally, the government could decrease its spending. In that situation, the GDP may fall. So there is a dilemma. That is why it is very difficult to deal with stagflation in an economy.

Present wholesale and retail inflation in India

The wholesale and retail consumer inflation rates are based on Wholesale Price Index (WPI) and Consumer Price Index (CPI). The CPI data is compiled by the Ministry of Statistics and Programme Implementation (MoSPI) and WPI based data is collected by both MoSPI and Department of Promotion of Industry and International trade (DPIIT). The articles and their weight differ in these two indices. WPI considers manufactured products with weight of 64.23%, primary articles with 22.62% and fuel and power with 13.15%. On the other hand, CPI gives food and beverage 45.86% weight, pan tobacco and intoxication 2.38%, clothing and footwear 6.53%, housing 10.7% fuel and light 6.84%, miscellaneous services 28.23%. One thing to be noted is that WPI does not consider services but CPI gives high importance to services. So, when services prices increase, WPI does not change considerably. But CPI changes to a large extent. On the other hand, WPI is affected mostly by manufacturing item prices. It is sensitive to changes in manufacturing input prices. Most of the central banks now consider CPI as the basis for policy action and it is the same for the Reserve Bank of India as well.

Conclusion

The Indian economy has been passing through a very low growth rate of GDP, rising WPI and CPI and high unemployment. Ambor Ghosh, Professor of Economics at Jadavpur University informed that the Indian economy is in stagflation. He blamed governmental policies for that. According to him, only people-oriented policies can save India from the situation. Income in the hands of the common people needs to be increased. Professor Anup Sinha, Non-Executive Chairman, Bandhan Bank and Director, Heritage Business School concurred with Ghosh. He opined that all indicators point towards stagflation in the Indian economy.