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Threat of Stagflation to India

  Aug 06, 2020

Threat of Stagflation to India

Why in news?

Economist and Former PM Manmohan Singh has cautioned that while India is not yet in stagflation territory, it would be prudent to watch out for increased risks of such an event occurring. According to him the citizenry’s distrust in institutions and lack of confidence in the government have caused a prolonged slowdown. 

What is the stagflation phenomenon?

A combination of simultaneously rising inflation and unemployment along with decline in economic growth is called stagflation. The term was coined by Paul Samuelson, the first American to win the Nobel Prize in economics, to describe the simultaneously rising inflation and unemployment rates in the US in the 1970s and 80s. 

What are statistics he used to show stagflation in economy?

1.   Nominal GDP growth is at a 15-year low (GDP↓); 

2.   Unemployment is at a 45-year high;

3.   Household consumption is at a four-decade low (Demand↓);

4.   Bad loans in banks are at an all-time high;

5.   Growth in electricity generation is at a 15-year low (GDP↓)

What caused Stagflation in India?

1.   Higher food prices, rising retail prices in economy

2.   Stagflation is also caused by a supply-side shock. For example, rising commodity prices, such as oil prices will cause a rise in business costs thus reducing growth GDP while increasing inflation

3.   Weak demand is reflected in the power, fuel, real estate and sales of vehicles, which have resulted in hundreds of thousands of job losses in some industries.

  1. Falling productivity: If an economy experiences falling productivity – production becoming more inefficient; costs will rise and output fall. GST reform, demonetization may have caused this
  2. Rise in structural unemployment, if there is a decline in traditional industries, we may get more structural unemployment and lower output. Example Automobile sector crisis in India Thus, we can get higher unemployment – even if inflation is also increasing.

How do we to revive economy according to Him?

The twin policy actions of boosting demand through fiscal policy and reviving private investment through ‘social policy’ by inspiring trust and confidence in the economic participants in our society.

What is role of social trust in economy?

The role of social trust in economic development has been well-documented, right from the times of Adam Smith to the modern-day discipline of behavioral economics- Nudge economy. The tearing of our social fabric of trust is the fountainhead of our current economic malaise. For economic growth to revive, it is very important that our torn social fabric of fear and distrust be stitched and knitted together to enthuse trust and confidence. It is very important for businessmen, capital providers and workers to feel confident and exuberant rather than being fearful and nervous.