Stagflation

Stagflation is the process during which inflation remains high, economic growth slows down, and unemployment crosses reasonable limits. India is approaching a phase of weak development associated with high inflation or stagflation, with the recent 7.35 percent increase in consumer prices since December. Due to interrupted economic growth and rising unemployment, existing earnings are not being able to keep pace with the rising costs.

What do you mean by inflation?

When steep inflation occurs amid slow economic development and high unemployment, it is known as stagflation. Policymakers face a dilemma with regard to dealing with stagflation because the instruments employed to reduce inflation often increase unemployment and vice versa. In other words, stagflation is a term that refers to a period of high unemployment, high inflation, and low economic growth. Inflation is not meant to occur in a poor economy, and thus this is an unusual situation. Slow growth avoids inflation in a functioning market economy. As a result, consumer demand falls sufficiently to prevent price increases. Government policies that disturb normal market functioning can cause stagflation.

What are the reasons behind the stagflation situation in India?

Decreased Consumption: Consumption declines contribute to ongoing stagflation. Consumption accounts for over 60% of GDP and expenditure has reduced due to lower income and fewer jobs. Consumer sentiment has remained stagnant.

The Volatility in Oil Prices: The ongoing volatility in the price of oil has resulted in further reduction in spending. The rising price of oil has been a result of the US-Iran spat. This has resulted in high transportation charges, which in turn has resulted in an increase in the overall costs of products, specially those of edible items.

Reduced Credit Availability: The Reserve Bank of India’s interest rate reduction and liquidity injections into financial markets have had little impact on lending. This is because banks with the highest stressed-asset ratios aren’t lending much and aren’t passing on rate reductions to borrowers.

Unemployment: Unemployment is at an all-time high, affecting people’s purchasing power. The country’s job development has been hampered by the manufacturing sector’s inability to improve growth, among other things.

Inflation: As input costs rise and aggregate supply shrinks, the cost of different goods and services rises. Due to poor monsoon, the amount of land under cultivation has decreased. As a result, there has been a decrease in output and, as a result, a decrease in supply. When aggregate supply is lowered, output and employment fall, but price levels rise.

What are the various steps to control stagflation?

Tax Measure: The reduction in income and corporation taxes is the most suitable policy measure as it will lower labour costs and increase demand for labour. 

Monetary Policy: Reduction in inflation could be a major goal of macroeconomics. Lowering inflation may increase the unemployment rate and slow down economic growth. However, once the market cost is under control, this form of unemployment may be targeted.

Conclusion

Stagflation must be dealt with on a war footing and as soon as possible. The government’s goal of becoming a $5 trillion economy necessitates the arrest of slowdown and inflation. Furthermore, the government should work with all stakeholders to identify supply-side challenges; a decrease in food costs will aid the government in avoiding stagflation.