Inflation high, growth slow, is stagflation near?
Change in retail prices of both Goods and Services consumed by defined population in given area known by Retail price inflation. In India Nov. 2019 observe 4.5% Inflation rate which highest in last 40 month. IIP (Index of Industrial Production) Oct. 2019 output fel 3.8% YOY, dropping for 3rd straight month. Country could be entering into a stagflationary phase. Stagflation is a combination of stagnant economic growth, high unemployment and high inflation. Its the perfect storm.
In our country inflation measured by 'Consumer Price Index'(CPI). CPI for Nov. 2019 noticed as 5.54% because of recent rise in food prices. RBI fixed 4% as medium term target for Inflation. Recent Monetary policy came out with unchanged REPO rate. According to NSO(National Statistical Organization) costlier vegetables, pulses and other protein rich food items pushed the CPI based retail inflation.
IIP's Oct 2019 data shows output fell 3.8% YOY with significant drop in all three major sector(Mining, Manufacturing and Electricity). After 2008's recession it is seen first time to decline in IIP's output for straight three month. RBI has slashed its growth rate forecast for 2019-20 to 5 %, which would be the lowest since the 2008 financial crisis. Recent developments like cutting corporate tax rate and incentivizing commercial banks to pump in liquidity into the struggling shadow banking industry has not yielded results so far. Government need to come up with more financial stimulus to the economy but it does not mean to curb its fiscal deficit far above targeted 3.3% of GDP.
Domestic PV sales fell in 13th consecutive month with no sign of immediate recovery in sector.
Is fall in market over? or worst may be on the way?
Negative IIP growth rate clearly indicating unemployment rate is rising. Along with rising unemployment prices are rising to and this has made us wonder if India experiencing stagflation.
The combination of simultaneously rising inflation and unemployment is called stagflation. Stagflation the term coined by Paul Samuelson, who won Nobel Price in Economics in 1979.
The Indian economy has seen a decline in GDP growth for seven consecutive quarters- a serious slowdown. Without Investment and Job creation consumption cycle not like to shooting up. Also rural wages are not rising as fast as earlier we seen there fore rural demand also not shooting up. This is first time all indicators are pointing downwards- usually we get mixed picture. The main reason for retail inflation still rising is the suppliers are more demotivated than the consumers. Mr. M M singh wrote in 'The Hindu', Stagflation a dangerous territory from which it becomes very hard for large economies to recover. While we are currently not in stagflation territory yet, it is prudent to act quickly to restore consumption demand through fiscal policy measure.
Recession vs Stagflation.
There is the difference between recession and stagflation.
The prolonged period of slow economic growth is coupled with high rates of inflation. Inflation also described as an ongoing decrease in the buying power of money. Inflation is a real confidence killer in an already depressing economic environment.
Where is Indian economy heading?
India is not stagflating.
Recent rise in inflation was influenced by food inflation. Weightage of "food & beverages' in CPI is 46%. Onion prices have been fire due to flooding in onion producer States. Core Inflation, which excludes volatile items like food and fuel, remained modest to 3.5%.
So, it's just the twin problems of low economic growth and high unemployment. Did we just say 'just'?
How can India's economy recover?
In short run, government will have to give up on its Fiscal Deficit target. In the long run, Fiscal Stimulus are necessary.
- Labour market reforms: New labour market legislation clubbing all labour related laws into four basket, but it is unwilling to address 'Labour market flexibility'.
- Liberalize farming- Agricultural sector reforms. Need to expand PM-Kisan and MGNREGA and reduce input subsidies.
- Direct tax reforms: The corporate tax cuts are welcome- and global experience shows that their short term revenue are often exaggerated and more than the made up in the medium term. There is need to cut personal income taxes to boost demand.
Note: Keynesian economics is an economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed by the British economist John Maynard Keynes during the 1930's in an attempt to understand the Great Depression.
KEY TAKEAWAYS
- Stagflation means a simultaneous increase in prices and stagnation of economic growth.
- Stagflation was first widely recognized after the mid-20th century, especially in the U.S. economy during the 1970's, which experienced persistently rapid inflation and high unemployment.
- Predominant economic theory at the time could not easily explain how stagflation could occur. Numerous other theories offer specific explanations for the 1970's stagflation, or stagflation more generally.
- Since the 1970's, rising price levels during periods of slow or negative economic growth have become the norm rather than an exceptional situation.
Sources of Information- Knappily, wallstreetmojo, Investopedia and CSO
Mayur Jagtap
Investment Consultant.
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