UNIQUE TIMES|October - November 2020
Historically, stagflation first arose in the mid-1970s, when the US economy faced a prolonged slump accompanied by high unemployment and rising inflation. The trigger was the announcement of an oil embargo by the Organization of Petroleum Exporting Countries (OPEC) in October 1973. By the end of the embargo in March 1974, the price of oil had risen nearly 300 percent from US$3 per barrel to nearly $12 globally.
V.P. Nandakumar

Former Prime Minister Dr. Manmohan Singh, writ-ing in The Hindu news-paper in November 2019, had warned about the imminent risk of stagflation facing the economy. At the time, India’s economic growth was slowing down. Nearly a year later, we are staring at a contracting economy. Interestingly, back in March 2013, when Dr. Manmohan Singh was the Prime Minister, Mr. C. Rangarajan, who was then Chairman of the PM’s Economic Advisory Council, had co-authored a paper titled `Growth or Austerity: The Policy Dilemma’, giving the exact same warning that India’s economy faced the risk of stagflation.

Of course, it may be argued that India’s recent shift from a trend of decelerating growth to one of outright contraction is the direct consequence of the outbreak of Covid-19 and the extraordinary measures such as lockdowns taken to contain its spread. However, the slowdown in GDP had begun well before the onset of the pandemic. In its last policy review, the RBI had forecast India’s GDP growth would be “negative” in FY21 (due to prolonged lockdown), the first instance of economic contraction since the 1991 liberalisation. After independence, India has observed negative GDP growth in a total of five years, 1958 (-1.21), 1965 (-2.64%), 1966 (-0.05%), 1972 (-0.5%), and 1979 (5.2%). Bear in mind that GDP growth in the pre-liberalisation period averaged just 3.9% over 45 years, while the recent average (over the last 25 years) is over 6.5% annualised growth.

What is stagflation

An economy is stated to be in stagflation when inflation runs high and the growth stuck at low levels. The Indian economy has now faced eight consecutive quarters of slowing growth since mid-2018. For long, the conventional view among economists was that there is a stable inverse relationship between inflation and unemployment. They argued that inflation should be considered tolerable because it meant the economy was growing and unemployment would be at low levels. Their belief was that an increase in the demand for goods and services drives up prices, which in turn encourages firms to expand and hire additional employees, creating additional demand throughout the economy.


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October - November 2020