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"We need to cope up with stagflation"
According to the chairman of the Prime Minister’s Economic Advisory Council, C Rangarajan, the Indian economy is facing stagflation – high inflation and poor growth rate.
India is currently facing an inflation of more than seven percent, one of the highest in the region. Stagflation is considered dangerous for an economy because when growth is low in a country, the central bank will try to stimulate the economy by reducing the interest rates to enhance public spending.
This will create more demand for goods, resulting in an increase in their prices. This will once again place the country in the vicious cycle of inflation. Hence, the central bank will have to adopt other tools to stimulate the economy, without increasing the rate of inflation, which is difficult. Hence, we will have to cope up with stagflation.
Statistics show that the consumer price index (CPI) reached 11.6 percent in January 2013, the highest in the last one year. On the other hand, the wholesale price index (WPI) reached 6.6 percent in January, a slight decline in the past few months.
These figures indicate that India’s economic slowdown has an adverse effect on the pricing power of the industry, which is why inflation for non-food and non-fuel items is low.
Industry experts predict that CPI will continue to rise because a number of sectors in India are experiencing a wage spiral, in light of the attacks and violence in Maruti’s plant in Manesar last year. In response to the violence, Maruti increased the wages of its workers by around 50-75 percent, forcing other companies in the industry such as Honda and Hyundai to follow suit.
An increase in wages ultimately led to an increase in the cost of the products. The increasing cost of products, coupled with a rise in fuel prices will lead to a decrease in demand. This will once again put pressure on the growth rate of the country.
Last month, P Chidambaram released the Union Budget, throwing light on additional taxes for consumer products and services such as mobile phones and dining out. The Finance Minister also listed a number of infrastructure projects to be undertaken by the government in the coming months and years. How will the government raise money for such expenditure?
It will do so by imposing more taxes on the middle and upper classes. Given all the developments in the Indian economic landscape, it is unlikely that we will see a downward trend in inflation anytime soon.
How did stagflation come about in the first place? In 2008, when the world suffered a financial crisis, the Indian government gave stimulus packages continuously for three years to boost the economic growth. This resulted in a high fiscal deficit, which ultimately led to high inflation.
According to C Rangarajan, the government should have put in place tighter fiscal policies when tax revenues were buoyant to ensure that there were sufficient government funds in the event of economic turmoil.
Sadly, bad decisions by former government officials have resulted in a ruined economy that we witness today. And with the latest reforms declared by the government, it is evident that no leader is able to tackle the rise in the cost of consumer goods.
Unless Indian leaders manage to find a way to enhance growth of the country without raising inflation, we will continue to drown in the deepening waters of stagflation.