Stagflation, the phenomenon that mostly the developed world experiences is now raising its ugly head in India. The situation is worrisome, as now, the government and the RBI has to face the war at two most delicate fronts of the nation. One is the creation of the employment and the second one is the controlling of inflation. If one studies the conventional economics, it can easily be found out that the stagflation is the phenomenon that developed after the establishment of the mainstream economics, most notably the classical and Keynesian economics. So, therefore, time is ripe to implement the policies that extends beyond the conventional boundaries of economics.
Stagflation is the situation, whereby, there exists no trade- off between the inflation and the rising unemployment i.e. the inflation and rising unemployment are not mutually exclusive. Therefore, it goes against the common dictum that rising inflation means the high demand from the consumers, as now, the consumers has more money at their disposal. This high demand will thereby, lead to more employment in the economy. This perception is commonly known as the ‘Phillips curve’. Stagflation, thus, runs contradictory to the theory of ‘Phillips curve’.
From the past many months, situations conducive to such phenomena are in existence in India. On the supply side, mainly the rising food prices has been instrumental in the rising of inflation. Heavy monsoons wreaked havoc on the production of the seasonal crops which created the shortages of the certain food items like that of onions. This leads to the rising prices of the food articles. On the demand side, the consistent policy of RBI of keep cutting the interest rates so as to stimulate the investment has added fuel to the fire. There is ample evidence in existence which manifests the fact that the private investment is all time low in the present scenario. Therefore, high money supply in the economy without the required level of investment has created the condition of inflation.
It is important to mention here is that the situation of stagflation is not same or similar as the situation of depression. But, at the same time, it is not less either. According to some estimates, the situation of stagflation is difficult to overcome once it starts. So, every possible action should be executed to contain this situation.
As always been said, setting up the strong structural fundamentals of the economy should always be given primacy. Though, it is a long-term solution but sooner or later, India has to move on this path. There is no way that India can circumvent this journey. Setting up of the efficient supply chain network, for example, will dampen the effect of the abrupt supply of the products thereby, reducing the cost of production and lessen the price of the products. Take for example, onions, the proper storage facilities of onions might have reduced the inflated prices that we are experiencing now.
Secondly, there is immediate need of the diluting, if not dismantling the structure of trade unions in India. Experiences from the industrial nations has revealed that the high wages demanded by the industrial workers has led to the rise in inflation. Moreover, India has also experienced direct correlation between the strong trade unions and sluggish economic growth. Therefore, India needs to adopt the flexible labour laws.
Finally, there is a strong need of the aloofness of the government from that of the activities of the central bank. Political activities in many a cases, influences or in some cases, even dictates the monetary policy activities like for example, the interest rates, lowering of which might have further the political interests but at the same time, has adversely affected the economic equations of the nation.
From the ongoing discussion, it can be concluded that the solution to the problem of stagflation is a long-term rather than the short-term. The sooner, the government adopts and practically implements the solutions, the better it will be. Or it can be stated that, the hurdle of stagflation needs to be resolved, if India aspires to be the 5 trillion economy by 2024.