Iccha Sharma, Pune
According to a bulletin from the Reserve Bank of India (RBI) on Aug. 17, despite a significant surge in prices, the risk of stagflation—a situation characterised by sluggish growth and high inflation – remains low in India. The central bank’s monthly bulletin also highlights that the Indian economy is gaining momentum in the second quarter, even though inflation is projected to continue averaging above the RBI’s comfort zone of 6%.
What is Stagflation?
“Stagflation” is a term used to describe a challenging economic situation where both high inflation and economic stagnation occur simultaneously. Inflation refers to a consistent rise in the general prices of goods and services. When inflation is high, the cost of items you buy regularly goes up, which can lead to a reduction in your purchasing power. Essentially, the same amount of money buys you fewer goods and services over time. For instance, if you spend 100 rupees on groceries every week, inflation might cause those groceries to become more expensive, and you’d end up getting fewer items for the same amount of money.
Stagflation in India
The RBI study indicates that the probability of stagflation in India is only 3%, attributed to factors like improved financial conditions, stability in the INR/USD exchange rate, and consistent domestic fuel prices. Although India’s retail inflation soared to 7.44% in July from 4.87% in June, primarily due to rising prices of food items like tomatoes and vegetables, the bulletin points out that the high-frequency food price data for August indicates ongoing price increases in cereals and pulses.
While tomato prices registered further increases on average, recent data suggests some reductions in prices. Onion and potato prices also experienced sequential increases. So far in August, retail selling prices of petrol and diesel remained steady in major cities, and while kerosene prices surged, LPG prices have remained unchanged.
The report also notes that while core inflation saw a moderation in July, headline inflation is anticipated to average well above 6% in the second quarter. Prime Minister Narendra Modi recently addressed the issue of inflation, acknowledging that the world is grappling with it due to the ongoing impact of the COVID-19 pandemic. He mentioned the government’s intent to take measures to curb inflation and alleviate its impact on the public, especially given the upcoming state and national elections.