Twin troubles: On low growth and high inflation (The Hindu)

Mains Paper 3: Economy
Prelims level: Stagflations
Mains level: Stagflation effect on Indian economy

Context:

• Economic data indicates India may be stepping even closer to stagflation.
• The Index of Industrial Production (IIP) contracted 3.8% in October, as against a healthy growth rate of 8.4% witnessed during the same month last year.
• Industrial output, it is worth noting, had shrunk by 4.3% in September.
• At the same time, retail inflation jumped to a 40-month high of 5.5% in November fuelled mainly by a sharp jump in food prices.

Stagflation effect:

• Retail inflation is now in the upper band of the inflation range targeted by the Reserve Bank of India (RBI) but might drop as fresh food supplies hit the market.
• Low growth combined with high price inflation is sure to cause further headaches for policymakers.
• Economic growth has declined for six consecutive quarters now, making it one of the longest downturns in recent history.
• With inflation raising its ugly head now, the RBI, which held rates stable in its recent policy meet, is unlikely to cut rates aggressively in the next few months at least.
• So it is entirely up to the government now to find ways to boost growth.
• Given the seriousness of the slowdown, the government cannot delay reforms.

Role of government:

• The government maintained that the country’s growth rate was held back by the tight monetary policy stance adopted by the RBI under its previous governors.
• But with the benchmark interest rate being cut five times so far this year, the government can no longer shift blame on to the RBI.
• The favourite defence of the government right now is that the slowdown in growth is merely a cyclical one that will end sooner than later.
• Except for the recent cut in corporate tax rates, the government has not come up with any other significant reform in response to the slowdown.
• The presence of low growth along with high inflation also raises questions about the root cause of the slowdown, which has been attributed to a drastic fall in consumer demand.
• But aggressive rate cuts by the RBI that have extended over most of the year cannot stop the continuous slide in growth rate; it may well be that supply-side is also in deep trouble.

Conclusion:

• The answer to the current slowdown lies in economic reforms that can first lift the potential growth rate of the economy. Otherwise, further rate cuts by the RBI will only add to the government’s troubles by stoking inflation in the wider economy.

  Online Coaching for UPSC PRE Exam

  General Studies Pre. Cum Mains Study Materials

Prelims Questions:

Q.1) With reference to “The Recycling of Ships Bill 2019’’, consider the following statements:
1. Now, ships to be recycled in India will need to obtain a ‘Ready for Recycling Certificate’ in accordance with the Hong Kong Convention.
2. It will raise the brand value of our Ships Recycling Yards located at Alang in Gujarat, Mumbai Port, Kolkata Port & Azhikkal in Kerala.

Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

Answer: C
Mains Questions:
Q.1) What is stagflation? Do you think that India may witness stagflation in near future?