Wednesday, June 20, 2012

Stagflation?

What is stagflation? A condition of slow economic growth and relatively high unemployment accompanied by rise in prices / inflation - basically, a period of stagnation. 

Are we headed towards stagflation? Our growth has been declining nine quarters in a row and recent headline inflation is north of 7.5% in May. Though rupee depreciation has been playing a role in WPI inflation, it is a concern, nonetheless. Two of the text book criteria for stagflation are being met and we have no recent reliable statistics on unemployment. 

The fact is that, scary 'S' word is doing its rounds in the recent times.  Global financial services firm Moody's has also recently stated that Indian economy is facing stagflation; According to senior economist of Moody's analytics, India's economy is in stagflation, with notably weaker growth but inflation still stubbornly high.  

Given the concerns of inflation, RBI put rate decision on hold and continued status quo in its meeting on Monday.  While there is a lot of criticism on RBI's decision (or lack of it) not to cut interest rate / not providing a lift to the sagging economy, I don't think reduction in interest rate alone will give thrust to growth. The blame game continues (as opposed to claims) and there has to be concerted effort between RBI and government as suggested by RBI guv today.

Creating an environment that is investor friendly is the need of the hour.  It goes without saying that investment would push up growth and employment; policy log jam over key factors of production and lack of infrastructure spend have been the major party poopers of investment climate. 

It is not too late to thwart stagflation or rising fears of economic downturn. If we are done playing political games, could we start focusing on country and it's people?