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What is Stagflation?
Stagflation is an economic condition when stagnant economic growth, high unemployment, and high inflation combine together. Basically, inflation plus stagnant growth equals stagflation. The term emerged during the 1973-1975 recession.
Causes of stagflation
The rising inflation leads to a drop in the currency's purchasing power as we would be able to buy only fewer items for the same money. The situation is far greater when rising inflation is accompanied by a stagnant output. As economic growth halts, unemployment rises but existing incomes do not rise fast enough, making people contend with inflation.
One of the causes of stagflation is when a central bank creates money flow by printing more currency but puts supply on hold. The situation also rises when the central bank's monetary or fiscal policies create credit.
While this at play, other policies slow growth if the government increases taxes or the central bank raises interest rates. Both of these moves prevent companies from producing more. Simply put, when conflicting expansionary and contractionary policies occur, it can slow growth while creating inflation, leading to stagflation.
Stagflation in India
In India, the situation implies stagflation in the future due to a fall in economic growth during coronavirus lockdowns. The second Covid-19 wave impacted economic activity in the April to June quarter. A high proportion of employees across businesses were affected by Covid 2.0, whereas rising medical expenditure contracted income and demand.
In the first quarter of FY21, the Indian economy contracted 23.9 per cent. The major components of GDP, that is consumer demand and investment demand – contracted 27 per cent and 47 per cent, while the food inflation rate registered a growth rate of around 9 per cent in August.
The contraction in GDP along with rising inflation flared debate on whether India inching towards stagflation.
What's the Stagflation cure?
Though there is no definitive solution to stagflation, according to economists there has to be a rise in production to the level that it leads to high growth while inflation stays the same. When the level is achieved, it would prompt the central bank to tighten its monetary policy. This is easily put but the right way is to prevent stagflation in the first place.
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