Stagflation is a condition when a country faces high rates of unemployment as well as inflation altogether. This term is coined from stagnant economic growth and inflation.
Stagflation is a difficult situation for a country since stunted economic growth fails to create jobs and steps to reduce inflation heighten the unemployment rates.
It was believed that inflation was inversely proportional and unemployment until now when the countries started undergoing stagflation. Increasing unemployment rate means common people have low per capita, that is low purchasing capacity, which in turn reduces the demand for goods and product prices will remain constant or drop and vice versa.
Stagflation in India
India is extremely vulnerable to stagflation. With the growth rate contracting by 1.8 percent in the last two years, the Indian economy is bound to face turbulent times ahead. The growth rate has never been this low in a decade. Adding to that are the tensions in the Middle East and the rise of crude oil prices.
The slowing down of the growth rate and inflation due to production as well as geopolitical reasons points to the fact that India has a high chance of entering a phase of stagflation very soon.
What must be done?
Normally, Stagflation is usually countered by raising the interest rates and increasing the supply to meet the rising demands of the people. Unfortunately the same would not work for India. The normal methods of dealing with stagflation do not help the economic situation. The Indian economy is weak thus the normal methods of decreasing interest rates don’t boost the economic growth. It becomes inconceivable to accelerate the economy by lowering rates while fighting inflation simultaneously.
The government has to reduce the money supply while still holding the key interest rates constant and get the fragile economy back to establish its firm roots again. Only this method, said economists, would regain India back its economic stability.
