24.

Stagflation

Intro

 Stagflation is a combination of stagnant economic growth, high unemployment,

and high inflation (increase in the cost of living as the price of goods and services rise)
 It's an unnatural situation because inflation is not supposed to occur in a weak economy.
 In a normal market economy, slow growth prevents inflation.
 As a result, consumer demand drops enough to keep prices from rising.
 Former Prime Minister Manmohan Singh warned that India could be entering a
stagflationary phase. The worrying prophecy was made on the basis of a set of gloomy
economic indicators that have rattled everyone. 

Why is the situation dangerous?

 The situation is dangerous mainly because in normal low growth situation the
government or the central bank can provide economic stimulus via higher public
spending and cut interest rates.
 But the catch is that when inflation is already running high, fiscal and monetary stimulus
can make it worse as that puts more money in the hands of the consumer. 

Example

 In the mid-1970s, stagflation was used to describe the period when the United States
faced a prolonged slump and high unemployment along with rising inflation.
 It was mainly on the back of OPEC's decision to cut oil supplies. As a result, the oil
prices reached the new heights and hampering productive capacity.
 The US Fed tried to address the issue by rate cuts and boosting money supply but
output couldn't rise much due to low productivity and oil shortage. So, all that extra
money just triggered inflation
 If you compare U.S. GDP by year to inflation by year, you'll find stagflation in the United
States occurred during the 1970s. The federal government manipulated its currency to
spur economic growth. At the same time, it restricted supply with wage-price controls.
 In 2004, Zimbabwe's policies caused stagflation. The government printed so much
money it went beyond stagflation and turned into hyperinflation.

Is India in a stagflationary phase? 

 India may not have yet entered stagflationary phase as of now. The US economic growth
between 1973-75 saw five quarters of negative growth and tripling of inflation to be
regarded as stagflationary.
 We may not be in a stagflationary scenario but slowing growth which is a far cry from
what India's potential is will pose a risk to government's $5 trillion goal.