Is India heading toward Stagflation?

A Research Paper 
Submitted for the Internal Project of 

International Finance 
B.Sc. Finance Semester V

Research                     Submitted by:

Mentor:           Rushil Gulyani C041
           Sakshi Bothra C042
Dr. Charu Bhurat Sanjana Mohan C043
Sanya Aversekar C044
Sarvath Shetty C045
Sharan Shankarnarayan C046

SVKM’s NMIMS Anil Surendra Modi School of Commerce

2022
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Table of Contents:

Particulars

Abstract

Introduction

Review of Literature

Objectives

Methodology

Discussion and Analysis

Recommendations & Conclusion

Bibliography

Annexure

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Abstract 

Numerous important changes have occurred in the Indian economy over the past 60 years.
The Indian economy should not be grouped with those of other less developed countries, as 
evidenced by these changes. It ought to be referred to as a fast-emerging economy. India's
phenomenal economic success can be attributed to its decision to open its doors to
globalization in the 1990s. 
India had one of the fastest-growing economies in the world in the 1990s, and it has
subsequently had a protracted period of extraordinary welfare improvement. From 13.1% of
GDP in 1990 to 20.3% of GDP in 2000, trade in India increased. However, India has had its
most turbulent and unstable period in the past ten years. The question of whether India is
experiencing stagflation arises in light of all these facts. In this context, the current study tries
to talk about inflationary trends, the rate of economic growth, and the threat of 
stagflation.
It also looks at the misery trend and GDP growth rate over the past 2 decades and makes
forecasts based on various indicators such as GDP, inflation rate, unemployment rate, misery
index lending rates, change in GDP per capita, and the modified misery index.
The paper also gives future recommendations based on solutions highlighted by well-known
economists.

Introduction

A stagnant economy, Inflation, and a high unemployment rate together result in Stagflation. It
is also known as Recession Inflation. Stagflation in a nation results in high commodity prices,
poor GDP, less purchasing power, the shutdown of businesses, a decline in consumer
spending, and an increase in unemployment due to corporate layoffs. This situation is tough
to handle for Economic policymakers. An attempt to correct one of the factors can exacerbate
another. Policy solutions to control slow growth will result in a rising in inflation and
unemployment. Measures taken for a recession may result in a further increase in recession
 
In the past increase in oil prices have been one of the main causes of stagflation, however
later many economists like Gordon, Barsky, and Hunt came out with various insights and

3
empirical evidence that stagflation can’t be attributed only to the oil price but their is a
variety of other factors like raw material prices, supply shock, wrongly devised fiscal
policies, etc that onsets Stagflation. This can be the result of both internal and external factors
The threat of stagflation in India has been in discussion since 2013 and more so after the
onset of the Covid Pandemic and the intense second wave of Covid in India which left India
high and dry. Erratic monsoons and supply shocks due to the Russia-Ukraine war have led to
an increased risk of Inflation. The record rise in the prices of petrol is adding fuel to the fire. 
In this paper, we will explore all the factors affecting stagflation in detail and deduce the
probability of India going into the Stagflation phase and some of the measures that can be
taken by the Government before another disaster- this time economic after Covid Pandemic.

Review of Literature

Rushil Gulyani

Policymakers and the public at large are still deeply concerned about the causes of stagflation
and the danger of it happening again. The two significant spikes in oil prices in 1973–1974
and 1979–1980 are widely mentioned as the causes of the Great Stagflation of the 1970s.
This article makes the argument that stagflation was not caused by oil price spikes nearly as
much as is commonly believed. The authors offer a model that can account for the majority
of stagflation without mentioning supply shocks through monetary expansions and
contractions. The price of oil (and other commodities) fluctuating significantly at the same
time as stagflation deteriorates is a surprising coincidence that can be explained by monetary
fluctuations. The research paper demonstrates that there is little evidence that oil supply (as
opposed to the CPI). The theory of the oil supply shock also falls short of explaining the
sharp rise in the price of other industrial commodities that occurred before the rise in the
price of oil in 1973–1974 and the fact that an increase in the prices of industrial commodities
precedes increases in oil prices during the OPEC period. ( Barsky, 2000)

The research inculcates the various processes of identification of the stagflation phenomenon.
To generalize and compare, the threshold values approach is used (for recognizing episodes
and assessing the severity of stagflation). Compared to identifying episodes, estimating the
extent of stagflation offers the following benefits: 1) enables quantitative comparison of
stagflation's detrimental effects; 2) eliminates the fundamental obstacle to determining
stagflation episodes—the requirement to employ various criteria based on economic progress.

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The paper also includes the calculation of indicators of the depth of stagflation of countries
GroupWise which include: developed countries (1980-2017), developing countries ( 1980-
2017), incl. post-soviet countries (1993-2017). It displays how under current circumstances,
developing nations are more likely to experience the stagflation phenomena. The research
paper demonstrates that there is little evidence that oil supply shocks actually raised the
deflator and that oil supply shocks may quite possibly lower the GDP deflator (as opposed to
the CPI). The theory of the oil supply shock also falls short of explaining the sharp rise in the
price of other industrial commodities that occurred before the rise in the price of oil in 1973–
1974 and the fact that an increase in the prices of industrial commodities precedes increases
in oil prices during the OPEC period. (Liliia, 2018) 

Sakshi Bothra

Following the Russian Federation's invasion of Ukraine, supply constraints, recovering global
demand, and rising food and energy costs have all contributed to a rapid spike in global
inflation since its mid-2020 lows. Markets anticipate that inflation will reach a peak in the
middle of 2022, drop, and then remain high even after these shocks pass and monetary
policies are tightened even further. Global growth has been trending in the opposite direction;
it has been rapidly declining since the start of the year and is predicted to continue to be
below the median of the 2010s for the rest of this decade. These changes have increased the
danger of stagflation, which is when there is both high inflation and slow growth. To combat
inflation during the 1970s stagflation recovery, major central banks of industrialized nations
had to raise interest rates sharply. This set off a global recession as well as a series of
financial crises in developing markets and emerging economies. Because of their elevated
financial vulnerabilities, worsening GDP fundamentals, and less anchored inflation
expectations, they would certainly confront significant difficulties once more if current
stagflationary pressures increased. (Ha, Kose, & Ohnsorge, 2022)

Since economic development is the phenomenon that comes after economic growth and
includes not only a rise in the overall output but also a change in the institutional and
structural factors that operate in the economy as well as a welfare quotient, economic growth
of the country is a component of economic development. India has been experiencing a
stagflation-related economic issue, which has hindered economic growth and, consequently,
economic progress. The focus is on the growth experienced in India and the factors that may

5
have contributed to the growth rate's recent decline, which has also hurt development levels.
The numerous indicators of an economy's economic development have also been addressed
in the paper. The article speculates on potential causes and remedies for economic stagflation.
(Sharma, 202)

Stagflation concerns have resurfaced fifty years after the 1970s. The Ukraine conflict
increases global inflation and slows down the pace of economic expansion. With rising
interest rates and a jump in inflation, 2022 will be a transitional year for the insurance sector.
Mark-to-market valuation damages to capital and assets are projected to result from declining
equity markets and expanding credit spreads. The severity of claims will rise as a result of the
inflation shock that is most likely to affect property and casualty insurers. Property and
casualty insurance profitability will face challenges in 2022 but will benefit from further rate
tightening in 2023. Property and automobiles are anticipated to suffer the most immediate
effects as price increases for building materials and auto parts exceed those for the overall
economy. Longer tail business lines will be particularly vulnerable to persistently high
inflation over the medium future. In 2022, we do not anticipate that advantages from
increased interest rates will balance out greater claims. Based on the market's hardening and
rising interest rates, the profitability prognosis for upcoming years is favorable. Since rising
interest rates help to enhance profitability, sustained high inflation mostly has indirect
consequences on life and health insurers. Bond portfolios rolling over into higher yields
increase investment performance, while guarantee-backed savings products become more
profitable. There are still huge downside risks to the profitability of insurers given the current
high level of uncertainty. Alternative scenarios are crucial for the capital and risk
management of insurers. (Garbers, et al., 2022)

Sanjana Mohan

This paper compares the concept of stagflation in market economies, with the concept of
short deflation in centrally planned economies. It explores how inflation is repressed in such
centrally planned economies, leading to shortages. To analyze stagflation, the paper uses
several rates of stagflation, which are combinations of inflation and unemployment rates, and
illustrates them in the form of Philips curves. It also defines several wage-price equations to
explain the causes of stagflation. Lastly, it constructs the “unhappiness index”, which is a

6
measure of stagflation that is a sum of inflation rates and unemployment rates in market
economies, for several market economies during 1980 and 1984, and ranks these economies
based on how high their stagflation was. Finally, this paper concludes that inflation is
controlled by unemployment in market economies while it is repressed by centrally planned
economies. (Kolodko & McMahon, 1987)

This paper defines inflation as a comprehensive phenomenon of both changing

unemployment and price rise. There is a long-run trade-off between inflation and
unemployment, and stagflation is a situation that is characterized by a high inflation rate and
low economic growth, as well as high unemployment. The paper gives one of the causes of
this as supply shocks, such as an increase in the prices of oil in the international markets. The
paper also mentions several theories of stagflation, some of which include: Shock theory
(caused by outside forces), Neo-classical theory (excessive government intervention, Quality
of money theories, Classic Keynesianism and the Phillips curve, Neo-Keynesianism, etc. It
also explores the inflation during 2010-11 and the rate hikes used by RBI to control said
inflation. It concludes that simply controlling demand through monetary policy and ignoring
the supply side can create a vicious stagflationary cycle, as high-interest rates may slow
growth and investments, affecting supply. (Sivadasan P., 2012)

This study compares the impacts of blows to the economies of the UK and India that occurred
in 2016, namely Brexit and the twin blows of Demonetization and the introduction of GST.
The possibility of recession giving way to stagflation due to supply-side constraints is
explored. For its analysis, it uses a GAM (Generalized additive model) to study the
relationship between inflation and unemployment and plots a smoothed curve using data
points from 2016 to 2020. It noted that during the study period, although the UK maintained a
mostly negative relationship between inflation and unemployment (signifying recession),
India recorded a positive relationship between the two, which signifies the presence of
stagflation in the economy. The paper posits the twin shocks in 2016 as a cause for this
stagflation. The existence of supply shocks could lead to the disappearance of the Phillips
Curve. Over time, a fall in the GDP growth rate along with a rising price level has been
observed in the Indian economy (stagflation). The authors of the paper recommend a direct
spending strategy in the short run to boost demand and capacity building in the medium term
to tackle the situation. (Victor et al., 2021)

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Sanya Avarsekar

A paper by (Thompson) concluded that by 2008 the rise in oil prices was a result of both
fresh demand in an environment where the economies of China and India were expanding
rapidly and what appeared to be a stasis in conventional oil output since 2005. The
subsequent problems brought on by high oil prices were made worse by the weak dollar in a
world where the US had turned to China as a structural creditor in the first half of the decade
and by oil markets’ risen volatility as these markets became more and more open to
speculative capital flows. A cumulative set of macroeconomic and geopolitical challenges for
western states resulted from these forces. The surge in prices of oil and the onset of the global
recession in 2008 was followed by a degree of stagflation. After that crisis in 2008, it is now
that the fears of stagflation are at their highest.

(Siddiqui) in a recent study on the effects of inflation and the Russia Ukraine war on the risk of
stagflation suggests that global food shortages caused by the war has shot up the prices of oil
and other essential commodities, which in turn will lead to increasing unemployment and
lesser demand. The paper concluded that in such a case where inflation is growing, there is a
high risk of stagflation and government spending needs to be focused on helping the poor in
a. However, the majority of developing nations are dealing with balance of payment issues,
which prevents them from using fiscal policy because they are limited by substantial external
deficits. They are unable to take independent policy actions to protect their own interests due
to the international financial institutions' severe fiscal discipline requirements.

A paper published by (Demary & Huther) this year stated that prices have recently increased
as a result of the demand's quick recovery and supply issues. This can be seen in the markets
for oil and gas and also in international trade, which has been slowed down by constraints at
ports of Asia. For the European Central Bank, this presents a trade-off because a monetary
policy which is expansionary is unable to alleviate supply-side constraints and bottlenecks,
whereas a monetary policy which is more restrictive would impede the pace of the economic
recovery. Key interest rate increases in the eurozone are therefore not anticipated for 2022.
Monetary policy will be compelled to be rigid if supply-side forces sustain and policy of
wages attempts to pass on the consequences of rising prices. From a macro-economic
perspective, the looming risk of stagflations calls for a financial policy which is flexible with
regards to investment policy if the long-term government bonds’ interest rate level is not as
high as the macroeconomic dynamic trend.

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Sarvath Shetty

This paper talks about the vulnerability of the Indian Economy. The paper introduces
concepts like “green shoot” and “quantitative easing” programs and their impacts, effects,
and failures on the economy of the nation. Green shoots which are a sign of economic
recovery and growth post a recessionary period were noticed when the rupee almost sank but
was rescued by the Federal Reserve. The then Union Finance minister, P Chidambaram,
returns from his attempt to woo foreign investors to realize that the economy is heading from
bad to worse as India’s GDP growth rate is said to decelerate to 4.2% from 5% with the CAD
dropping to 4.4% from 4.8% the previous year (2012-13). Despite the “green shoots”, India’s
current account deficits seem to have risen by 0.9% to 4.9% as compared to 4% in the
previous year. When placed alongside a possible rise in the US interest rates, if in case the
Fed starts tapering, the value of the rupee would only see a declining trend.

After reading the RBI’s Bulletin paper we notice that stress tests indicate that the fiscal
situations of India's most indebted states (Bihar, Kerala, Punjab, Rajasthan, and West Bengal)
may worsen still, necessitating corrective action. In its bulletin, the RBI makes this statement.
We are not only referring to the problematic states when we discuss the FY22 growth rate of
8/7%. The Bulletin adds that the recovery is still strong in FY23 and that India's GDP has
surpassed its pre-pandemic level by 1.5%. One should use caution when interpreting the
8.7%. As we are well below our potential, it follows a decline in the preceding fiscal year's
growth. There is a chance that it will become stagnate, however, growth has occurred post the
two-year slump.

"India faces near-term challenges in managing its fiscal deficit, sustaining economic growth,
reining in inflation, and containing the current account deficit while maintaining a fair value
of the Indian currency," the Finance Ministry wrote in its most recent MER (for the month of
May). According to the report, many nations, are facing problems post-COVID-19, and India
is relatively better positioned to handle them due to the stability of its financial system and
the effectiveness of its immunization program in enabling the economy to open. The
economy grew 8.7% last year compared to 6.6% in the previous year. However, the economy
is still facing multiple bottlenecks. The research stated that "several international

9
organizations have forecasted a slowing of global economic growth" and that India's
economy is also anticipated to experience a slowdown in growth, despite still growing faster
than the other developing market economies.

                                                                                                          

Sharan Shankarnarayan

The study by (Singh, 2018) looked at the impact of inflation on GDP and the unemployment
rate in India from 2011 to 2018. The data used was obtained from India's national statistics
website. The study concluded that inflation has a negligible impact on GDP and
unemployment and that the correlation is negative. At the 10% level of significance, the
correlation between unemployment and inflation was positive but insignificant. With a value
of 0.196, the correlation between GDP and the unemployment rate was also found to be
insignificant. As a result, it was concluded that inflation played a significant role in the
macroeconomics of the Indian economy, but only for GDP and unemployment at
insignificant levels.

(Banik, 2012) The relationship between the cyclical component of agricultural output and
rainfall in India is investigated in this paper. When the cause of food inflation is a supply
shortage caused by insufficient rainfall and inadequate irrigation facilities, a contractionary
monetary policy may result in stagflation. According to this paper, the cyclical component of
agricultural GDP in India is more sensitive to supply-side shocks than to demand-side shocks.
This means that whenever food prices rise, it is due to a shortage caused by a poor harvest
rather than an increase in aggregate demand. What is required is the implementation of
supply management policies such as infrastructure investment, a focus on developing new
technology, the maintenance of a buffer stock of essential commodities, and so on. Such
efforts will ensure growth stability, particularly in India's agricultural sector.

The research topic of this article (Xia, 2021) evaluates the rate of unemployment and
inflation in the Indian economy over a six-year period to determine a trade-off between
inflation and unemployment. The research employs the bivariate analysis method, with the
rate of unemployment as the variable in the first theory and the inflation rate as the variable
in the second. The Phillips curve is the primary tool in this study. The curve investigates the

10
relationship between a lack of employment and the rate at which wages change. The study's
findings demonstrated that a lack of employment influenced inflation. The lack of
employment is a common occurrence in the economies of all developing countries. It has a
positive impact on the GDP, people's living standards, and price levels. The findings revealed
a significant relationship between inflation and unemployment, but the relationship is
insignificant in India's economy. The main implication of these findings is that policymakers
should prioritize efforts to reorganize the economy, increase employment, and manage price
fluctuations. As a result, there must be strong collaboration among ministries in India dealing
with inflation and unemployment.

Objectives

 To examine whether stagflation exists in the Indian economy by studying the trend of
inflation and unemployment
 To analyse and assess the looming spectre of Stagflation in the Indian economy

Methodology

In the process of writing this research paper, we have used various methods of trend analysis
and indexes, such as:
We ran a linear GAM model on monthly inflation and unemployment data for the past six
years, from 2018. General Additive Model is a regression model that uses spline functions to
make a smooth non-linear curve based on the x and y variables. 12 splines in our model. X
variable is inflation Y variable is unemployment. We used this to study the trend in data, as a
high positive relationship between these two variables would indicate stagflation.
The misery Index is an economic indicator that aids in determining how the average citizen
performs economically and is calculated by applying the annual inflation rate to the
seasonally adjusted unemployment rate. GDP Growth Rate is the average yearly growth rate

11
of the gross domestic product (GDP) for a certain period, at market prices, based on constant
local currency.
The Annual Misery index and modified misery index were calculated using the inflation rate,
unemployment rate, GDP growth rate, prime lending rates, and percentage change in real
GDP per capita for the last twenty-three years and two forecasted years. Trends in these two
indices and a comparison with the GDP growth rate were drawn to assess the spectre of
Stagflation.

Discussion and Analysis

Analysis 1: General Additive Model

For this section of analysis, we have used a General Additive Model. The main feature of a
GAM is that you can add non-linear features, unlike linear regression. In a GAM, instead of
using linear coefficients, the model is allowed to learn non-linear functions, called splines.
We have used 12 splines for our model.

In our model, our y variable Unemployment was regressed over the x variable inflation, to
find the relation between them. 

As we can see in the chart below, there is only a slight upward slope to the curve. Moreover,
if we take a closer look at the data given in the GAM output from PyGAM, we can see that
the R squared and P value indicate that the data is scattered, and is unable to predict a proper
trend. This tells us that India is not experiencing a stagflationary environment during the
period of study (2018-2020). For stagflation to occur, employment and inflation have to be
high. This graph indicates a low possibility of India heading towards stagflation. There are
various reasons for this.

LinearGAM

Distribution: NormalDist Effective DoF: 5.8309

-
Link Function IdentityLink Log Likelihood 297647.6136

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 Number of
Samples 52 AIC: 595308.8889
AICc: 595311.311
GCV: 0.0001
Scale: 0.0001
Pseudo R-
Squared: 0.1771

Feature Function Lambda Rank EDoF P > x

2.84E-
s(0) [0.6] 12 5.8 01
1.11E-
intercept 1 0 16

Table: Linear GAM model results using PyGAM on Unemployment and Inflation data

13
Figure: Linear GAM graphical representation (see annexures for data source)

Figure: Scatter plot before removal of outliers

Unemployment:

India's unemployment rate decreased from a four-decade high the previous year to 5.8% in
2018–19. The results of the National Statistical Office's periodic labor force survey show that
the unemployment rate increased to 6.1% in 2017–18 from 2.2% in 2011–12, the preceding
survey. This was because many people were still recovering from the demonetization-related
job loss. The percentage of the population that is employed or actively seeking employment,
or the labour force participation rate (LFPR), increased slightly from 49.8% in 2017–18 to
50.2% in 2018–19.

However, the government reported that the jobless rate had reached a 45-year high after the
general elections were completed in May 2019. In 2020, India's jobless rate had significantly
climbed to 7.11 percent. According to the Centre for Monitoring Indian Economy, the
lockdowns and restrictions imposed by various state governments had an immediate impact
on India as well, with the unemployment rate approaching a one-year high of 14.73 percent in
the week ending May 23 (India's unemployment rate peaked at 23.52 percent in April 2020).

14
The overall unemployment rate was 7.97% in April 2021 and jumped to 11.84% in May
2021. States took their time releasing important economic activity, even though the second
wave of the Covid-19 outbreak in India is still far from ending. As a result, the
unemployment rate rapidly increased. The rise in mobility and economic activity constraints
is to blame for the increase in the jobless rate. In 2021 December, the report on India's
unemployment situation for December 2021 was made public by the Centre for Monitoring
Indian Economy (CMIE). The report states that in December, the nation's unemployment rate
was 7.91%.

These results could be explained by imposed limits given the rise in Omicron instances since
December 2021. Schools, gyms, and movie theatres were among the several services that had
to temporarily close in several states. Due to this, economic activity was significantly
impacted, which also raised the unemployment rate. According to the National Statistical
Office, from April to June 2022, the unemployment rate for people aged 15 and over in urban
areas decreased from 12.6% to 7.6%. (NSO). The most recent data showing a decline in the
unemployment rate along with a higher labor force participation rate is evidence of a long-
term economic recovery in the nation that was suffering from a pandemic-driven economic
crisis. Although it hasn't dropped as much as it did before the pandemic, it is still an
improvement.

Inflation:

The Indian economy has had six quarters of subpar growth since 2018. Most economists
believe that there is insufficient consumer demand for goods and services to explain the
slowdown. In actuality, a lack of demand was largely responsible for the low rate of price
inflation that persisted in the economy until recently. The Reserve Bank of India (RBI) was
under pressure to lower interest rates from the government and other critics to increase
demand. This significantly strained relations between the government and the RBI and
caused several high-ranking officials to resign as a result (among them the former governor
of the RBI). The RBI eventually capitulated and reduced the repo rate, which serves as its
benchmark interest rate, five times in 2019. This was done under Governor Shaktikanta Das.
Analysts anticipated that decreasing interest rates would increase demand and bolster the
economy. Due to the RBI's rate decrease in the second half of 2019, prices of items started to
climb more quickly.

15
However, the economy's growth rate kept sharply declining. The fact that core inflation,
which includes goods like vegetables whose prices are too unpredictable, is still within the
RBI's intended range, maybe the only thing keeping people from concluding that the
economy is currently in full-blown stagflation at this juncture. The RBI had been working to
support economic growth throughout the pandemic, but economists note that Covid-19 has
also increased inflation, necessitating additional attention. The pandemic-related increase in
health expenditures was one of the factors contributing to high inflation. As food prices
increased more gradually after COVID, Indian inflation decreased to a three-month low in
April 2021. Retail inflation in the nation, as determined by the Consumer Price Index (CPI),
has increased sharply, rising to 7.41% in September 2022 from 7% a month earlier. The
statistics on inflation based on the Wholesale Price Index (WPI) for the month of September
2022 are expected to be released soon. The WPI experienced a declining trend in August of
this year, falling to 12.41% from 13.93% in July. The CPI increased by a startling 3.06%
from 4.35% in September 2021. India contains stagflation possibilities. This is justified by
the RBI's repeated tightening of the key rates to lower inflationary pressure. However, the
government anticipates that its policy interventions, such as excise tax reductions,
rationalization of customs charges, increased subsidies for specific groups, changes to trade
policy, and a push for capital expenditures, will help to restrain inflation, sustain growth, and
generate enough employment.

Analysis 2

Stagflation is an economic state characterized by the economic slowdown, high unemployment,

and high inflation. Inflation and unemployment are the major persistent problems of the Indian
economy. Over the previous decade, India's inflation rate has been rising. In 2010, India's
inflation rate was 11.99%, up from 3.77% in 2004. Rising food prices, high commodity
production costs owing to increasing labour costs, and the global financial crisis of 2008 were
the causes of the substantial surge in inflation rates. The high inflation rates have affected
various sectors of the Indian economy. The unemployment rates have been steady over the last
decade except for the year 2020 due to the nationwide lockdown during the global pandemic.

The misery index is calculated by adding the annual inflation rate and the rate of
unemployment of a country. According to the misery index, both increasing unemployment

16
rates and increased inflation have economic and social ramifications for the country.
According to the forecast, India's misery index has remained persistently at elevated levels
for the decade. As seen in the graph below, the misery index in India peaked at 17.54% in
2010, as both inflation and unemployment increased following the global economic crisis of
2008-09. The calculated value of the misery index for the year 2023 from forecasts of several
credible sources is 14.20% which is concerning but still not as high as it was in 2010 when
the fear of stagflation was looming over the economy. It can yet lead to increased financial
risks and a further loss of income with high unemployment. The misery index is widely used
but is a rather simple measure that conveniently ignores a lot of factors from the
macroeconomic perspective.

Misery index
20.00%
18.00% 17.54%
16.00%
14.00% 14.20%
12.00%
10.00%
8.00%
6.00%
4.00%
2.00%
0.00%
1995 2000 2005 2010 2015 2020 2025

Sources: World Bank, RBI, Statista, trading economies

From the graph below, we can conclude that India’s historical GDP has been rather stable but a
slowdown to 4.7% in 2023 is predicted shortly. The slight fluctuations in the values have been
due to economic shocks both domestic and external. The substantial downfall was due to the
pandemic as the economy managed to resurrect itself soon after. The widening gap between
the GDP and the misery index, indicating rising inflation and unemployment coupled
with economic slowdown is a cause of concern for the Indian economy.

Misery Index and GDP growth rate

20.00%
17
15.00%

10.00%
 0.00%
99 01 03 05 07 09 11 13 15 17 19 21 23
19 20 20 20 20 20 20 20 20 20 20 20 20
-5.00%

-10.00%

Misery index GDP growth rate

Sources: World Bank, RBI, IMF, Statista, trading economies

The modified misery index is calculated by subtracting the year-over-year percent change in
real GDP per capita from the sum of unemployment, inflation, and prime lending rates. This
is because high-interest rates raise the misery index while GDP growth lowers it. This index
historically varies from the previous one due to the change in real GDP per capita factor
which has a wide range of values. As seen in the graph below, the modified misery index for
India is expected to be 14.21% in 2023 which is half of what it was back in 2010 at 29.83%.
As rising inflation leads to high borrowing rates, India is in a bad predicament. Alongside
that, an economic slowdown is expected as economic activity is restrained by increased
finance costs and lower governmental expenditure. These factors have increased the
likelihood of a 2023 recession, aggravating the unemployment scenario, as the forecasted
values indicate that the unemployment rate is expected to rise. Hence, it can be inferred that
stagflation is a cause of concern but can be tackled with the right policy measures.

Modified misery index

35.00%

30.00%

25.00% 29.83%

20.00%
14.21%
15.00%

10.00%

5.00%

0.00%
18
-5.00%
 Sources: World Bank, RBI, IMF, Statista, trading economies

Limitations

Analysis 1

 A significant pattern could not be identified in the dataset used.

 The trend in inflation and unemployment could be studied but not the extent of
stagflation in the economy.
 It provided a rather general perspective of the stagflationary environment instead of
specific periods of stagflation.
Analysis 2
 Misery index is a simple measure that fails to take into account several other
macroeconomic factors.
 Underestimation of figures, for instance, unemployment due to part-time working and
hidden unemployment hinders the accuracy of the results.
 Forecasted figures are mere estimates which may fail to correctly gauge future
outcomes.

Recommendations and Conclusion

The GDP growth rate in India is decreasing, not the GDP itself, which remains stable year
over year. Let’s assume India's annual GDP growth rate is 5%, which means that if GDP was
$10 last year, it is $15 this year. Therefore, even though our GDP growth rate has decreased
from 9 to 4 percentage points, our economy is still expanding. Only that the expansion is not
as rapid as it was in the past. Perhaps the Indian economy is not experiencing any sort of
standstill, but compared to what is thought to be its potential, the Indian economy is faring
much worse. Additionally, it is not expanding fast enough to offer its vast and young
population opportunity. The market's state has a significant impact on GDP growth rate. It is
anticipated that the Indian government will reduce market and bureaucratic restrictions in

19
response to the change in the political landscape. Hopefully, this will help to some extent
keep the rate of economic growth on track.

References

Demary, M., & Huther, M. (2022). How Large Is the Risk of Stagflation in the Eurozone?
Intereconomics.

Siddiqui, D. K. (2022). Problems of Inflation, War in Ukraine, and the Risk of Stagflation .
ResearchGate.

Thompson, H. (2017). The Spectres of Peak Conventional Oil and Stagflation. Building a Sustainable
Political Economy: SPERI Research & Policy.

Kolodko, G. W., & McMahon, W. W. (1987, May). Stagflation and Shortageflation: A

comparative Approach. Kyklos, 40(2), 176-197.
https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1467-6435.1987.tb02671.x

Sivadasan P. (2012). Inflationary trend in the Indian Economy. Global Journal of Arts and
Management, 2(1), 41-45. http://rrjp.in/admin/papers/P-%2010%20Sivadasan.pdf

Victor, V., Karakunnel, J. J., Loganathan, S., & Meyer, D. F. (2021, May 7). Unemployment
comparison between the UK and India. Economies, 9(2), 73. https://www.mdpi.com/2227-
7099/9/2/73

Banik, N. a. (2012). The curious case of Indian agriculture. Munich Personal RePEc Archive,
11.

Singh, D. R. (2018). Impact of GDP and Inflation on Unemployment Rate:"A study of Indian
Economy in 2011-2018". International Journal of Management, IT & Engineering, 12.

Xia, X. (2021). Unemployment, Inflation and Impact of GDP in India. Atlantic Press, 7.

Garbers, H., Holzheu, D. T., Lanci, L., Lechner, R., Sharan, R., & Zhu, J. (2022).
Stagflation:the risk is back,but not 1970s style. 38.

Ha, J., Kose, M. A., & Ohnsorge, F. (2022). GLOBAL STAGFLATION. KOÇ
UNIVERSITY-TÜSİAD ECONOMIC RESEARCH FORUM, 46.

Sharma, N. (202). ECONOMIC SLOWDOWN: AN EXPLANATION OFFALLING

GROWTH RATE IN INDIA. EPRA International Journal of Research and Development , 7.

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Annexure

Analysis 1

Analysis 2

Plagiarism Report

21
Contribution Table

22
Name Contribution
Sanjana Mohan GAM analysis (Analysis 1)
Python: PyGAM
Literature Review
Sanya Avarsekar Analysis 2
Research Methodology
Literature Review
Sakshi Bothra Analysis 1
Literature Review
Rushil Gulyani Introduction
Literature Review
Sharan Shankarnarayan Analysis 2
Literature Review
Sarvath Shetty Abstract
Recommendations and Conclusions
Literature Review

23