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Views | Is India moving towards stagflation?

Views | Is India moving towards stagflation?

Translated into plain English, the new economic review released by the Reserve Bank of India on Monday roughly translates as: the economy is caught between the devil and the deep blue sea.

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The professional forecasters who are polled by the RBI have revised their growth forecasts for FY12 downwards while raising their forecast for inflation. The question needs to be asked: is India headed for a mild version of stagflation, with lower growth and higher inflation?

The RBI says that growth is now below trend, capacity utilization pressures are easing and the output gap has widened. These developments should ideally take pressure off the price level. However, it seems that actual inflation may take time to ease off thanks to heightened inflationary expectations. India could settle down by the middle of this decade with a lower growth rate and a higher inflation rate.

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It is time the policy establishment takes the threat of incipient stagflation seriously. The government continues to run a revenue deficit even as investment activity falters. A profligate government will need to borrow more from the money market to meet its growing obligations, thus pushing up interest rates to make investments in new projects even less attractive. The Indian central bank has flagged off a big concern: will long-term growth be damaged if the investment drought continues?

The Manmohan Singh government has put the long-term India story at risk. Is it too late to expect any corrective action?

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