The ‘red shoots’ of stagflation are visible

Outside the Eco-chamber

“The language of money,” writes the British novelist John Lanchester in How to Speak Money, “is powerful and efficient, but it is also both exclusive and excluding”. The people who work in the world of money -- fund managers, analysts, economists, stock brokers, influential investors, all included -- like to talk in a language laced with jargon because they are trying to project their expertise. And experts don’t talk in a simple language.

The common people do not understand this jargon-laced language well enough to be able to discern what is being said. One such jargon thrown around is ‘green shoots’, a term used to signify signs of economic growth or renewal after the economy has gone through a troubled time.

Given that most moneymen and women are in the business of projecting 24x7 positivity, they have never really gotten around to coining a term that is the opposite of ‘green shoots’ – one that would signify signs of the economy getting into trouble.

Let’s fill that gap here. Let’s call the opposite of green shoots, ‘red shoots’. And now that we have coined a term, it’s time to use it.

The ‘red shoots’ of stagflation are becoming visible in the Indian economy. The term stagflation is a combination of stagnation plus inflation and was first used by the British politician Ian Macleod in 1965 when he said in a speech: “We now have the worst of both worlds—not just inflation on the one side or stagnation on the other, but both of them together. We have a sort of ‘stagflation’ situation.”

So, what are the red shoots of stagflation that are becoming visible? In a recent report, NielsenIQ pointed out that the sales volume of consumer goods fell by 4.1% for the period January to March 2022 in a comparison to a year earlier. A few examples of consumer goods are soaps, toothpastes, detergents, shampoos, snacks, etc., basically daily-use products that people buy.

A fall in volumes means that people aren’t buying as many units of these products as they did in the past. The sales volume in rural markets fell by 5.3%. In the urban markets, the sales contraction was 3.2%.

This fall in sales volumes is primarily on account of higher inflation. As a recent research report by Kotak Institutional Equities points out: “Soaps continued to witness price hikes and [annual] inflation is now in the range of 25-50%.” Other products like toothpastes and detergents have also seen price increases.

The interesting thing is that many companies carry out indirect price increases by cutting down on the grammage of the product. As Hindustan Unilever, one of the biggest consumer goods companies in the country, recently pointed out: “Almost 30% of our business comes from packs that operate at magic price points like Re 1, Rs 5 or Rs 10. In these packs our preferred mode of taking price increase is by reducing grammage. As a result, even the same number of units sold leads to volume decline.”

Nonetheless, while the sales volume has contracted, the value of sales of consumer goods companies went up by 6%. To put it in simple English, the companies made more money despite selling a lower number of units of their products. This was primarily on account of the price hikes they carried out.

Consumer goods are bought by people across different sections of the population and a contraction in their sales volume tells us that inflation is badly hurting people and leading to stagnation in sales.

A similar stagnation can be seen across more expensive products as well. Two-wheeler sales between January to March 2022 were down 23% to 3.35 million units, in comparison to the same period in 2021. Having said that, April sales did see a jump.

When it comes to cars, R C Bhargava, the Chairman of Maruti Suzuki India, recently said: “The small-car market, which is the ‘bread and butter’ for Maruti Suzuki India, is shrinking and the ‘butter’ from the segment has gone away.” He said that prospective small-car customers were being squeezed out due to higher costs.

The recently released GDP data also indicates a stagnating economy. Economic growth, adjusted for inflation, was down to 4.1% between January to March 2022, against a higher growth in the earlier quarters. The GDP data also reveals that job-creating sectors like manufacturing and construction aren’t in the best shape. The manufacturing sector contracted by 0.2% between January and March 2022 in comparison to a year earlier. The construction sector grew by a minimal 2%.

International factors also do not inspire much confidence. The United States is on the cusp of a recession (basically, two consecutive quarters of the economy contracting). In 2021-22, the US was India’s biggest exports destination, with overall goods exports standing at $76.2 billion.

China’s continued zero-Covid policy has ensured that many global supply chains continue to remain broken, feeding into inflation. At the same time, lockdowns in China will slow down Chinese growth, in turn slowing down global growth as well.

There are enough red shoots pointing towards stagflation. But this is something that the government isn’t ready to buy yet. Chief Economic Adviser V Anantha Nageswaran recently said that the risk of stagflation for India is lower than that for other countries. As Martin Amis writes in his novel The Information: “Denial was so great. Denial was the best thing. Denial was better even than smoking.” Question is, will denial work in this case? Let’s wait and watch.

Vivek Kaul lives to read crime fiction, and unlike his honest ancestors, makes a living writing on economics @kaul_vivek