What we are seeing is stagnation, not stagflation

Outside the Eco-Chamber
Last Updated : 21 December 2019, 18:43 IST
Last Updated : 21 December 2019, 18:43 IST

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The human mind seeks simplicity when it comes to understanding things. It hates the complexity that nuances introduce into an argument. The mind likes things that are in binary -- yes or no, this or that, right or wrong, good or bad, and so on. Trouble is, most of the real world is complex and not simple, as the mind likes it to be.

The media and subject matter experts feed on this need for simplicity when they try and explain what’s happening in the world around us. They leave out the details and thus make nuance, which makes human understanding difficult, disappear.

Take the case of the economic slowdown that India is currently going through. A few experts have now labelled it ‘stagflation’. Stagflation is a combination of two terms, stagnation and inflation. Former British Chancellor of the Exchequer (their equivalent of the Indian finance minister) Iain Macleod is credited with having coined the term in 1970.

The stagnation is reflected in the fact that real GDP growth in the first six months of 2019-20 (i.e. between April and September) was 4.8%. The GDP is the sum of private consumption expenditure, government expenditure, investment and net exports (exports minus imports). If we leave out government expenditure from the GDP, the rest of the economy grew by an even lower 3.8%. The government expenditure typically forms around 10-12% of the economy, which means non-government GDP forms the bulk of the Indian economy.

The 3.8% growth reflects the stagnation in the economy. It is also reflected in the inability of either the industry or the government to keep creating jobs at a pace for the one million Indians who are entering the workforce every year. And even when jobs are on offer, the skillsets of the workforce are not up to the mark.

Along with this, in November, the inflation or the rate of price rise, as measured by the consumer price index, was at 5.5%, the highest in nearly three and a half years. So, economic stagnation along with high inflation has led to the conclusion that there is stagflation.

How much sense does this make? Inflation, as measured by the consumer price index, is high primarily because of high food prices. Food inflation in November was at 10%. In urban areas, it was at 12.3% and in rural areas, it was at 8.8%. Within food, higher vegetable prices have driven up inflation. They have gone up by 36% in the last one year. Food constitutes 39.06% of the consumer price index.

If we look at core inflation, it was 3.3% in November, the lowest in five years. Core inflation is calculated after leaving out food, fuel and light items that constitute the consumer price index.

Along similar lines, if we look at inflation as measured by the wholesale price index (WPI), it throws up a similar picture. Food inflation in November, as per this index, was at 11.1%. Nevertheless, if we look at manufactured items, which form 64.23% of the index, their prices fell by 0.8% during November. In fact, prices of manufactured items fell in October and September as well by 0.8% and 0.4%, respectively.

What does this, along with very low core inflation, tell us? It clearly tells us that the economic activity in the country is down in many sectors, and they are not growing at the same pace as they were in the past. The fall in prices of items that constitute manufacturing isn’t surprising at all, given that everything from car sales to two-wheeler sales to tractor sales to commercial vehicles sales have been contracting this year. The real-estate sector, which tends to use a lot of steel, isn’t going anywhere either.

Hence, low non-core inflation and falling manufacturing prices, are evidence of a slowdown or a fall in economic activity across different sectors. Given this, economic stagnation is well and truly here. But suggesting that stagflation is also here is a little bit of a stretch. Currently, inflation is high because of high food prices, particularly vegetables. Vegetable prices are high because of unseasonal rains and political factors at play.

If food prices remain high in the months to come, chances are that the higher food inflation might seep into the overall inflation as well and then we can probably say with greater confidence that stagflation is here. But currently, that is not the case.

Published 21 December 2019, 18:28 IST

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