Friday, March 9, 2012

What is stagflation?

India is suffering from low growth rate at the same time that inflation is rocking its economic boat. And the irony is that it can't take enough strong measures to slow down inflation as it will end up hurting economic growth further. In economic parlance, such a situation is called as stagflation. The Wall Street Journal believes that India is certainly going through one of its own stagflationary phase. To be fair though, India's Reserve Bank of India (RBI) did try hard enough to take the air out of inflation. It raised rates for as many as 13 times between 2010 and 2011 but to no avail. The spending spree of the Government meant that most of RBI's efforts counted for nothing. Thus, while growth did improve, there was a significant drop in the quality of the same, reflected in higher inflation numbers. 

So, where do we go from here? We believe that the onus rests firmly with the Government of India. It will have to slow down its fiscal excesses if it were to get Indian economy out of this vicious stagflationary circle. As mentioned earlier, the state election results would have dealt a big blow to this plan.



Now that the state assembly polls are over, the economy is back to business as usual. Yesterday the Indian Railways withdrew the 4% exemption on fertiliser and food grain loading rates. At the same time, it has also hiked freight rates of other commodities by about 10-15%. It goes without saying that this will put an upward price pressure on goods ranging from coal to fertilisers. This move was undertaken in a bid to save the state-run transporter from a financial turmoil. The Railways is expected to report freight earnings of about Rs 700 bn in the fiscal year 2011-12. The freight hike could raise its earnings by up to Rs 180 bn. 

The Railways claim that the freight hike will not pinch the common man. This is because the additional freight burden would be absorbed by agencies like the Food Corporation of India (FCI) which are primary customers of the Railways. The Railways may deny it. But we believe that the freight hike will certainly put some inflationary pressure in some form or the other.

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