India’s Stagflation A Case Study By Ahmad Bhuiyan


“Stagflation is a condition of slow economic growth or ‘stagnation'(no growth for long) and relatively high unemployment, accompanied by rising prices, or inflation. It can also be defined as inflation and a decline in gross domestic product (GDP)”- cited by ‘Investopedia’.

Economy of India is World’s 6th and Asia’s 3rd-largest one and is dominating the list of the fastest growing economies on the planet for upcoming decade, outperforming that of China (Business Insider, November 2019). With 1.34 billion people now, the country is set to surpass china’s 1.4 billion by 2027 to be world’s most populous one according to ‘UN 2019 World Population Prospects Report’. Therefore, it’s little wonder that the economy is growing fast. Utilizing this ‘demographic dividend’ to maximum extent and driving it into asset, it can unlock the potentials to thrive and lead the World Economy in future.
It rests as world’s agricultural powerhouse. Exporting worldwide massively, it accounts for India’s 50% jobs. It has a diversified export basket unlike Bangladesh, the RMG of which shares 85% of its export revenues. Along with traditional village farming, the diverse economy entails modern complex industries of mining & automobiles. Capitalizing largely, it has become a major exporter of software engineers and technology services. Shundor Pichai & Satto Nadela are among others. According to Oxford Economics Research Institute, ranging from 2019 to 2035, all the top 10 fastest-growing cities in terms of GDP will be in India. Notable of which is Bengaluru, well known ‘as silicon valley of India’ as it shares most of the technology startups in the country
Unfortunately, other of side of the coin tells a different story, woeful & saddening for Indian economy.Three years ago, it was enjoying economic growth of about 9%. Now the rate dropped to just half that. At the end of 2018, it was still the world’s fastest growing economy. It has since then, China took the title back. Let’s listen to that story.
A country’s economic health is predominantly determined by GDP (Gross Domestic Product) and its growth year on year. GDP is ‘’market value of all final goods and services produced by a nation within a given period, most frequently a year and GDP growth rate is ‘percentage of increase in real GDP’. When the rate is positive, economy’s output (GDP) is meant to increase and decrease when the rate is negative. ‘Any decrease in GDP or negative growth for two consecutive quarters or six months’ is termed as ‘Recession’. Indeed, output has declined (negative growth) for consecutive 5 quarters up until 2nd of 2019-20 fiscal year, as the graph above depicts decreasing trend. To be noted, India’s fiscal year lapse April to march & there are four quarters.
Output continued its downward spiral for fifth consecutive quarter. To their bad luck, within just one & half a year they experienced negative growth of 4.5% from 8% in Q1; 2018-19 (April-June). GDP Numbers in Second quarter of 2019-2020 (July-September) contracted to 4.5% by -0.5% in comparison to the last quarter. It was the slowest in six years’ record. The past slow stood at 4.3 per cent in the final quarter of 2012-13. As mentioned in the definition, stagflation requires contraction of GDP associated with price hike & higher unemployment.

The slowdown also affected Consumer Price Index (CPI) with liftingretail inflation to 5.54% in November from 4.62 % in October. CPI is largely used statistics for identifying inflation which measures average price changes in consumer’s frequently used commodities. Unemployment rate in October climbed to 8.5%, highest of last three years’ record. The situation even worsened when September’s infrastructure output shrinked by 5.2%. As fewer outputs yielded smaller profit, manufacturers cut down demand for production which resulted in sacking labors with higher joblessness. These chain of events prompted some economists to remark that the country entered into a stagflationary state.
Economy’s different sectors subdued to stagflation too. Index of industrial production (IIP) shows October industrial output declining BY 3.8% compared 4.3 per cent in September.Major industries – agriculture, mining, and manufacturing had been struck. Number of unsold housings in real estate went up.many factories shut down and unemployment epidemic got heated and companies like Unilever reportedly slashed prices due to lower demands.

Whatever the quarterly reports were, Annual growth rates over the years are satisfactory numbers but declining GDP of last 6 quarters reflected well in GDP of 2018, falling to 6.98 trillion by negative.18 trillion from past year, as seen from the graph above.
Prime Minister Narendra Modi first took to the power in 2014 promising to take Indian economy into new heights and create huge employability every year. Then for second term, he triumphed with a landslide victory early of 2019. But the yearlong economic poor performance has prompted questions on his ability to handle the economy.

What accounts for this dampening? What were the events forced these negative growth spirals?
Indeed, government’ immense intervention on central bank massive for non-performing loans(NPL) and Modi’s demonetization policy are predominantly liable. Marking the election year, Modi’s government, was frequently was leaning on RBI (Reserve Bank of India) to relax lending criteria and use excess funds to boost the economy. Such NPL bring shortage in loanable funds reflecting cut down in private consumption, investment and savings. Ultimately, Total output decline with a decrease in Aggregate demand.
Then bank’s senior officers warned the government against threatening RBI’s autonomy. Such dispute with the central bank and Modi’s government made governor ‘Urjit Patel’ to resign abruptly stimulating questions on central bank’s autonomy. Whatever happened in between them, modi entertained with his tweet, quite humorous; ‘‘Dr. Urjit Patel is a thorough professional with impeccable integrity. He leaves behind a great legacy. We will miss him immensely.’’’

In 2016, then governor ‘RaghuramRajan’ had also resigned over rift with the BJP-led government. Indeed, more collaboration between government & the central bank is prerequisite to a well-functioning economy unless what harms the economy, ‘Argentina’s central bank crisis in 2010’ is another good example.
For such slowdown, Economists are also blaming the abrupt decision in 2016 to take the highest value – 500 & 100 rupee bank notes out of circulation, known as demonetization. It was expected to close down black economy of smuggling, corruption & unveil hideaways of untaxed cash transactions.
The decision created acute cash shortages all over India for initial few months that made manufacturing and construction sectors particularly slack. While manufacturing experienced zero growth & construction industry shrinked by 3.7%.As Indian Economist Gurchuran Das said: ‘’demonetization was a big mistake. What this has done is put us back about six months. We should have been inching towards 8% annual growth, but have ended up around 7.1%. Already we were having problems creating those jobs, but demonetization has exacerbated it by a couple of quarters.”
Bhaskar pant, LSE graduate Indian economist opined ‘there was a strong political motivation behind demonetization & it was not driven by good economics’. Modi promised to return black money from foreign tax havens as an election promise in her constituency in 2014 & redistribute it among the poor. However, despite taking a series of measures being less fruitful than expected, Modi wanted to portray demonetization as demonstration of his commitment against corruption & black money.’’
Over the years, while India’s looming economy is ‘talk of the conferences’, Bangladesh’s booming one is also leading one. Since 2016, Bangladesh’s GDP grew to 12.9 percent at a Compound Annual Rate (CAR), more than doubled that of India’s 5.6 percent. ‘Standard Chartered India’ asserts, if Bangladesh manages to retain its GNI and GDP growth rates up & India follows ongoing economic trend, the latter’s PPI will amount $5734.6 exceeding $5423.4 of India by 2030.

Bilateral trade between Bangladesh and India is noteworthy, measured at $9.5 billion in fiscal year (FY) 2017-18 & in FY 2019, the figure increased to $9.85 billion. Country’s ready-made garments (RMG) sector is major driver for our economic growth which posts 85% contribution to nation’s exports. The industry’s Raw materials; cotton, yarn, fabrics etc are largely imported from India.  Hence, imports from India are strategically important for RMG to thrive & persist.
On the other hand, this ‘stagflation’ can have multiple effects on bilateral trade between two countries. Firms’ aggregate output and households’ aggregate income are diminishing there. So, Bangladesh has been& so will be (if such continues) unable to meet its market demands with declining imports. There is a mismatch in mutual trade since, India imports from outer world but very few from Bangladesh & our exports are almost similar to their imports.With this downturn pertaining, our economy is likely to face trade restrictions by India as it tries to keep imports lower and exports higher for trade balance & therebyprotecting aggregate demand from further deterioration. Furthermore, many Indian items will not be moving out of inventories owing to stagflation. So, businesses men have to incur more‘inventory costs’ associated with holdup. To clear inventories, there is higher possibilities thatIndian products will be ‘dumped’ in our local markets making their ’net exports’ higher with depreciated ‘rupee’ which will lead Bangladesh’s trade deficit up with increasing imports.
Indeed, effects of this ‘economic dampening’ range widely. It may avert Bangladesh from full-fledged benefit of regional trade, faced by ‘market dumping’ & imposing trade restrictions by India. In order to pursue persistent growth rates, Policy-makers & government officials of both countries are solicited respectively to leverage the urgency by focusing on holistic approaches & devising appropriate strategies in order to its adverse effects.

The author is independent analyst on economic & international affairs.