Experts advise caution on stagflation fears

Say Centre, RBI should ensure their policies don’t stoke inflation

The economy seems to have hit stagflation with gross domestic product (GDP) contracting 23.9 per cent in the first quarter of the fiscal year, leading to job losses and the consumer price index (CPI) crossing the Reserve Bank of India’s (RBI’S) comfort zone of 6 per cent for the fourth month on the trot.

Economists have hence cautioned the government and the central bank, asking them to be careful about their policies not stoking inflation.

Sudipto Mundle, distinguished fellow at the National Council of Applied Economic Research (NCAER), said: “The economy has entered severe stagflation. It is a challenging task to come out of it. The fiscal and monetary policies have to be calibrated to revive growth while at the same time reining in inflation.”

Stagflation is a situation of slow economic growth and relatively high unemployment or economic stagnation, which is at the same time accompanied by rising inflation rates.

A recent study by the Asian Development Bank and International Labour Organisation has estimated job losses in India at 4.1-6.1 million in 2020, depending on the extent of pandemic-induced lockdowns.

When told that expected bumper kharif production is likely to cool food inflation, which forms a major part of the CPI, Mundle said this could help cut inflation to a point, but not pull it down to a great extent.

Retail food inflation stood as high as 10.48 per cent in April and came down a bit to 9.2 per cent the next month and 8.72 per cent in June. However, it again rose to 9.62 per cent in July.

The RBI did not recognise the April and May inflation numbers because they are imputed.

Imputation means prices of some groups are taken to collate with those of similar groups for which information is not available. This was the case due to lockdown in these months

Mundle said pressure on inflation was coming from supply shortages in nonfood items. Logistics bottlenecks are also coming in the way of the supply of food

In the current juncture, the mandate for the RBI to not let inflation cross 6% should be reviewed. It should be a new limit, though there is a tolerance level for inflation. The new limit should also not go beyond 7%

The economy has entered severe stagflation. It is a challenging task to come out of it. The fiscal and monetary policies have to be calibrated to revive growth while at the same time reining in inflation

items, but the rest of it is productionrelated, which is not there in agriculture.

“Go for a fiscal stimulus, which has to be accommodated partly by monetisation, but not let it drive inflation to double digits,” he said.

He said if the government did not pump-prime the economy, the inflation rate would not reach double digits.

“But if it does, inflation will enter double digits. It is a tough job because inflation and growth are conflicting objectives. It is not an easy task, that’s why fiscal and monetary policies have to be calibrated,” Mundle cautioned.

Former RBI governor C Rangarajan did not use the word “stagflation” but said if liquidity was injected into the system, there would be high inflation.

He said in the current juncture the mandate for the RBI to not let inflation cross 6 per cent should be reviewed. It should be a new limit, though there is a tolerance level for inflation, he said. The new limit should also not go beyond the tolerance level, say, 7 per cent, he said.

The target of keeping CPI inflation in the range of 2-6 per cent is valid till March 31, 2021, according to the RBI Act, amended through the Finance Act, 2016. That Act also brought in the Monetary Policy Committee (MPC) to achieve it through monetary policy.

Rangarajan, who headed the Economic Advisory Council when Manmohan Singh was prime minister, however, added that the current liquidity-boosting measures might not add to inflation because these were not being transmitted through the economy adequately.

Former chief statistician Pronab Sen did not agree with the view that the economy was entirely in stagflation.

“What kind of stagflation are we talking about,” he wondered. He said that while the CPI was on a high trajectory, the wholesale price index (WPI) had been witnessing deflation.

There could always be a gap between the CPI and WPI rates, but the opposite direction of the two was not a usual thing, he said.

So, there could be stagflation from the point of view of consumers, but not from the point of view of producers, he said.

ICRA Principal Economist Aditi Nayar said there was a risk that in the current situation of rising infection might force further localised lockdowns and could worsen supply disruptions, preventing a fall in the inflation rates and recovery in output.

C RANGARAJAN, former RBI governor SUDIPTO MUNDLE, distinguished fellow at NCAER PRONAB SEN, former chief statistician

There could be stagflation from the point of view of consumers, but not from the point of view of producers. As such, there should be proper analysis as to why these two inflation rates are moving in opposite directions