NEW DELHI: India is headed for a period of stagflation with retail inflation as measured by Consumer Price Index (CPI) rising to 7.35% in December 2019, according to data released by the government, the highest rate of price rise since July 2014.
Stagflation is a phase where inflation rises while the economy slows down and is usually accompanied by high levels of unemployment and a fall in demand.
India’s GDP growth slowed down to 4.5% in the July-Sept 2019 quarter, a six-year low. The growth figures for the last quarter are not expected to be far better as factory production contracted by 3.8% in October and grew by a tepid 1.8% in November.
Former prime minister Manmohan Singh had warned of possible stagflationary pressures about two months ago.
India’s retail inflation grew on the back of rising food prices, way above the comfort zone of the Reserve Bank of India with experts warning that the trend may continue for the next few months.
It is for the third consecutive month that the CPI breached the RBI’s medium-term target of 4%. Retail inflation was 5.54% in November.
The spike in retail inflation is attributed to high food inflation, which rose to 14.12% in December against (-) 2.65% in the same month in 2018. It was 10.01% in November 2019.
Vegetables prices rose to 60.5% in December from 36% in the previous month.
While the central bank has already revised its inflation projection upwards from 3.5-3.7% in the second half of 2019-20 to 4.7-5.1%, experts feel inflation is likely to stay higher than the RBI’s expectation.
’70s re-run?
Stagflation happened in the 1970s when oil price spike saw most economies struggling to grow jobs and production as high inflation cut demand