Stagflation in India: Reasons Why This is Possible

Earlier in January 2022, the world bank projected that India’s growth will be at 8.7% for this financial year. But, on Tuesday 7th, June 2022, the world bank revised this projection to 7.5%. This negative change was due to various global factors like lockdowns in China, the Russia-Ukraine war, supply chain disruptions, higher unemployment in India, a slowdown in the global economy, etc. These severe conditions resulted in higher inflation across various countries and higher unemployment. All these factors are hinting that India is entering into a cynical economic circumstance known as stagflation.

Stagflation Meaning and concept:

Stagflation is a pessimistic condition that an economy faces when there is high inflation, unemployment increases, and the overall demand remains stagnant. In Lehman’s terms, when inflation is high, and the economic growth of a country is slow or stagnant, by the Effect of inflation it is known as stagflation. 

It adversely affects the prices of even necessities. Also, investors trade on a low-profit margin. People either suffer from unemployment, or those with jobs face difficulties with the affordability of goods and services. Since stagflation continues for long period, some companies might close down because of the inability to pay debts and working capital.

As for India, RBI says that the Indian economy has not entered the state of stagflation, and there are no such risks for the same too. But, there are subtle signs and reasons for which India might enter a state of stagflation anytime soon. Let us discuss some major reasons:

The reasons that India Might Enter Stagflation:

  1. Supply Chain Disruption: Due to increased risks of covid-19, huge lockdowns are imposed on crucial parts of China. It is disturbing the global supply chain leading to a drastic rise in the price of raw materials and semi-finished goods. Ultimately it is resulting in inflationary conditions in dependent countries like India.

  2. India’s Cost-Push Inflation: The current inflationary scenario in India is known as Cost-Push Inflation. Here, the prices of commodities rise because of the increase in the cost of raw materials and essentials in the production process. In this kind of situation, the prices increase, but the demand remains stagnant and has a risk of lowering demand.

  3. Russia- Ukraine War: This conflict is resulting in adverse conditions throughout the world. Because of the war, the oil prices have increased and have boosted the inflation in many countries. The Russia-Ukraine war is one of the main reasons for the increased risk of recession and slow economic growth of many big and small economies including India. 

These were the top 3 reasons why India is entering into a state of stagflation. Although the Reserve Bank of India (RBI) has assured that there is no risk of stagflation in the Indian economy and they are taking necessary measures to reduce inflation and boost economic growth and employment in the Indian economy.

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