Economy facing stagflation: C Rangarajan

MUMBAI: C Rangarajan, chairman of the Prime Minister’s Economic Advisory Council, and a former governor of Reserve Bank of India, has become the first highranking policy maker to declare that Indian economy faces stagflation, a state of high inflation, and poor growth rate.

“It is pertinent to note that stagflationary tendencies have already reared their head in emerging markets, like India, where financial intermediation was never a problem,” Rangarajan says in a paper titled `Growth or Austerity: The Policy Dilemma’ co-authored with Alok Sheel. The assessment brings to fore the monetary policy challenges for RBI, which is facing demands for lower interest rates despite strong inflationary expectations.

“One would have thought that policymakers had learnt the right lessons from the oil price shock of the seventies, which administered a lasting negative shock to final disposable income in oil importing countries,’’ says the paper published in ICRA’s Money & Finance February issue.

“Several western economies tried to stimulate their way out of the problem. The result was stagflation, until the US Federal Reserve under Paul Volcker forced painful adjustment on America by raising — rather than lowering—interest rates.’’

Paul Volcker, the chairman of the US Federal Reserve, became famous for steep interest rate hikes in early 80s to fight stagflation after the Arab oil shock. India’s economic growth rate plunged to a decade low of 4.5% in the December quarter and Central Statistics Office forecasts 5% growth for the fiscal.

The scene on the inflation front is confusing with the Wholesale Price Index (WPI) easing from its peaks as inflation dampened price rise in manufactured goods. Consumer prices, however, are continuing to climb.

The Wholesale Price Index was at 6.62% for January, but inflation as measured by consumer prices rose 10.91% in February. The Index of Industrial Production in January climbed 2.4%, but the capital goods production, sign of investments, contracted.

“Stagflation is too harsh a term,” said Madan Sabnavis, chief economist, Care Ratings. `"During a stagflation situation, governments pump in a lot of money into the system to revive the economy, but it ends up with high inflation and no growth. But the current situation for India is different. Inflation is high but not galloping. The current inflation is largely due to supply side factors and pricing policies of the government.’’