TheRodinhoods

Is India Stagflating?

Sort of.

Stagflation is when Inflation rises even though the pace of economic growth slows down. So in a strict sense yes, we are.

However, the late learned Mr.Keynes conveniently ignored the “political angle” of economics at times. Why are prices rising in India? In other words what is causing Inflation?

So, is it a Supply Side or a Demand Side phenomenon?

The poor monsoons is the only indicator of reduced Supply. The jury, though, is still out on that and we dont know for sure.

Till the monsoons (ahem,the lack thereof), there were no other Supply side pressures.

So now we come to Demand.

And there, kind sirs, we have our answer since the crazy government borrowing that is supposedly trickling down via MNREGA into consumption spending is perhaps the single largest cause of inflation.

It may be the single largest cause, but it has a double impact.

ONE

Government borrowing crowds out private borrowing since nobody`s credit rating is better than the Sovereign as well as the fact that the money supply is finite and if one borrower (in this case the Government) corners most of the supply, then the others will have less.

As such, interest rates go up, which lead to larger interest payments for producers which in turn are passed on to consumers.

TWO

As MNREGA pays out copious amounts of money that work their way into the economy in terms of higher spending, prices go up. Especially for food since the first priority for most of India`s poor is better nutrition.

QED

There. Now you have a view of the causes behind the current inflation in India. Even though it is much too simplistic.

Back to Stagflation

Returning to beginning is an excellent way to end sometimes. So to answer the question at the top of the post, yes, we are perhaps Stagflating however not in the term is generally used.

To elaborate, the original Stagflation was the 1971 American one where Commodity Supply Shocks and the Oil Shock (Also supply, obviously) led to high inflation in a period of low growth.

In our case, there is no Supply Shock. Atleast as of now. (We dont know what will be the impact of the US drought as yet.) And no Oil Shock for sure. Infact, oil prices are Shockingly Low.

What we have, ladies and gentlemen, is an invention of our perverted political masters. Please welcome a global first – Demand Shock.

*thunderous applause in background*

By the way…

I was`nt the only one to have considered Stagflation to just be an unimaginatively named inflated male deer.

An inflated male deer ? www.awfullyclever.me