India slipping into Stagflation or is it just an Overstated Worry

Stagflation is a phenomena wherein an economy experiences slowdown in some sectors leading to slow or no growth in GDP with overall inflation. The term was coined by economists to describe the world economic situation during the period of oil crisis of 1970s. India remained a victim of stagflation for many years in the pre reforms period before finally opting for economic renaissance.

The recent economic and political happenings have thrown an open invitation for a crisis. Corruption is reigning high but, it was always there; the problem is its sudden exposure with the govt. almost thunder struck. Inaction on part of govt. has shaken investor's confidence. Then there is the fear of another global economic slowdown triggered if US defaults on its debt. Economic reform process almost at a stand still with many revolutionary bills like Land Acquisition Act being lapsed also pose a threat to economic sentiments. It is easier to revive industrial slow down but difficult to revive economic pessimism.

Indian economy grew at rate of 7.8% in quarter ending March 2011, slowest in past 5 quarters; India's industrial output grew at a rate of 6.3% in April 2011 on an Y-O-Y basis and eight core industries expanded at a rate of 5.3% in May 2011; FII amounting to $1.44 billion flew from the economy in the month of May only. On the other hand, headline inflation rose to 9.06% in May from 8.66% in April. This is despite the fact that food inflation is easing out which once was major contributor to inflation. 

A quick glance at the above stated figures definitely point out towards anomaly in the economy and stagflation in making. India yet not have entered into the stagflation mode but, if inaction on part of the govt. continues then considering the dooming global economic environment stagflation would not be an overstated worry. This is the time for supply side reforms which will not only ease inflationary pressure from the economy but, also boost growth. So, the ball is in govt.'s court we can only wait and watch.