New Delhi, November 23: The economy is reeling under stress with nominal GDP growth at a 15-year low; unemployment at a 45-year high; household consumption at a four-decade low; bad loans in banks at an all-time high; growth in electricity generation at a 15-year low.
Reacently, former prime minister Manmohan Singh launched a scathing attack on the government and wrote a column in a daily, stating the “perilous state of fear (among industrialists, bankers and policy makers), distrust and lack of confidence among citizens are the fundamental reasons for our sharp economic slowdown”
Former PM Singh, who is an economist, did not stop here but cautioned the government that while we are yet not in the stage of stagflation we should tread the path carefully.
What is Stagflation?
Stagflation is described as a situation in the economy where the growth rate slows down, the level of unemployment remains steadily high and yet the inflation or price level remains high at the same time.
This term was coined by Paul Samuelson. He was the first American to win the Nobel Prize in economics, for explaining the simultaneously and concomitant rise of inflation and unemployment rates in the US during 1970s and 80s. During 1973, the US inflation rate more than doubled, reaching 8.7 per cent in December. It climbed to 14 per cent by 1980.
Through this period of soaring inflation, unemployment remained stubbornly high, just as Chicago economist Milton Friedman, who received the Nobel in economics in 1976, had warned about the same in the past.
The term ‘stagflation’ was also used in the British Parliament by Lain Macleod in 1965. Basically, once stagflation occurs, it is difficult to deal with.
Under normal recessionary conditions, inflationary policies are acceptable, but here due to the already high inflation, pushing inflation still higher could mean prices spiralling out of control, thus further hitting productivity and growth.