Despite the sharp pick-up in inflation, the risk of stagflation remains low at the current juncture, the Reserve Bank of India said.
In its State of the Economy report, the central bank said that historical analysis shows that high stagflation risks were encountered during certain periods such as the Asian Crisis (1997-98), the Global Financial Crisis (2007-09), the taper tantrum (2013), and the COVID-19 pandemic. “Currently, however, stagflation risk remains low for India with a probability of only 3 per cent with easing of financial conditions, stability of the INR/USD exchange rate and steady domestic fuel prices,” it said in the report.
Stagflation is defined as persistent high inflation combined with high unemployment and stagnant demand in a country’s economy.
The COVID-19 pandemic followed by the war in Ukraine rekindled concerns about stagflation – a combination of
economic stagnation with high inflation, the RBI report said, adding, weaker long-term global growth prospects and persistent inflation have intensified this risk more recently.
“Evidence from 22 economies, particularly those heavily reliant on non-commodity exports, indicates that higher commodity prices and US dollar appreciation are key factors contributing to the risk of weak economic growth and high inflation, particularly in emerging market economies (EMEs). India has historically faced multiple episodes of simultaneous occurrence of high inflation and low growth,” it said.
Supply-side measures
A number of measures were undertaken to arrest the price spike by improving the supply of key food items. The National Agricultural Cooperative Marketing Federation (NAFED) and National Cooperative Consumers Federation (NCCF) were directed to procure tomatoes from mandis in Andhra Pradesh, Karnataka, and Maharashtra for simultaneous distribution at discounted prices in major consumption centres where retail prices recorded maximum increases. Under the recently launched brand ‘Bharat Dal’, the sale of subsidised Chana dal (Rs 60 per kg for a one kg pack and Rs 55 per kg for a 30 kg pack) from the government’s stock is intended to meet consumer demand at affordable prices. In response to high cereal inflation, the government has undertaken seven e-auctions under the Open Market Sale Scheme – Domestic, with a total sale around 8.2 lakh tonnes of wheat and 1,995 tonnes of rice (as on August 9).
Rice curbs
The government has also ceased the diversion of subsidised rice to distilleries for ethanol production under the ethanol blending programme (EBP). Additionally, export of non-basmati white rice (semi-milled or wholly milled rice) and deoiled rice bran (mainly used as fodder) was restricted with effect from July 20 and July 28, 2023, respectively.
The stock levels for both rice and wheat stood at 2.8 and 1.0 times their respective quarterly buffer norms (as of August 1, 2023) which provides a cushion to address supply concerns.
