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The Measures To Control Indian Stagflation Economics Essay

1942 words (8 pages) Essay in Economics

5/12/16 Economics Reference this

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India is home to 1.21 billion people, which is about 17.4 per cent of the global population. However, it accounts for only 2.4 per cent of world GDP in US dollar terms and 5.5 per cent in purchasing power parity terms.

The global welfare too is linked to progress in India as reflected in the keen global interest in India. But, India seems to inspire and disappoint at the same time. This is reflected in various comments on the Indian economy.

India’s economic experiment of planned development was held out as an example to many aspiring low-income countries in the 1950s. While some countries raced ahead in the development process, India lagged behind. This is evident from the fact that it took 40 long years from 1950-51 for India’s real per capita GDP to double by 1990-91. But, 1991-92 was a defining moment in India’s modern economic history as a severe balance of payments crisis prompted far reaching economic reforms, unlocking its growth potential. As a result, in only 15 years, India’s per capita income doubled again by 2006-07. If the current pace of growth is maintained, India’s per capita income could further double by 2017-18, in 10 years time.

I recommend highlighting the key policy reforms since 1991-92, reviewing the economic progress made so far

Policy Reforms Post-1991

Macroeconomic crisis of 1991 marked a turning point in India’s economic history for two reasons.

First, fiscal deficit driven external payment crisis with a dip in foreign exchange reserves to below US$ 1 billion in July 1991 drew a crisis resolution strategy to restore macroeconomic stability.

Second, simultaneously efforts were made towards wide ranging structural reforms encompassing areas of trade, exchange rate management, industry, public finance and the financial sector.

An abiding objective in respect of industrial policy measures since then has been to create a competitive environment to improve productivity and efficiency. New industrial policy fostered competition by abolishing monopoly restrictions, terminating the phased manufacturing programmers’, freeing foreign direct investment and import of foreign technology and de-reservation of sectors hitherto reserved for the public sector.

At present, only five industries are under licensing, mainly on account of environmental, health, safety and strategic considerations. Only two industries are reserved for the public sector, atomic energy and railway transport. Reservation of industrial products for the small scale sector is still a lingering issue. Foreign Direct Investment (FDI) up to 100 per cent is allowed under the automatic route in most sectors, with a few exceptions.

The infrastructure sector has been thrown open to the private sector. Considering the large requirements of funds for infrastructure, 100 per cent FDI has been allowed in all infrastructure sectors. There are extended tax holidays to enterprises engaged in the business of development, operation, and maintenance of infrastructure facilities.

The monetary policy framework and the associated operating procedures of monetary policy in India have evolved over time with the changes in the underlying macroeconomic structure and development of financial markets.

With the opening up of the economy and deregulation of the financial sector, the stability of money demand function became suspect. The Reserve Bank, therefore, switched from a monetary targeting framework, adapted in the mid-1980s, to a multiple indicator approach. Under this approach, various indicators such as rates of return in different markets, movements in currency, credit, fiscal position, trade, capital flows, inflation rate, exchange rate, refinancing and transactions in foreign exchange – available on a high frequency basis – are juxtaposed with output data for drawing policy perspectives.

In the financial sector, the objective was to provide operational flexibility and functional autonomy to banks and other financial institutions so that they could allocate resources more efficiently. Some of the important initiatives in the financial sector were:

Reduction in statutory preemptions so as to release greater funds

Interest rate deregulation to enable price discovery

Allowing new private sector banks to create a more competitive environment



The trade policy reforms comprised withdrawal of the quantitative restrictions on exports and imports, phasing out of the system of import licensing and lowering the level and dispersion of nominal tariffs so as to bring them on par with the East Asian economies. The peak customs tariff rate was progressively brought down from 150 per cent in 1991-92 to 10 per cent by 2008-09. The liberalization of restrictions on various external transactions led to current account convertibility under Article VIII of the Articles of Agreement of the IMF in 1994.

India embarked on a gradual and well sequenced opening up of the capital account. The active capital account management framework was based on a preference for non-debt creating capital inflows like foreign direct investment and foreign portfolio investment.

Economic Progress Post-1991

The initiation of economic reforms in the 1990s saw India gradually breaking free of the low growth trap which was euphemistically called the “Hindu growth rate” of 3.5 per cent per annum. Real GDP growth averaged 5.7 per cent per annum in the 1990s, which accelerated further to 7.3 per cent per annum in 2000s. A feature of the growth acceleration during the period was that while the growth rate of industry and services increased that of agriculture fell. By the 1990s, the momentum of “green revolution” had died down. Consequently, the yield increases in the 2000s were much lower than those experienced even in the 1990s.

The growth dynamics altered the structure of the Indian economy with a decline in the share of agriculture from 28.4 per cent in the 1990s to about 15 per cent in 2009-11. There was corresponding gain in the share of services, including construction, from 52 per cent to 65 per cent during the same period. What is, however, of concern is that the share of industry has remained unchanged at around 20 per cent of GDP.

Not surprisingly, the growth acceleration was accompanied by a sharp pick-up in the rate of growth of gross fixed capital formation which had more than doubled from an annual average of 7.2 per cent in the 1990s to 15.7 per cent in the high growth phase of 2004-08. It, however, has dropped significantly in the post-crisis period to 5.8 per cent

The structure of Indian economy also underwent a change during this period in terms of openness. Exports and imports of goods and services have more than doubled from 23 per cent of GDP in the 1990s to 50 per cent in the recent period of 2009-11. If the trade flows are considered alongside capital flows, the rise in was more dramatic from 42 per cent of GDP in the 1990s to 107 per cent in the recent period.

The high growth was achieved in an environment of price stability as headline wholesale price index inflation dropped to an annual average of 5.5 per cent in the 2000s from 8.1 per cent in the 1990s. Subsequently, however, in the post-crisis period the inflation trend has reversed with the headline WPI inflation averaging over 7 per cent and the consumer price inflation crossing double digits during 2009-11. The uptick in food price inflation was particularly sharp during 2009-11.

Table 8: Inflation



2001- 2010








(Annual Average Percentage change)

1. Wholesale Price Index





1.1 Food Articles





1.2 Fuel Group





1.3 Non-Food Manufactured Products





2. CPI- Industrial Workers





2.1 CPI- Industrial Workers Food





No power on earth can stop an idea whose time has come. Ever since, there has been no looking back as India launched wide ranging structural reforms and has made significant economic progress over the past two decades. India’s industrial environment has become more competitive and open, infrastructural gaps have been sought to be bridged through public-private initiatives with both domestic and foreign sources of funding, current account has become fully convertible while capital account is virtually free for non-resident. As statutory preemptions were reduced and interest rates were deregulated, banks gained operational autonomy for commercial lending. If India could maintain the current pace of growth it will lift millions out of poverty and enrich the global economy. While India has come a long way, maintaining the current pace would itself be challenging and require continued reform efforts.

India will continue to face “stagflation-type” situation for a few more months, the government’s loose fiscal policy and persistent strong rise in real rural wage growth without a commensurate increase in productivity growth is at the heart of the current stagflation-type environment.

Stagflation is a situation when economic growth of a country stagnates while inflation is rising.

In its quarterly monetary policy review, RBI lowered the economic growth projection for the current fiscal to 6.5 percent from its earlier estimate of 7.3 percent, stating rising government expenditure poses risks to economic stability.

Its inflation forecast for the fiscal ending March, 2013 has also been raised to 7 percent from earlier projection of 6.5 percent. According to reports, monetary policy has a limited role in this stagflation-type environment. Moreover, the inflation outlook remains challenging. Indeed, given the poor progress of the monsoon, in reality food and overall inflation will likely accelerate in the coming months.

Measures to control Indian stagflation:

India may have progressed on paper and on screen but do we see the progress on the streets of India?

There are millions of people still surviving in India on an income of less than one dollar a day. India can never be considered a developed country unless and until the poverty, hunger and pain of the poor on the streets and those living in the slums is curbed.

Lately the government of India has come up with several developmental plans and no doubt it has helped boost the economy of the Country in some ways. But the long term impact of these plans do not seem to serve the purpose, or what should be the purpose of any government, that is, prosperity of the common man. Investment is pouring in from within the Country and abroad, but the poor man is getting poorer.

In order to be considered a developed Country, India needs to focus on the common man.

It is not only the Government’s role to make India a developed nation. People of the country should also take responsibility.

Education and job Creation will be the key factors involved.

Citizens with enough disposable income must do charity as a part of life – not only to save tax, but with a genuine concern

India should give more importance to rural household, proper health facilities in rural as well as in the urban sector.

More importance to poor farmers such that providing then loans at cheap rates.

Improve governance

Raise educational achievement

Increase quality and quantity of universities

Control inflation

Introduce a credible fiscal policy

Liberalize financial markets

Increase trade with neighbors’

Increase agricultural productivity

Improve infrastructure

Improve environmental quality

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