Numerous international media outlets have criticised India and its Prime Minister for failing to implement ‘reforms’.
Numerous international media outlets have criticised India and its Prime Minister for failing to implement ‘reforms’.

The stagnation hypothesis

Unpacking claims of a ‘crisis’ in the Indian economy.

Many economists, policy makers and commentators – both from the Right and the Left – and especially representatives of corporate capital, have characterised the current conjuncture as a crisis of the Indian economy. While different analysts offer different policy prescriptions, the first question to ask is whether the facts justify this characterisation? So let us start with the facts. Measured by growth of GDP , the Indian economy has been slowing since the fourth quarter of 2010-11, when GDP growth was 9.17 percent. That figure has declined steadily to 5.33 percent according to the latest available data from the fourth quarter of 2011-12. Inflation rates have remained stubbornly high, with the headline wholesale price index (WPI) inflation hovering around 7.6 percent and the consumer price index (CPI) inflation climbing back into the double digits to stand at 10.4 percent in April 2012. While WPI inflation measures increases in wholesale prices in the economy, CPI inflation is more relevant for common people as it tracks increases in retail prices – the prices at which we buy commodities in the market. Double digit CPI inflation is very worrying because it quickly erodes the purchasing power of consumers. The combination of economic slowdown (which some economists characterise as stagnation) and high inflation has even led some commentators to diagnose a case of 'stagflation' – a scenario first observed in the advanced capitalist countries in the late 1970s.

As the argument goes, the evils of a stagflationary trap are compounded by the twin deficit – the Indian government's budget deficit and current account deficit – and the depreciating rupee. India's current account deficit – the disparity between expenditures on imports and earnings from exports of both goods and services (after accounting for the net outflow of dividends and other income payments) – has increased spectacularly over the last few years, from around USD 9.66 billion in 2006-07 to USD 78.2 billion in 2011-12. The Indian government's budget deficit – the gap between government expenditure and revenue – spiked at about 10 percent of GDP in 2009-10, but has since gradually declined to about 8.7 percent of GDP in 2011-12. The rupee's nominal exchange rate vis-à-vis the US dollar (the rupee price of a USD) has increased by about 20 percent over the 2011-12 fiscal year, reaching an unprecedented high of INR 56 per US dollar by May 2012.

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Himal Southasian