India faces risk of stagflation; what is it, and why it is a worry for economies of the world, explained

A new worldwide dragon is a topic of discussion now, and it is called stagflation 2.0. The stagflation has created fears through the recent actions by the US FED. Now India is one of the countries which is on the edge to face the stagflation. However, questions have been raised by many about its impact on the economy and the upcoming causes due to the GDP slow down. 

Stagflation

Stagflation is defined as an economy that is suffering both an increase in inflation and a stagnation in economic output at the same time. Stagflation was initially identified in the 1970s when an oil shock caused fast inflation and significant unemployment in many industrialized economies.The flagation occurs due to high unemployment, little or no growth, and soaring inflation.

If stagflation occurs, it will be a great threat to the economy and economists fear it. The fears is unambiguously harmful to the economy, as high inflation and inflation uncertainty distort investment decisions- said DeKaser one of the economists.

This time, the crisis in Ukraine has heightened fears of stagflation not only in Europe or the US but also in India. Moreover, the double whammy of Covid-19 pandemic-induced lockdowns.

However, the name is not related to the word recession, instead, 80% of economists named stagflation as the greater long-term risk to the economy according to the Securities Industry and Financial Markets Association. The next biggest risk they identified was deflation, with 13% of respondents. 

Moreover, a recent Bank of America global fund manager survey found fears of stagflation are the highest they have been since June 2008. It is “by far and away from the most popular description of what the economic backdrop will be in the next 12 months,” according to the report.

Read Also: India’s GDP grows at 20.1% in April-June 2021; Analysis

Countries at risk

According to a Bloomberg report, stagflation is higher in the US, the UK, and the other European countries where economic recovery after the pandemic had been stronger. According to economists, stagflation has not yet hit the US, but if the current situation prevails for a longer time, the US might experience another stagflation after 1970.

Economists say the rise in production levels will lead to higher growth and a surge in demand which will in turn reduce the stagflation. India is in a slow process and as of now, it has not reached its peak. Both the central government and the Reserve Bank of India (RBI) are trying to allay fears over stagflation.