Survey spells out 3-pronged strategy to deal with stagflation

Concerned over persistent high inflation getting entrenched into the economy, the pre-budget survey recommended three-pronged strategy required to tackle this stagflation.
Stagflation is a condition of slow economic growth accompanied by persistent high inflation and unemployment.
"Unlike other emerging markets (EMs) that also witnessed a slowdown in the post-crisis years, in India the slowdown in growth and investment was accompanied by elevated levels of consumer price inflation. The possibility of stagflation raises serious challenges for macro-economic policy," the Economic Survey 2013-14 tabled in Parliament by Finance Minister Arun Jaitley said.
"Data shows that inflation is becoming entrenched in the Indian economy...Despite a business cycle downswing and underutilised capacity, inflation has persisted. A three- pronged strategy is required to tackle this stagflation," it said.

The survey said the inflationary expectations are high and sporadic increases in prices of food items spill over to non-food prices.
Spelling out strategy to deal with stagflation, it said there is need to revive investment to improve India's long-term growth prospects.

As a first step, the government should work towards achieving low inflation by putting in place a framework for monetary policy, fiscal consolidation and food market reforms, it said.
Secondly, the survey underlined the need for tax and expenditure reform, including implementation of Goods and Service Tax (GST) to ensure a more predictable tax regime and thus place public finances on a sustainable path.

It further suggested that regaining growth momentum requires restoration of domestic macro-economic balance and enhancing efficiency.
For the current fiscal, it said the growth will improve to 5.4-5.9 per cent, after remaining at sub-5 per cent level for past two years.
The survey said inflation in India began rising after 2005-06 with rapid credit growth arising from difficulties in sterilising foreign exchange intervention. Though policy interest rates were raised, liquidity continued to rise, and consequently the overall stance of monetary policy remained easy.
With the benefit of hindsight, it appears that the fiscal and monetary stimulus provided by the government in 2011-12 proved to be excessive and fostered high inflation, it said.

Post-crisis fiscal stimulus raised aggregate economic activities above their long-term trends since the first quarter of 2010 and led to higher inflation, it added.