No question of recession or stagflation in India, says FM Sitharaman

No question of recession or stagflation in India, says FM Sitharaman

Subject: Economy

Section: National income

Context: According to Finance Minister ,India is nowhere near a recession or stagflation and the government is making all efforts to bring down retail inflation below 7 per cent.While many major economies have triple-digit debt-to-GDP ratios, the central government’s debt-to-GDP ratio declined to 56.29 per cent of GDP in FY22 from the revised estimate of 59.9 per cent for the same year. According to the IMF, India’s general government (centre+states) debt stood at 86.9 per cent of GDP in FY22.Comparing the economic situation during the 2013 taper tantrum when India was considered one of the fragile five economies, FM said the NDA government has kept inflation under control

Key concepts:

CPI:

• Inflation is measured using CPI. A comprehensive measure used for estimation of price changes in a basket of goods and services representative of consumption expenditure in an economy is called consumer price index.
• The National Statistical Office (NSO), Ministry of Statistics and Programme Implementation is releasing CPI (Rural, Urban, Combined) on Base 2012=100
• An inflation measure which excludes transitory or temporary price volatility as in the case of some commodities such as food items, energy products is called core inflation

WPI:

• Wholesale Price Index, or WPI, measures the changes in the prices of goods sold and traded in bulk by wholesale businesses to other businesses
• The numbers are released by the Economic Advisor in the Ministry of Commerce and Industry.

WPI Vs CPI

• While WPI keeps track of the wholesale price of goods, the CPI measures the average price that households pay for a basket of different goods and services.
• Even as the WPI is used as a key measure of inflation in some economies, the RBI no longer uses it for policy purposes, including setting repo rates. The central bank currently uses CPI or retail inflation as a key measure of inflation to set the monetary and credit policy.

Stagflation

• It is a seemingly contradictory condition described by slow economic growth and relatively high unemployment, or economic stagnation, which is at the same time accompanied by rising prices (i.e. inflation).
• Stagflation can also be alternatively defined as a period of inflation combined with a decline in gross domestic product (GDP).

Recession

• Recession is a slowdown or a massive contraction in economic activities. A significant fall in spending generally leads to a recession.
• Such a slowdown in economic activities may last for some quarters thereby completely hampering the growth of an economy.
• In such a situation, economic indicators such as GDP, corporate profits, employments, etc., fall.
• This creates a mess in the entire economy. To tackle the menace, economies generally react by loosening their monetary policies by infusing more money into the system, i.e., by increasing the money supply.
• The debt-to-GDP ratio indicates how likely the country can pay off its debt. Investors often look at the debt-to-GDP metric to assess the government’s ability of finance its debt. Higher debt-to-GDP ratios have fuelled economic crises worldwide.

Fragile Five:

In August 2013, a financial analyst at Morgan Stanley coined the term “Fragile Five” to represent emerging market economies that have become too dependent on unreliable foreign investment to finance their growth ambitions. The five members of the Fragile Five include Turkey, Brazil, India, South Africa and Indonesia.