Friday, January 15, 2016

[Editorial # 41] Stagflation risk ahead : The Hindu

[Following editorial has been published in The Hindu on 15th January 2016. Read through it and try to answer the questions that follow. Please do not copy and paste answers. The objective of this exercise is to get you in the groove of answer -writing. Try to write in your own words. Don't hesitate to write in a bulleted-format, if you are uncomfortable in writing in paragraph form.]
The latest Index of Industrial Production data, showing a contraction in factory output in November, should set alarm bells ringing in North Block, especially when read along with the acceleration in retail inflation. While the reasons for the slump in industrial production, including the festival holidays, were broadly known, the magnitude of overall decline as well as the drops in specific industries are cause for concern. Both basic goods and capital goods – proxies for manufacturing and investment demand – contracted 0.7 per cent and 24.4 per cent, respectively. The government’s IIP figures also come close after the Nikkei India Manufacturing Purchasing Managers’ Index, where the survey revealed a drop in output in December when companies scaled back production on a decline in new orders. The gathering consensus among economists is that, save a few bright spots like automobiles and consumer durables, demand is precariously placed. Two key drivers, the overseas export markets and the rural economy, are both facing independent challenges. Global trade growth has been becalmed by China’s slowdown and is now being roiled by the yuan’s depreciation, while back-to-back deficient monsoons have sapped rural consumption capacity. The economy’s momentum, thus, is threatened by the prospect of a sustained slowdown that may need to be countered urgently by corrective fiscal interventions. With the Consumer Price Index (CPI)-based reading rising for a fifth straight month in December to 5.6 per cent, the accelerating retail inflation could end up posing a significant risk, of combining with the faltering growth to produce stagflation.
Some economists, including the Chief Economic Adviser Dr. Arvind Subramanian, have mooted the idea of the government temporarily straying from its fiscal consolidation path in order to enable it to step up spending on infrastructure to pump prime the economy, especially given the low levels of private investment. Any additional public expenditure, when coupled with the increased payouts for salaries and pensions as part of the implementation of the Seventh Pay Commission’s recommendations and the One Rank, One Pension scheme, will in turn fuel price pressures at the retail level and could complicate the Reserve Bank of India’s inflation targeting agenda and monetary policy calculus. While oil prices remain in free fall, offering succour, food prices continue to climb pushing food inflation to 6.4 per cent in December. And the outlook on that front is hardly reassuring, with reports that unseasonal weather conditions including an El Nino-induced milder winter could lead to the rabi crop yield ending up well below expectations in several regions. With the RBI’s bi-monthly monetary policy and the annual Central budget set to bookend February, all eyes will be on the next set of monthly IIP and inflation data to see if the price gains will plateau, as the central bank had predicted in December, or continue to trend up, and whether output growth recovers or not.
Questions:
1. Explain the following terms:
  • Retail Inflation
  • Basic goods
  • Capital goods
  • Purchasing Managers' Index
  • Slowdown
  • Public Expenditure
  • Fiscal Consolidation
  • Monetary Policy
2. What is Index of Industrial Production? How is it calculated? Which agency is responsible for calculation of  IIP? At what frequency is IIP calculated?

3. What indices are there to measure inflation in India? Which agency is responsible for calculating these indices? At what frequency are these indices calculated?

4. What is the use of Purchasing Managers' Index? How is it different from other inflation measuring indices?

5. What is Consumer Price Index? How is it related to the economic growth of India?

6. What is Seventh Pay Commission? At what frequency are Pay Commissions appointed? What is the composition of a Pay Commission? What is the objective of a Pay Commission?

7. What is understood by One Rank One Pension? How is it related to the economy of our country?

8. It is said that Indian economy is directly related to El-Nino. Do you agree? Justify

9. What is stagflation? How does it impact the economy? What are its causes?


13 comments:

  1. 2. What is Index of Industrial Production? How is it calculated? Which agency is responsible for calculation of IIP? At what frequency is IIP calculated?
    A. IIP is index used to calculate the growth in various sectors of the economy. It is calculated by using Laspeyrer's formula. The IIP was first published in 1951 by CSO which was estb in 1950.It is a monthly exercise of CSO to revise the data.

    ReplyDelete
  2. 3. What indices are there to measure inflation in India? Which agency is responsible for calculating these indices? At what frequency are these indices calculated?
    A. WPI:economic advisor: monthly&weekly
    CPI:rural,urban,combined:CSO; monthly
    GDP deflator: Ministry of Statistics and Programme Implementation (MOSPI) comes out with GDP: quarterly basis

    ReplyDelete
  3. NORTH BLOCK:
    The terms 'North Block' and 'South Block' are often used to refer to the Ministry of Finance and the Ministry of External Affairs respectively

    ReplyDelete
  4. 4. What is the use of Purchasing Managers' Index? How is it different from other inflation measuring indices?
    A. PMI is similar to consumer confidence index , which effects the investment sentiment in the manufacturing sector. This is calculated on a scale of 0-100. It doesnot give the entire picture of the economy. A value of 50 indicates the investment sentiment is in balanced view.if the no. is >50 it shows the manufacturing sector is expanding.

    ReplyDelete
  5. 5. What is Consumer Price Index? How is it related to the economic growth of India?
    A. CPI is used to measure the real change in the prices of goods at the consumer level.It captures the movement of change in the value of goods and services in both rural and urban areas. Thus it represents the holistic picture of the state of the inflation.

    ReplyDelete
  6. 6. What is Seventh Pay Commission? At what frequency are Pay Commissions appointed? What is the composition of a Pay Commission? What is the objective of a Pay Commission?
    A. the 7th pay commission will be constituted for every 10 years to revise the salaries and pensions of the government employees. Its objective is to reduce the impact of global economy, inflation on the central government employees. it is also geared to make the government employees self sufficient there by reducing the corruption in the country.
    make recommendations on the work and pay structure of all civil and military divisions of the Government of India.

    ReplyDelete
    Replies
    1. Composition ::
      a. Chairman
      b. A full time member
      c. A part time member
      d. A secretary

      Delete
  7. 7. What is understood by One Rank One Pension? How is it related to the economy of our country?
    A. It is the demand of armed forces to make the pensions same for the same ranked personnel irrespective of the retirement age . If the demands are met it costs 0.65% of GDP to the govt.

    ReplyDelete
  8. 8. What is stagflation? How does it impact the economy? What are its causes?
    A. If there is inflation in the economy and there is unemployment simultaneously then it is called stagflation. It is the result of both inflation and stagnation. Inflation is the result of persistent rise in prices while stagnation is due to the fall in demand of goods and services.

    ReplyDelete
  9. This comment has been removed by the author.

    ReplyDelete
  10. Fiscal Consolidation:
    It refers to the steps taken by any Govt. to check the rising Fiscal Deficit.
    Public Expenditure:
    expenditure made by the government on public good.

    ReplyDelete
  11. 2. What is Index of Industrial Production? How is it calculated? Which agency is responsible for calculation of IIP? At what frequency is IIP calculated?
    It is a composite indicator that measures the short term changes in the production capacity of various industries during a fixed period with respect to the base period.
    It is calculated monthly at a gap of six weeks by the Central Statistical Organization.
    It is calculated by measuring the short term changes in the volume of production of industrial products.

    3. What indices are there to measure inflation in India? Which agency is responsible for calculating these indices? At what frequency are these indices calculated?
    India measures inflation either through Wholesale Price Index or Consumer Price Index, though the government recently adopted CPI as a new measure.
    Reserve Bank of India calculates these indices.
    WPI is measured weekly while CPI is measured monthly.

    4. What is the use of Purchasing Managers' Index? How is it different from other inflation measuring indices?
    They are economic indicators that are derived from the monthly surveys of private sector companies. It consists of five sub-indexes like production level, new orders, supplier deliveries, inventories and employment level.
    Other indexes like Harmonised Index for Consumer Prices, Consumer Price Index, Retail prices Index aim to measure the changes in the cost of ‘buying’ certain products.

    ReplyDelete
  12. 5. What is Consumer Price Index? How is it related to the economic growth of India?
    Changes in prices are measured by different price indices. Consumer price Index is equal to current price divided by base price (any year’s price) multiplied by 100.

    6. What is Seventh Pay Commission? At what frequency are Pay Commissions appointed? What is the composition of a Pay Commission? What is the objective of a Pay Commission?
    Seventh Pay Commission was formed by previous UPA government and headed by Justice A.K. Mathur after formation in February 2014.
    The government constitutes the Pay Commission every 10 years to revise the scale of salaries and its recommendations are adopted by the States after some modification.
    The 7th Pay Commission is constituted of Vivek Rae, a retired IAS officer and Rathin Roy, an economist. Meena Agarwal is the Secretary of the Commission.
    The objective is to make recommendations on the work and pay structure of all civil and military divisions of the Government of India.

    7. What is understood by One Rank One Pension? How is it related to the economy of our country? It is said that Indian economy is directly related to El-Nino. Do you agree? Justify.
    It is a pension movement of retired Armed Forces personnel demanding equal pensions for people from the same rank irrespective of which year they retired in.

    OROP will cost more than Rs. 8,400 crore in a year but it will be beneficial to the Indian economy by increasing the purchasing power of the beneficiaries. A Merril-Lynch Report has even suggested a potential 1% rise in the GDP. But it increases the pressure on the Government Treasury as well.

    El Nino has been responsible for 60% of droughts in India and adversely affects the output of Indian agriculture that makes up 18% of the GDP. The dip in agriculture income means inflation in food.


    8. What is stagflation? How does it impact the economy? What are its causes?
    The term was coined by a British Parliamentarian Ian Macleod in 1965. It is a situation where inflation rate is high, the economic growth rate is slow and the unemployment rate remains constantly high.
    It is a tough predicament since measures to combat inflation will lead to increase in unemployment rates e.g by reducing the amount of money in the market, production will be hampered leading to decrease in jobs.
    There are mainly two reasons for stagflation:
    i) It can occur in cases of supply shock where sudden decline in supply (oil imported from elsewhere) reduces demand in the market due to high prices, affecting production and hence employment. It reduces the money in the economy.
    ii) Excessive flow of the money in the economy to such an extreme level that it must be reversed suddenly can also be a cause.

    ReplyDelete