Short-term inflation rise doesn’t lead to growth: N.R. Bhanumurthy

New Delhi: The classical economic theory of high inflation leading to the gross domestic product (GDP) growth will not be applicable to India even if the retail inflation has touched 7.35 percent since the price rise is led by highly volatile food and vegetables and is a short-term spike.

“The current inflation is temporary, led by vegetables, as the difference between core and current inflation is almost 3.7 percent. The inflation in January could have come down to 6 percent. Thus, we should not be relating the headline inflation with growth. It’s a short-term spike and would not lead to growth. It’s a temporary phenomenon”, N.R. Bhanumurthy, Senior Professor at the National Institute of Public Finance and Policy said.

The core inflation excludes the more volatile items — food & fuel from the computation of the inflation index. While the retail inflation accelerated to 7.35 percent in December on the back of rising food prices, the core inflation is still low due to subdued demand. Thus, once the vegetable prices decline, the headline inflation will return within the Reserve Bank of India (RBI) comfort zone of 4 percent.

According to SBI, if onion prices are excluded from the headline inflation, the print comes to be 4.48 percent.

The country is witnessing a six-year decline in the GDP growth and six-year high inflation. The previous high in retail inflation was witnessed at 7.39 percent in July 2014, the year Narendra Modi-led government assumed office.

At that time, the inflation in ‘pulses and products’ was recorded at 15.44 percent, and ‘meat and fish’ price rise was nearly 10 percent.

The peculiar situation of low growth and high inflation had led former Prime Minister Manmohan Singh to warn the government in November of stagflation. Singh had said the Indian economy was entering a stage of stagflation, with inflation being high and demand stagnant.

The USA had a similar experience in the 1970s. During the stagflation, the GDP rises slowly, below the desired level, high inflation persists and unemployment remains high due to low production. (IANS)

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