C.P. Chandrasekhar, Professor, Centre for Economic Studies and Planning, School of Social Sciences, Jawaharlal Nehru University, in The Hindu:
To the government’s discomfiture, this incipient stagflation is also not serving to reduce the pressures on the balance of payments front. India had been recording trade and current account deficits that were rather easily financed by the large capital flows the country had attracted. But with international oil prices rising sharply, and a combination of speculation and investor flight to safety increasing the demand for imported gold, India’s import bill rose sharply in the last financial year. In the event, despite exports having held their own in 2011-12, the current account deficit has burgeoned. The result is weakness of the rupee that now seems to have become the target of speculation, resulting in a sharp downward slide in its value. A collapsing currency is a sure negative signal for international investors, and can accelerate their exit. A downward spiral is a possibility that therefore needs to be pre-empted.
However, there appears to be no convincing response from the government thus far. The RBI is wary about stoking inflation by reducing rates to spur growth. The deficit on the government’s budget and India’s relatively high public debt to GDP ratio are preventing the government from raising expenditures (as it did in response to the global crisis of 2008). This is partly because of the government’s own fiscal conservatism. But the more important reason is the fear that larger fiscal deficits or higher taxation would upset foreign investors and hasten their exit.
In the event, we have the Finance Minister speaking of the need for austerity and harsh decisions amidst a slowdown in growth. That could convert falling growth into a recession. Further, the “harsh decisions” involve measures such as cutting subsidies to reduce expenditure and raising oil prices. Combined with the increase in the prices of imports as a result of the rupee’s depreciation, these administered price hikes would only fuel inflation, and further aggravate the tendency towards stagflation. More: