Analysis of India and Stagflation Literature review

Analysis of India and Stagflation - Literature review Example It is caused by cost-push inflation according to new Keynesian economic models. Such inflation occurs when certain factors increase the cost of production. These include government policies, e.g., fiscal ones, or the paucity of resources. Radhika Rao, a Singapore-based economist with DBS Bank, opines that â€Å"The economy might be trapped in a stagflationary-type environment, as growth is at the cusp of moving another leg lower while inflation bottoms out† (qt. in Kala). There is less local and foreign demand for Indian industrial goods. Even the borrowing costs have gone up. The automobile industry which drives manufacturing growth has forecast that auto sales will fall for the second continuous year. However, as Kala notes, exports grew on stronger global demand as the weak rupee makes Indian exports more competitive; and consequently, the imports into India become costlier, thus bringing down the deficit. Globalization is greatly responsible for stagflation, with the effec ts felt in most other countries. The question that Shrivastava asks is whether the Indian economy should have been opened up in a more selective manner. The global financial markets are volatile, which affects the Sensex, for instance. Moreover, the demand for Indian goods and services has reduced due to the recession in the US. Inflation has been growing due to a rise in commodity prices and a steady rise in the price of oil. Because the Indian economy is dependent on those of the US and other rich countries, a home market for products is no longer a prerogative of the government. The US recession has led to fall in exports, whereas the rise of the rupee against the dollar (till recently) cost many job losses. Indian companies are finding it difficult to raise capital abroad due to the decisions taken by the Federal Reserve, the central bank of the USA. The rise in prices of steel, cement, and oil has increased the costs in all industries. Due to the hike in interest rates to keep inflation under check, the cost of interest has also gone up. Uncertainties at the global level have slowed down the growth of industrial investment. Oil prices have increased due to futures trading in oil because of excess liquidity in the hands of big speculators. Another reason for this was the low value of the dollar (before the Indian rupee went into a free fall). Food prices have increased for various reasons. The demand for food has changed greatly. Since industrial agriculture is based on the use of fossil fuels, price hikes in oil directly affect food prices too. Climate change is another reason for raised food prices. With the increase in globalization, there is constant pressure on India to globalize the food sector and to bring the prices in line with those abroad. The US decision to push biofuels has led to a rise in food prices. The US government started giving subsidies to farms for growing corn to make ethanol for use in cars.  Ã‚