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“The inverse relationship between inflation and unemployment is often seen as a confirmation of the hypothesis that inflation helps the economy function at its full potential”, comment in the light of stagflation that Indian economy is facing off late .

Topic:  Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.

7. “The inverse relationship between inflation and unemployment is often seen as a confirmation of the hypothesis that inflation helps the economy function at its full potential”, comment in the light of stagflation that Indian economy is facing off late .(250 words)

The Hindu

Why this question:

The article highlights the fact that the retail price inflation has increased to a nearly six-year high of 7.35% in December 2019, raising worries that the Indian economy may be headed towards stagflation.

Key demand of the question:

Discuss in detail the current conditions of Indian economy, explain the relationship between inflation, unemployment; discuss the concept of Stagflation; reasons causing it in the Indian economy. Suggest what needs to be done to overcome it.

Directive:

Comment– here we have to express our knowledge and understanding of the issue and form an overall opinion thereupon.

Structure of the answer:

Introduction:

First discuss what stagflation is.

Body:

Discuss that stagflation is an economic scenario where an economy faces both high inflation and low growth (and high unemployment) at the same time.

Stagflation challenges the conventional view that inflation helps an economy operate at full capacity.

Move on to provide for a brief background of current situation of India.

Express the current concerns, policy dilemmas; The major reason attributed to the current slowdown in India is the lack of sufficient consumer demand. In such a scenario the general measures suggested to revive the Indian economy involves measures like greater spending by the government and the central bank. However, stagflation essentially prohibits the government and the central bank from taking such countercyclical policy steps.

Explain what needs to be done to handle the situation and bring it to control.

Conclusion:

Conclude by highlighting the need to get reforms to bring about genuine economic growth.