“Dark shadow” of stagflation looms over SAARC nations, warns RBI Deputy Governor Patra

The “dark shadow” of stagflation looms over South Asian Association for Regional Cooperation (SAARC) member countries, Michael Patra, a deputy governor of the Reserve Bank of India (RBI), has said.

“The future appears uncertain and gloomy against the backdrop of an unprecedented slowdown in economic activity, employment, and export earnings,” Patra said in a speech on August 24, which was made public by the RBI on August 26.

“Risks to our growth prospects are slanted to the downside. The dark shadow of stagflation looms over us and our outlook,” he added.

Patra delivered the speech at the SAARCFINANCE Seminar in New Delhi earlier this week.

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An economy is said to be in stagflation when inflation is persistently elevated, economic growth low, and unemployment high.

SAARC’s member states include Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka. The last of these, Sri Lanka, is currently facing an acute economic and political crisis thanks to a pile up of foreign currency denominated debt and a hit to growth from a slump in tourist visits due to the coronavirus pandemic. Other countries, such as Pakistan, are in trouble too.

India, however, is in a better position. In June, the monthly State of the Economy paper prepared by RBI staff had said that while the external environment was becoming increasingly hostile, “India is better placed than many other countries in terms of avoiding the risks of a potential stagflation”.

In his speech, Patra acknowledged that elevated and persistent inflation had taken hold and threatened to undermine the nascent progress made so far.

“Several members face double digit inflation in high reaches. Global spillovers in the form of exchange rate volatility, elevated commodity prices and supply chain pressures have exacerbated imported inflation. Since February this year, shortages of essential commodities and soaring food and energy prices have threatened livelihood and the welfare of our people,” the deputy governor said.

As such, the region faces a “tremendous developmental challenge”, Patra warned, adding that SAARC members had also seen a sharp deterioration in their fiscal deficits and balance of payments.