Title: The Interplay of Inflation and Unemployment: An Analysis of Indian

Government Policies and Recommendations for Sustainable Economic

Growth

Abstract
This research paper explores the relationship between inflation and
unemployment in the Indian context, focusing on the application of the Phillips
Curve concept. Drawing on historical trends, policy analysis, and economic
theory, the study examines how structural factors such as the informal sector
and labor market rigidities influence this relationship. It identifies challenges in
effectively managing inflation and unemployment in India and proposes a
multifaceted approach that integrates monetary and fiscal policies with
structural reforms and private sector engagement. The paper concludes with
predictions for India's economic trajectory, emphasizing the importance of
proactive measures amidst global uncertainties. Overall, the research provides
insights into India's economic dynamics and offers guidance for policymakers
seeking to promote sustainable growth and address socio-economic challenges.

Introduction
Inflation and unemployment are two critical economic indicators that
significantly impact a country's economic growth and stability. India, as one of
the fastest-growing economies globally, has faced challenges in addressing
these issues. Indian government policies have played a major role in addressing
these issues and over the years the approach to its management has changed
over the years. This research paper aims to examine the effectiveness of past
and current government policies in addressing unemployment and inflation in
India along with the trends. It will also emphasize on the relation between the
two factors and how one leads to the other. Furthermore, it will provide
recommendations for policymakers to mitigate the negative effects of
unemployment and inflation and promote sustainable economic growth in India.

In the ever-evolving landscape of global economics, the interplay between

inflation and unemployment remains a critical concern for policymakers
worldwide. As one of the fastest-growing economies globally, India has faced
its fair share of challenges in addressing these issues. The Indian government
has implemented various policies over the years to tackle the dual challenges of
inflation and unemployment, with the approach to their management evolving
over time.

This research paper aims to provide a comprehensive analysis of the

effectiveness of past and current government policies in addressing
unemployment and inflation in India. By examining the trends and the
relationship between these two factors, we aim to shed light on how one leads to
the other. Furthermore, this paper will offer recommendations for policymakers
to mitigate the negative effects of unemployment and inflation and promote
sustainable economic growth in India.

Inflation and unemployment are two critical economic indicators that

significantly impact a country's economic growth and stability. Inflation, which
refers to the rate at which the general level of prices for goods and services is
rising, can lead to a decrease in the purchasing power of consumers. On the
other hand, unemployment, which refers to the state of being without a job, can
lead to a decrease in overall economic activity and consumer spending.

The Indian government has implemented various policies to address these

issues, including fiscal and monetary policies, as well as structural reforms.
Fiscal policies, such as taxation and government spending, have been used to
stimulate economic growth and control inflation. Monetary policies, such as
interest rate adjustments and reserve requirements, have been used to control
inflation and promote economic stability. Structural reforms, such as labour
market reforms and infrastructure development, have been implemented to
address unemployment and promote long-term economic growth.

Throughout this research paper, we will examine the effectiveness of these

policies in addressing unemployment and inflation in India. We will also
explore the relationship between these two factors and how one leads to the
other. By providing recommendations for policymakers, we aim to contribute to
the ongoing efforts to promote sustainable economic growth in India.

This research paper will delve into the complex interplay between inflation and
unemployment in India, examining the effectiveness of past and current
government policies and offering recommendations for policymakers to
promote sustainable economic growth. By understanding the relationship
between these two factors and the policies implemented to address them, we can
gain valuable insights into the challenges faced by the Indian economy and the
potential solutions to overcome them.

Types of Inflation
Demand-Pull Inflation: This happens when there's too much demand for goods
and services in the economy.
Causes of Demand-Pull Inflation:
1. When the economy is doing well, people feel confident and spend more
money.
2. Sometimes, the government spends a lot, which can also raise prices.
3. If more money is available, people tend to borrow and spend more.
 4. If a country exports a lot, its currency might lose value, making imports
more expensive.
5. Low unemployment rates mean more people have jobs and money to
spend.
Effects of Demand-Pull Inflation:
1. Sometimes, there might not be enough goods to meet the demand,
causing shortages.
2. Prices of goods and services go up.
3. Overall, it becomes more expensive to live.
Cost-Push Inflation: This type of inflation happens when the cost of making
goods and services goes up.
Causes of Cost-Push Inflation:
1. When the cost of materials or inputs needed to make things increases.
2. Sometimes, people hoard goods or speculate on their prices, making them
more expensive.
3. If there are problems in the supply chain, like delays or shortages, it can
raise prices.
4. When taxes on goods increase, it makes them cost more.
5. If a country's currency loses value, it makes imported goods more
expensive.

Economics of the Issue

The Indian economy is characterized by a diverse geography, a large population,

and a rapidly evolving economic landscape. The country's economic growth has
been driven by various factors, including industrialization, urbanization, and
globalization. However, these factors have also contributed to the rise in
inflation and unemployment rates.
The rise in inflation in India can be influenced by various factors, including:

Demand-Pull Inflation: When demand for goods and services exceed supply, it
can lead to an increase in prices. Factors such as rising consumer spending,
increased government expenditure or expansionary monetary policies can
contribute to demand-pull inflation.
Cost-Push Inflation: This type of inflation occurs when the cost of production
increases, leading to higher prices for goods and services. Factors such as rising
wages, increased raw material costs, or higher taxes can contribute to cost-push
inflation.
Monetary Policy: The actions of the Reserve Bank of India (RBI) regarding
interest rates, money supply, and credit availability can impact inflation.
Expansionary monetary policies, such as lowering interest rates or increasing
money supply, can fuel inflationary pressures.
Fiscal Policy: Government spending and taxation policies can also influence
inflation. Increased government spending without corresponding increase in the
revenue generation can lead to higher inflationary pressure.
Global Factors: International events such as changes in oil prices, fluctuations
in global commodity prices, or currency exchange rate movements can impact
inflation in India, especially for goods that are imported or linked to global
markets.
Supply Chain Disruptions: Disruptions in the supply chain due to natural
disasters, geopolitical tensions, or pandemics can lead to shortages and price
increases for certain goods, contributing to inflationary pressures.
Structural Factors: Structural issues within the economy, such as inefficiencies
in production, distribution, or regulatory constraints, can contribute to persistent
inflationary pressures.
Inflation Expectations: Expectations of future inflation can influence current
inflationary trends. If consumers and businesses anticipate higher prices in the
future, they may adjust their behaviour, leading to inflationary pressures.

Problem Statement
India, the most populous country in the world, faces ongoing challenges of
unemployment and inflation that hamper its economic growth and social
stability. Finding effective solutions though addressing these issues is important
for policymakers.

Research Objectives
1. Examine Historical Trends and Causes: Investigate the long-term and
short-term trends of unemployment and inflation rates in India. Identify
the main economic, demographic, and structural factors contributing to
these trends.
2. Understand the Trade-off: Use economic models like the Phillips curve
to analyse the relationship between unemployment and inflation. Evaluate
government policies aimed at managing this trade-off.
3. Assess Impact on Economic Growth: Determine how high
unemployment and inflation simultaneously affect macroeconomic
indicators such as GDP growth, productivity, and investment.
4. Review Policy Interventions: Evaluate past and current government
policies designed to tackle unemployment and inflation. Identify areas for
improvement and alternative strategies to foster sustainable economic
growth.
5. Provide Recommendations: Based on research findings, offer practical
recommendations to policymakers. These recommendations should
outline actionable steps to reduce unemployment, maintain price stability,
and promote economic prosperity in India.
Hypothesis

The hypothesis of this research is that the Indian government's policies have not
been entirely effective in addressing the issues of inflation and unemployment.
The government needs to adopt a more comprehensive and integrated approach
to mitigate the negative effects of these economic indicators and promote
sustainable economic growth.

Background
Trends in Inflation and Employment Policy since Post Independence

Source – Inflationdata.com
Pre-Independence Era (1951 - 1991):

 Pre-Independence Era (1951-52 to 1991-92):

o Inflation in India during the pre-reform period saw fluctuations,
with the 1960s experiencing acceleration due to wars and crop
failures.
o Inflation breached 20% in the early 1970s due to setbacks in
agriculture and oil price hikes, with the 1950s showing lower
inflation rates.
o The 1980s saw an average inflation of 7.2% per annum, with
notable reductions in variability.
  Post-Independence Era (since 1992-93):
o Post-reform period witnessed a sharp increase in inflation in the
early 1990s, influenced by global and domestic factors.
o Double-digit inflation rates in the 1990s gradually decelerated,
with the average inflation from 1996-97 to 2000-01 being the
lowest since the mid-1950s.
o Inflation rates were impacted by global economic conditions,
domestic policies, and the phased opening up of the Indian
economy.
 Inflationary Experience Overview:
o Inflation rates in India have shown a mix of high spikes and
decelerations over the years, influenced by various economic and
external factors.
o The Wholesale Price Index (WPI) has been a preferred measure of
inflation in India, reflecting wider coverage and frequency.
o The inflation trends in India reflect a complex interplay of
historical events, economic policies, and global market conditions
shaping the country's inflationary experiences.
(Source: Office of Economic Advisor, Ministry of Finance and Industry,
Government of India)

Unemployment Rate and Analysis

To understand this properly lets understand the trend taking into consideration
the five year period and analyse the same.
1947-1970:
 During the early years post-independence, India focused on agrarian
reforms and industrialization, aiming to boost employment.
 The unemployment rate during this period might have been relatively low
due to the emphasis on labour-intensive sectors such as agriculture and
small-scale industries.
 Government policies like the Five-Year Plans aimed at creating
employment opportunities and reducing poverty.
1971-1980:
 The oil crisis of the 1970s and subsequent economic challenges might
have led to an increase in the unemployment rate.
 Rapid population growth, urbanization, and limited job opportunities in
the formal sector could have contributed to higher unemployment levels.
 The government introduced initiatives like the Employment Guarantee
Scheme to address unemployment issues.
1981-1990:
 Economic liberalization and reforms in the 1980s aimed at boosting
industrial growth and attracting foreign investment.
  While these reforms led to economic growth, they might have also caused
structural changes in the labour market, impacting employment patterns.
 Unemployment rates during this period might have varied based on
regional disparities and sectoral shifts in the economy.
1991-2008:
 Economic reforms initiated in 1991 aimed at liberalizing the economy,
promoting private sector participation, and enhancing competitiveness.
 While these reforms led to higher economic growth, they might have also
resulted in job displacements and increased informal employment.
 The unemployment rate might have fluctuated during this period due to
various factors, including globalization, technological advancements, and
economic fluctuations.
2013-2017:
 The unemployment rate continued to hover around 5.3-5.4% from 2013
to 2017.
 This period saw some economic reforms and initiatives aimed at boosting
growth and employment, which may have helped maintain a steady
unemployment rate.
2018-2022:
 Unemployment remained relatively low, ranging from 5.27% in 2019 to
7.33% in 2022.
 Economic factors such as demonetization in 2016 and the implementation
of the Goods and Services Tax (GST) in 2017 may have influenced
employment dynamics during this period.
2023-2024:
 The unemployment rate experienced some fluctuations, with a decline to
6.8% in January 2024 from 8.003% in 2023.
 Economic conditions, including the impact of the COVID-19 pandemic
and subsequent recovery efforts, likely influenced employment trends
during this period.

Historical Trends and Relationship between Unemployment and Inflation

Post-Independence Era:
 Post-independence, India faced periods of both high unemployment and
inflation, especially during the 1950s and 1960s.
 During this period, slower economic growth contributed to rising
unemployment, while inflationary pressures were also observed.
 The mismatch between labour supply and demand, coupled with
structural issues in the economy, led to simultaneous challenges of
unemployment and inflation.
1980s to 2015:
  Official statistics indicate that unemployment rates in India hovered
around 2.8 percent between the 1980s and mid-2010s.
 Despite relatively low unemployment rates, inflation remained a concern,
with fluctuating rates observed over the years.
 The number of unemployed persons steadily increased from around 7.8
million in 1983 to 12.3 million in 2004–05, indicating persistent
unemployment challenges.
 High inflation rates during certain periods, such as the early 2000s,
coincided with relatively low unemployment rates, suggesting a lack of a
direct inverse relationship between unemployment and inflation.
2018-2019:
 The lack of employment opportunities was identified as a significant
concern by a majority of Indians during this period.
 Unemployment rates remained relatively low, but inflationary pressures
persisted, affecting the purchasing power of consumers.
 Despite efforts to address unemployment through policy interventions,
inflation continued to pose challenges to economic stability.
2020 (Present Status):
 The Covid-19 pandemic led to a rise in unemployment rates in 2020,
reaching 10.3 percent according to the National Statistical Office (NSO).
 The economic disruptions caused by the pandemic also had implications
for inflation, with fluctuations observed in consumer prices due to supply
chain disruptions and changes in consumer behaviour.
 While high unemployment rates indicated weakened demand in the
labour market, inflationary pressures persisted, highlighting the complex
relationship between unemployment and inflation.
Relationship between Unemployment and Inflation:
 The trends suggest that while there may be periods of overlap between
high unemployment and inflation, the relationship between the two
economic indicators is not always straightforward.
 Factors such as economic growth, structural changes, government
policies, and external shocks influence the dynamics of both
unemployment and inflation.
 Policymakers need to adopt a balanced approach to address both
unemployment and inflation, recognizing the nuances of their relationship
and implementing targeted measures to promote sustainable economic
growth and price stability.

Major Events That impacted Unemployment Rates in India:

1. Global Financial Crisis (2008-2009): This big financial problem around
the world slowed down India's economy. Less growth meant fewer jobs.
 2. Demonetisation (2016): In 2016, the government decided to stop using
certain high-value money notes. This caused trouble, especially for small
businesses, and some people lost their jobs for a while.
3. Goods and Services Tax (GST) (2017): The government brought in GST
to make taxes simpler. But at first, it caused some problems for
businesses, which affected jobs for a short time.
4. Covid-19 Pandemic (2020): The Covid-19 pandemic hit the economy
hard. Lockdowns meant businesses had to close, leading to many people
losing their jobs.

Methodology

The Government of India (GOI) calculates inflation using various measures,

with the most prominent being the Consumer Price Index (CPI) and the
Wholesale Price Index (WPI).
1. Consumer Price Index (CPI): The CPI in India measures changes in the
retail prices of a basket of goods and services consumed by households. It
reflects inflation from the perspective of consumers. The GOI calculates
CPI for various categories such as:
 CPI for Industrial Workers (CPI-IW): It covers industrial workers
and is used for calculating dearness allowance for employees in the
organized sector.
 CPI for Agricultural Labourers (CPI-AL): It focuses on agricultural
labourers.
 CPI for Rural Labourers (CPI-RL): It covers rural labourers.
 CPI for Urban Non-Manual Employees (CPI-UNME): It considers
non-manual employees in urban areas.
 CPI for Rural, Urban, and Combined (CPI-R, CPI-U, CPI- C):
These indices provide a broader picture of inflation across different
segments of the population.
2. Wholesale Price Index (WPI): The WPI tracks changes in wholesale
prices of goods in different sectors like primary articles, fuel and power,
and manufactured products. It is an indicator of price movements at the
wholesale level, affecting producers, manufacturers, and traders.
The methodology for calculating these indices involves selecting a base year
and a representative basket of goods and services. Price data is collected
regularly from selected markets, and weights are assigned to each item based on
its importance in consumption or production. The percentage change in the
index over time indicates inflationary or deflationary trends.
In addition to these indices, the GOI may also use other measures and indicators
to assess inflationary pressures and trends in the economy. These could include
the Producer Price Index (PPI), GDP deflator, and sector-specific indices.
Methodology for Inflation Rate:
1. Select a Basket of Goods and Services: The inflation rate measures the
change in the average price level of a selected basket of goods and
services over a specific period.
2. Determine Price Changes: Track the prices of individual items within
the basket over time. These items may include food, housing,
transportation, healthcare, and other essential goods and services.
3. Calculate Price Index: Calculate a price index to quantify the overall
price level change. The most commonly used index is the Consumer Price
Index (CPI), which reflects changes in the cost of living for urban
consumers.
4. Base Period Comparison: Compare the current prices to those of a
specified base period. The base period serves as a reference point for
measuring price changes.
5. Apply the Formula: The inflation rate is calculated as the percentage
change in the price index between the current period and the base period.
Inflation Rate = [(Current Price Index - Base Price Index) / Base Price
Index] x 100

Methodology for Calculating Unemployment Rate:

1. Define the Labour Force: The labour force includes all individuals aged
15 years and above who are either employed or actively seeking
employment.
2. Identify Unemployed Individuals: Unemployed individuals are those
who are not currently employed but are actively seeking employment.
This typically includes individuals who are not working but are available
and willing to work.
3. Determine the Civilian Labour Force: The civilian labour force
consists of both employed and unemployed individuals within the eligible
age range.
4. Apply the Formula: The unemployment rate is calculated as the number
of unemployed persons divided by the civilian labour force, expressed as
a percentage.

Unemployment Rate = (Number of Unemployed Persons / Civilian Labour

Force) x 100
Alternatively, it can be calculated as:
Unemployment Rate = (Number of Unemployed Persons / (Number of
Employed Persons + Number of Unemployed Persons)) x 100
1. Periodic Data Collection: Unemployment rates are typically measured
on a monthly or quarterly basis through surveys conducted by
government agencies or independent research organizations.
 2. Periodic Data Collection: Inflation rates are typically calculated and
reported on a monthly or annual basis by government agencies such as
the Bureau of Labour Statistics (BLS) in the United States or the Reserve
Bank of India (RBI) in India.

 Survey Data Collection: Government agencies like the Ministry of

Labour or independent research organizations conduct surveys to gather
data on employment status.
 Definition of the Labour Force: The labour force includes all
individuals who are either employed or actively seeking employment. It
excludes individuals who are not working and are not actively looking for
work, such as retirees, students, and homemakers.
 Calculation of Unemployment Rate: The unemployment rate is
calculated as the percentage of the labour force that is unemployed. It is
obtained by dividing the number of unemployed individuals by the total
labour force and multiplying by 100.
 Unemployment Rate = (Number of Unemployed Persons / Labour
Force) x 100
 Reporting and Analysis: Once the unemployment rate is calculated, it is
reported to policymakers, economists, and the public to assess the health
of the labour market. Changes in the unemployment rate over time can
indicate shifts in economic conditions and help inform policy decisions.

Literature Review

A review of existing literature on the topic reveals that several studies have been
conducted to understand the relationship between inflation and unemployment
in India. Some of the key findings from these studies include:

Phillips Curve:
The Phillips Curve is a simple yet powerful idea in economics that helps us
understand the relationship between inflation (the rate at which prices increase)
and unemployment (the percentage of people who are looking for jobs but can't
find one). In simple terms, the Phillips Curve suggests that when unemployment
is low, inflation tends to be high, and vice versa.
Imagine a seesaw at a playground. On one end, you have inflation, and on the
other end, you have unemployment. When one side goes up, the other side goes
down. This is similar to the relationship between inflation and unemployment in
the Phillips Curve.
The idea behind the Phillips Curve is that when more people are employed and
businesses are doing well, they tend to raise their prices because there's more
demand for goods and services. This leads to higher inflation. On the other
hand, when unemployment is high and businesses are struggling, they may
lower their prices to attract customers, leading to lower inflation.

Source – Bureau of Labour Statistics

"The lower the unemployment rate, the tighter the labor market and,
therefore, the faster firms must raise wages to attract scarce labor." - A. W. H.
Phillips

The Phillips curve is a concept in macroeconomics that depicts the relationship

between the rate of inflation and the rate of unemployment in an economy. It is
named after A. W. H. Phillips, who conducted a seminal study on this
relationship in the United Kingdom from 1861 to 1957. The core idea behind
the Phillips curve is that there is an inverse relationship between inflation and
unemployment: when inflation is low, unemployment tends to be high, and vice
versa.
Phillips's original study focused on wage inflation and unemployment. He
observed that when unemployment rates were high, wages tended to increase
slowly, but when unemployment rates were low, wages rose rapidly. Phillips
proposed that this relationship was due to the dynamics of the labor market.
Specifically, he argued that when unemployment was low, the labor market
became tighter, leading firms to raise wages more quickly to attract scarce labor.
Conversely, when unemployment was high, the pressure to raise wages
diminished.
The Phillips curve became widely discussed and used as a tool for economic
policy in the 1960s. Economists began to estimate Phillips curves for various
economies, relating general price inflation to unemployment instead of just
focusing on wage inflation. This broader perspective acknowledged that prices
were closely linked to wages, and changes in wage inflation could impact
overall price levels.
The traditional Phillips curve model suggests that policymakers can manipulate
unemployment and inflation through monetary and fiscal policies. For example,
if the government wants to lower unemployment, it can implement
expansionary policies to stimulate economic activity. This might lead to a
temporary increase in inflation, as shown by the Phillips curve. Conversely,
contractionary policies aimed at reducing inflation could lead to higher
unemployment in the short term.
However, economists like Milton Friedman and Edmund Phelps challenged the
traditional Phillips curve model by introducing the concept of the natural rate of
unemployment. They argued that in the long run, the economy tends to revert to
a natural or equilibrium rate of unemployment, which is determined by
structural factors such as demographics, technology, and labor market
dynamics. Attempts to push unemployment below this natural rate through
expansionary policies could lead to sustained higher inflation without
permanently reducing unemployment.
The expectations-augmented Phillips curve emerged as a refinement of the
traditional Phillips curve. It incorporates the idea that economic agents form
expectations about future inflation when making wage and price decisions.
Rational expectations theory posits that economic agents make predictions
based on all available information, including past trends and government
policies.
Modern macroeconomic models often use variations of the Phillips curve, such
as the expectations-augmented Phillips curve or models that incorporate the
output gap. The output gap measures the difference between actual and potential
GDP and is used to gauge the level of aggregate demand relative to aggregate
supply. These models help economists and policymakers understand the
dynamics of inflation and unemployment and guide policy decisions.

"With an unemployment rate of 6 percent, the government might stimulate

the economy to lower unemployment to 5 percent." - Paul Samuelson's
interpretation of using the Phillips curve for policy guidance

Major Government Policies for Inflation and Unemployment

Government policies to tackle Inflation
The Government of India (GOI) employs various policies and measures to
control both demand-pull and cost-push inflation.
1. Advisories against Hoarding and Black Marketing:
 The government issues advisories to state governments to take
strict action against hoarding and black marketing. This involves
 enforcing acts like the Essential Commodities Act, 1955, and the
Prevention of Black-marketing and Maintenance of Supplies of
Essential Commodities Act, 1980, especially for commodities
facing shortages.
2. Regular Review Meetings:
 The GOI conducts regular review meetings on price and
availability situations at various levels, including Committee of
Secretaries, Inter Ministerial Committee, and Price Stabilization
Fund Management Committee. These meetings help in assessing
the market conditions and taking necessary actions.
3. Minimum Support Price (MSP) Enhancement:
 Higher MSPs are announced to incentivize agricultural production,
thereby increasing the availability of essential food items and
helping to moderate prices. This encourages farmers to produce
more, reducing the gap between demand and supply.
4. Price Stabilization Fund (PSF):
 The GOI implements the Price Stabilization Fund to control the
price volatility of agricultural commodities such as pulses and
onions. This fund aims to stabilize prices by intervening in the
market when necessary, ensuring price stability for consumers and
producers alike.
5. Buffer Stock Management:
 The government enhances buffer stocks of essential commodities
like pulses to enable effective market intervention for price
moderation. By maintaining an adequate buffer stock, the GOI can
release supplies into the market during periods of shortage, helping
to stabilize prices.
6. Import Policies:
 The GOI facilitates imports of essential commodities, such as
onions, to improve availability and moderate prices in the domestic
market. By importing goods to meet demand-supply gaps, the
government ensures adequate supply and prevents sharp price
fluctuations.

Government policies to tackle Unemployment

1. National Rural Employment Programme (1980):
 Objective: Additional employment for underemployed persons in
rural areas.
 Focus: Implementation of employment opportunities particularly in
backward districts.
2. Mahatma Gandhi National Rural Employment Guarantee Act
(2005):
  Objective: Provide a minimum of 100 days of paid work per year
to families opting for unskilled labor.
 Focus: Guaranteeing employment and social security, especially
for rural households.
3. Deen Dayal Antyodaya Yojana – National Livelihoods Mission
(2013):
 Objective: Reduce poverty by providing gainful self-employment
and skilled wage employment opportunities.
 Focus: Building sustainable livelihoods through grassroots
institutions for the poor.
4. National Skill Development Mission (2014):
 Objective: Drive the 'Skill India' agenda by converging skill
training initiatives with quality and scale.
 Focus: Enhancing industry-relevant skill training to improve
employability.
5. Start-up India Scheme (2016):
 Objective: Promote start-ups, generate employment, and create
wealth.
 Focus: Building a robust start up ecosystem to transform India into
a country of job creators.

Analysis and Findings

Analysis of RBI's Monetary Policy Committee Meeting (February 2024)

The recent meeting of the Monetary Policy Committee (MPC) of the Reserve
Bank of India (RBI) held in February 2024 provided insights into the
macroeconomic conditions, policy decisions, and outlook for inflation and
growth in India. Here's a detailed analysis of the minutes and key takeaways
from the meeting.
Macro Review:
1. Global Economic Outlook: The MPC noted a steady outlook for global
growth in 2024, with inflation showing signs of easing from previous
highs. However, financial market sentiments remained volatile,
influenced by changing views on central bank policies in advanced
economies and currency fluctuations in emerging markets.
2. Domestic Economic Activity: India's domestic economic activity
strengthened, as indicated by the first advance estimates (FAE) released
by the National Statistical Office (NSO). Real GDP growth for 2023-24 is
expected to be 7.3%, primarily driven by robust investment activity,
especially in manufacturing and services sectors.
Monetary Policy Decision: The MPC decided to maintain the policy repo rate
under the liquidity adjustment facility (LAF) at 6.50%, along with unchanged
rates for standing deposit facility (SDF) and marginal standing facility (MSF).
This decision reflects the committee's focus on withdrawing accommodation
gradually to align inflation with the medium-term target of 4% within a band of
+/- 2%, while supporting economic growth.
Inflation and Outlook:
1. Current Inflation Scenario: CPI inflation increased from 4.9% in
October 2023 to 5.7% by December, driven mainly by food inflation,
particularly vegetable prices. Core inflation softened to 3.8% in
December, reflecting a four-year low.
2. Inflation Projection: CPI inflation for 2023-24 is projected at 5.4%, with
a further decline to 4.5% for 2024-25, assuming a normal monsoon.
However, risks to inflation remain balanced, influenced by food price
uncertainties, crude oil price volatility, and input cost pressures in various
sectors.
Policy Rationale:
1. Economic Activity: The MPC acknowledged the resilience of India's
economic activity, supported by investment demand, positive business
sentiments, and consumer confidence. However, food price shocks and
geopolitical events pose risks to the inflation trajectory.
2. Inflation Management: The committee emphasized the need for
sustained disinflationary measures, considering the cumulative impact of
previous policy repo rate increases. The focus is on anchoring inflation
expectations and ensuring fuller transmission of policy actions.
Future Outlook: The MPC's decision to maintain the policy repo rate
unchanged reflects a cautious approach to manage inflation while supporting
growth. The committee remains vigilant about food price pressures, supply
chain disruptions, and global economic uncertainties that could impact India's
inflation dynamics.

Analysis of Inflation, Unemployment, and Policy in India

The Phillips curve, a foundational concept in macroeconomics, posits an inverse
relationship between inflation and unemployment. However, its application in
India is nuanced due to structural factors like labor market rigidities and a
significant informal sector. This analysis delves into India's experience with
inflation, unemployment, and policy responses, highlighting the challenges and
opportunities for the future.
Phillips Curve in India: The traditional Phillips curve suggests that as
unemployment decreases, inflation rises, and vice versa. In India, this
relationship is influenced by unique factors. The presence of a large informal
sector, comprising a substantial portion of the workforce, affects wage dynamics
differently from formal sectors. Formal sector wages may respond more directly
to changes in unemployment, aligning with the Phillips curve, but the informal
sector's flexibility can blur this relationship.
Additionally, structural issues like labor market rigidities, including restrictive
labor laws and mismatched skills, complicate the Phillips curve dynamics.
These factors create barriers to swift adjustments in wages and employment
levels, leading to deviations from the standard Phillips curve predictions.
Monetary Policy and Inflation: Monetary policy has been a primary tool in
India's inflation management arsenal. The Reserve Bank of India (RBI) employs
tools like interest rate adjustments and liquidity management to control
inflationary pressures. While these measures have shown effectiveness in
curbing short-term inflation spikes, their impact on long-term inflation
dynamics is debatable.
In recent years, India has faced challenges in maintaining inflation within the
RBI's target range. External factors like global commodity prices and domestic
supply-chain disruptions have added complexity to inflation management. The
Phillips curve's applicability in predicting these inflationary trends has been
limited due to these externalities.
Fiscal Policy and Unemployment: Contrary to the Phillips curve's traditional
focus on inflation, fiscal policy plays a crucial role in addressing unemployment
in India. Public investment in infrastructure projects, social welfare programs,
and employment generation schemes has been instrumental in reducing
unemployment rates, especially in rural areas.
Programs like the Mahatma Gandhi National Rural Employment Guarantee Act
(MGNREGA) have provided a safety net and employment opportunities to
millions of rural households. These initiatives demonstrate the impact of fiscal
interventions on unemployment, showcasing a departure from the Phillips
curve's conventional narrative.
Challenges and Future Directions: Despite notable successes, India grapples
with persistent challenges in managing inflation and unemployment effectively.
Structural factors such as labor market rigidities, informal sector dominance,
and skill mismatches continue to hinder policy outcomes.
To address these challenges, a holistic approach is necessary. Labor market
reforms aimed at increasing flexibility, promoting formalization, and enhancing
skill development are imperative. Investing in education, vocational training,
and technology-driven sectors can improve workforce productivity and align
skillsets with market demands.
Encouraging private sector participation in job creation through favorable
policies and incentives is another crucial aspect. Public-private partnerships in
infrastructure development, manufacturing, and service sectors can stimulate
job growth and economic dynamism.
Predictions and Conclusion:
Looking ahead, India's policy landscape must evolve to navigate the
complexities of inflation and unemployment. A multidimensional strategy
encompassing monetary prudence, targeted fiscal interventions, structural
reforms, and private sector engagement is essential.
Predicting the exact trajectory of inflation and unemployment in India is
challenging due to global economic interdependencies, technological
disruptions, and evolving market dynamics. However, a proactive approach
addressing structural bottlenecks while leveraging policy synergies can pave the
way for sustained economic growth, job creation, and inflation stability.

Conclusion

Looking ahead, it is essential to consider the evolving economic landscape in

India and its implications for inflation and unemployment policies. With
ongoing structural reforms and efforts to formalize the informal sector, the
dynamics of the labor market are expected to change. This transformation may
lead to a reassessment of the traditional Phillips curve framework and the
development of new models that better capture India's unique economic
characteristics.

In terms of policy outlook, a balanced approach that combines monetary

measures for inflation control with targeted fiscal interventions for employment
generation could yield more sustainable outcomes. Emphasizing skill
development, entrepreneurship promotion, and investments in critical sectors
like healthcare and education can also contribute to long-term economic
resilience and inclusive growth. As India navigates its economic trajectory,
policymakers will continue to refine strategies to address the complex interplay
between inflation, unemployment, and broader socioeconomic objectives.

In conclusion, the Indian government's policies have not been entirely effective
in addressing the issues of inflation and unemployment. To promote sustainable
economic growth, policymakers need to adopt a more comprehensive and
integrated approach that focuses on labor market reforms, investment in
education and skill development, and encouraging private sector investment in
infrastructure and job creation. By addressing these structural factors, India can
mitigate the negative effects of inflation and unemployment and promote
sustainable economic growth. Based on the MPC's analysis and policy stance, it
is predicted that India's economy will continue its growth trajectory, albeit with
cautious optimism. Inflation is expected to gradually decline, supported by
proactive monetary measures, favourable domestic conditions, and improved
global economic stability. However, external factors and geopolitical
developments remain critical variables that could influence India's economic
outlook in the coming months.

Sources
 https://www.forbes.com/advisor/in/personal-finance/inflation-rate-in-
india/
 https://byjus.com/free-ias-prep/inflation/
 https://www.brookings.edu/articles/how-does-the-government-measure-
inflation/
 https://www.forbesindia.com/article/explainers/unemployment-rate-in-
india/87441/1
 RBI’s MPC Policy