South Asian Association for Regional Cooperation (SAARC) member countries are now faced with tricky situation of a stagflation looming over them, given the recent unprecedented slowdown in economic activity, employment and export earnings, according to Michael Patra, Deputy Governor, Reserve Bank of India (RBI).

“The future appears uncertain and gloomy against the backdrop of an unprecedented slowdown in economic activity, employment, and export earnings,” said Patra 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.

Speaking at the SAARCFINANCE Seminar in New Delhi earlier this week, Patra said that elevated and persistent inflation had taken hold and threatened to undermine the nascent progress made so far. The region has a tremendous developmental challenge, he added.

“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,” he said.

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

Patra said that SAARC has great potential for economic expansion with abundant natural resources, human capital and market access. The promotion of economic and social development through increased trade and investment and through deeper regional economic integration holds considerable promise in South Asia. “We must rise up to this challenge and seize the window of opportunity even as we recover from the debilitating effects of the pandemic and geopolitical developments”, he added.

Currently, SAARC has eight member states — Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka. 

Sri Lanka is currently facing an acute economic and political crisis. This is mainly due to a pile up of foreign currency denominated debt and a hit to growth from a slump in tourist visits due to the Covid pandemic. 

India, however, is in a better position, according to a recent RBI staff paper. 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.

Published on August 26, 2022