Stories during stagflation: How India fares on ‘modified’ misery index?

News: Global economies are staring at the simultaneous prospect of low-to-zero growth and high inflation, i.e. Stagflation.

What is a misery index, and how does the countries fare on it today?

Economists in the 1970s devised a concept to describe what people were experiencing under stagflation: A misery index

– It basically added up the rate of consumer inflation and the rate of unemployment.

Misery is highest in the countries known for economic mismanagement and/or congenital problems: Turkey, Argentina, South Africa.

After that come two of the BRICS economies (war-affected Russia and Brazil), keeping company with Pakistan and Egypt.

Next comes India. Not very flattering, for sure, but the leading European economies and the US are not far behind.

Modified Misery index

Two modifications were made to the misery index.

One was to add the prevailing rate of interest. That makes the picture much worse for poorly-placed countries like Turkey, Brazil, Russia, and Pakistan — since high inflation usually brings with it high interest rates. It doesn’t look great for India, which ranks more than halfway down a list of 20 economies chosen to represent the major economies in each region.

The second modification added per capita income growth rates, since these reduce economic hardship. This helps India (which in 2022 is expected to remain the fastest-growing large economy) to improve its score, but not its rank. With all four factors (inflation, unemployment, interest rates, and income growth) taken into account, India remains in 12th position in our list of 20.

Based on their scores, both China and Japan appear to be models of economic management.

They score the best on the misery index, in its original form and with modifications. They do better than average on the twin deficits. But, it’s worth noting that China’s growth rate has come down to “normal” levels (around 5 per cent) while its fiscal deficit has grown. The signs of stress are beginning to show.

Way forward

Such measurements capture only part of the full reality. One could therefore add other measures, like absolute income levels and poverty (since that determines one’s capacity to deal with difficult times), and also inequality.

The greater the inequality, the less is the chance of intergenerational mobility, something that is captured through yet another measurement construct — appropriately dubbed the Great Gatsby Curve — which was thought up by an economist on US President Barack Obama’s team.

To the extent that India does not do well on these measurements either, the country has a lot of food for thought as it prepares to celebrate the 75th anniversary of its freedom from colonial rule.

Source: This post is based on the article “Stories during stagflation: How India fares on ‘modified’ misery index?” published in Business Standard on 10th June 22.

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