Phillips Curve in the Indian Economy After 2014
The Phillips Curve suggests an inverse relationship between inflation and unemployment. When inflation rises, unemployment usually falls, and vice versa. Economists have tested this idea in many countries. Moreover, researchers continue to examine its validity in India after 2014.
India Adopted Inflation Targeting
The Reserve Bank of India shifted to flexible inflation targeting in 2016. It aimed to keep consumer price inflation around 4 percent. As a result, policymakers focused more on price stability. However, this change raised questions about the traditional Phillips Curve relationship.
Studies Show Mixed Results
Several researchers analysed data from 2014 onwards. Some studies found a weak negative relationship between inflation and unemployment. In addition, the curve appeared flatter than in developed economies. Supply shocks from food prices and the large informal sector often weakened the link.
Other studies using state-level data confirmed a conventional Phillips Curve. Excess demand still pushed inflation higher in many regions. Furthermore, the relationship became clearer during periods of strong economic growth. Therefore, the curve has not disappeared but has changed its shape.
Output Gap Matters More Than Unemployment
Many Indian studies prefer the output gap instead of the unemployment rate. The output gap measures the difference between actual and potential economic growth. Moreover, this measure shows a stronger link to inflation. As the economy grows faster than its potential, inflation tends to rise.
Recent Years Brought New Challenges
The COVID-19 pandemic disrupted the relationship. Supply chain problems and lockdowns created high inflation along with job losses. In contrast, post-pandemic recovery showed some return of the trade-off. Hence, economists now describe the Phillips Curve in India as non-linear and context-dependent.
What This Means for Policy
The Reserve Bank of India still considers the inflation-unemployment link in its decisions. However, it also watches supply-side factors closely. As a result, monetary policy focuses on anchoring inflation expectations. In addition, structural reforms help reduce supply shocks and strengthen the curve.
Conclusion
The Phillips Curve remains relevant in the Indian economy after 2014. Nevertheless, it works differently due to India’s unique conditions. Researchers continue to study its changing form. In short, understanding this relationship helps policymakers balance growth and price stability more effectively.