The term stagflation was coined to describe America's economy in the post-oil shock 1970s, mired with slow to negligible growth but also inflation, with the two conspiring to exacerbate one another.

The cycle of malaise lasted until the Federal Reserve under Paul Volcker jacked up interest rates, causing a sharp but contained recession. President Ronald Reagan's tax cuts and deregulation then paved the way for 30 years of expansion.

India may be at the beginning of a similar cycle, warns Lombard Street Research, a London-based economics consultancy, which forecasts 5-6% real output growth coupled with double-digit inflation for the country.

The common perception is that India is enjoying robust growth -- among the best in the world. But the fourth quarter saw an actual contraction of GDP, as private consumption and investment has weakened.

"On average since 2004, India has grown by just over 2% per quarter, slightly higher than the 1.6% long-run trend," notes a Lombard Street report dated May. "So this slowdown is significant."

Inflation, meanwhile, ranges from 9.6% to 16%, depending on the measurement. Lombard Street says inflation is at risk of steepening at a time when the domestic-demand story driving Indian growth is losing steam.

The economists accuse the Reserve Bank of India of acting too slowly. The run-up to the May 2009 elections saw monetary and fiscal policies loosened considerably, with the government deficit rising to 12% of GDP.

Lombard Street's calculations find that the fourth-quarter drop in growth is due to high inflation eating up discretionary income. Therefore the RBI will be under increasing pressure to raise interest rates -- at a time when the economy is slowing down.

Given the already-high yields on government bonds, the policy reaction needs to be severe if inflation is to be tamed, Lombard Street suggests. However, it also suspects markets will 'bake in' expectations of double-digit inflation into bond yields, which it says is merely ignoring the problem. This inertia is likely because the market lacks inflation-linked bonds or inflation swaps.