April 2, 2009
Inflation rose marginally to 0.31 per cent for the week ended March 21 as prices of certain food items such as tea, gur, aerated water and imported edible oil went up.
Inflation as measured by movement in wholesale prices was 0.27 per cent for the week ended March 14 and 7.8 per cent in the corresponding period a year ago.
The price of blended tea went up by 48 per cent, while packaged tea and aerated water became expensive by 22 and 10 per cent, respectively.
Among other items which became dearer were soft drinks, oil cake, bajra, condiments and spices, while among non-food items cement, rubber, plastic products and PVC fittings became expensive.
Inflation is close to negative territory, something that was witnessed only in the 1977-78.
Soyabean, niger seed, raw rubber, groundnut, mustard seed and raw cotton too became dearer. On the other hand, fruit and vegetables, barley, jowar, raw silk, khandsari, salt, mustard and coconut oil became cheaper.
Similarly, prices of furnace oil, textile items, hair oil, steel ingots and bars went down.
Meanwhile, inflation for the week ended January 24 has been revised downwards from 5.07 per cent to 4.7 per cent.
Despite declining inflation, prices of commodities have not really dropped. Arvind Virmani, chief economic adviser to the finance ministry, said a week ago that the retail price-based inflation, which is ruling above the wholesale price index, will come down with a lag but would not fall as much as the rate of rise in wholesale prices is falling.
"I expect consumer price index also to come down with a lag but I don't think it will go down to a level we see in the WPI," Virmani said.
He said that he does not expect wholesale price index (WPI) in March 2010 to be lower than March this year. "We have been saying that industrial growth is weak and inflation is coming down. That has certain implications for the policy, which the Reserve Bank of India will take account for," Virmani added.
After a year of spiraling prices, rising inflation, India might be heading for deflation, say economists. Some economists insist that this is dis-inflation and not deflation. So what is deflation and why is it bad?
What is deflation and why is it bad for the economy?
Deflation is a fall in the price of goods and services. Deflation occurs when the inflation rate falls below zero per cent. This is the opposite of inflation.
When the inflation rate is negative, the economy is in said to be in a deflationary period.
Why does deflation happen?
A fall in spending -- it could be personal spending or a cut in government expenditure -- leads to deflation. The decline in the supply of money and credit thus leads to deflation.
So, if money-supply decreases; supply of other goods increases, demand for money rises, and the demand for other goods slips, it is deflation.
What are the consequences of deflation?
Deflation leads to a lower level of demand in the economy. It increases the real value of money. It also increases unemployment.
In a deflationary environment, those sectors with a high proportion of variable costs are likely to benefit from falling input prices, according to Goldman Sachs.
What could happen if India slips in deflation?
India would see deflation or reduction in general price level from next month due to slackening demand, according to financial services firm Goldman Sachs said.
"We expect yearly headline WPI inflation to fall rapidly below 1 per cent in March. And enter a period of deflation beginning in April, which could last till end-2009 due to not only continuing demand destruction but also a sharp step-up in the base," it said in a research report.
"There will be negative inflation for a few weeks in the first quarter of next fiscal, driven largely by higher base effect but we do not expect a pronounced deflationary trend in the economy," Dun and Bradstreet chief operating officer Kaushal Sampat said recently.
Is deflation good for you as prices are falling?
A fall in the prices may sound good for consumers. But it is not actually good. The lack in demand may push companies to further lower prices.
This can lead to a situation where the prices of product fall bellow the cost of manufacturing a product. This in turn forces the companies to cut production, slash jobs and shut down business till demand picks up. This worsens the situation.
Is deflation here to stay?
Deflation is not likely to last long. The monetary and fiscal stimulus measures of the government is likely to boost demand in the long run. In 2010, however, Goldman Sachs expects inflation to come back due to both a gradual pick-up in demand, and conversely, a low base from 2009.
It further said that the Reserve Bank could slash cash reserve ratio (CRR) for banks by 150 basis points by mid-2009 to provide liquidity into the system.
