Negative Inflation In India

Latest Inflation Figures

Inflation for the week ended 6th June 09 came at -1.61%. It has happened for the first time since 1977 that we have a negative inflation. And this only evinced a smirk from most as for every man on the street, these figures have no meaning as they continue to pay more and there is no indication for them that prices have come down.

Capital Market Response To It

The markets also gave this number a cold shoulder and ignored it completely. But it surely got the economists excited, as this was a first. Negative inflation which is also referred to as deflation is the biggest indicator of recession in the economy. But here, in Indisa, it was touted by all as a “historic statistical curio”, that’s all it was. A statistical aberration.

Does this mean that the Indian economy is in recession?

Definitely not! For a economy to be officially declared as being in recession, it has to show a negative real economic growth or falling GDP consistently for at least two quarters. Deflation in economic parlance means fall in price level of goods and services, resulting in an increase in the real value of money.

When Deflation Occurs?

Deflation occurs where there is a fall in demand and prices are also down. In deflationary economy, people typically delay their buying until prices fall further which in turn reduces overall economic activity, leading to huge idle capacities thus contributing to the deflationary spiral.

Deflation is usually counteracted with a cut in interest rates, increasing supply of money and announcing economic stimulus. Now this is something which we see in USA – the stimulus, the bailout leading to increased money supply and interest rates are at their lowest levels.

Indian Scenario

In India, there was a time when people delayed their buying’s but this was seen only in realty sector but not all around. It’s not like people have been putting off buying cars because they expect prices to come down further. One has to just go the shopping malls on any given weekend to see if people have stopped buying. And rate cuts? There is no way that RBI is going to initiate any rate cut now based on this negative inflation as it is simply not needed.

Then there is the question of increase in the real value of money. Apart from the rupee rising vis-à-vis the US dollar, there is no real rise in the value of money. Price of commodities is up, pulses and grains, vegetables and fruits costs’ more.

Yes, we did have economic stimulus and lowering of interest rates but that was at a time when the entire world was reeling under recession and we had huge piles of inventories. At that time, if someone had said that we had deflation it was more believable. But today, when the April IIP numbers have come in the positive and some sectors are showing sure signs of revival, how can we say this -1.61% is deflation?

why do we have a negative inflation?

The biggest reason is the base effect. Due to higher prices last year as measured by the WPI, we thus have a negative inflation. It is more of a statistical fall and does not indicate any systemic deficiency. Consumer price index is over 9% and India’s GDP is growing at the rate of 6%.

The struggling-to-survive man on the street, the woman haggling with the vendors to save a few pennies more and the elderly having to do away with healthy fruits simply because they are unaffordable all point in one direction – prices need to come down. On one had we have deflation and then life becoming tough due to mounting costs on the other. This means, we need to urgently change the way we calculate our inflation rates as it seems to have no connection whatsoever with the ground reality.