INFLATION, which is at 2.4% for the week ended February 28, is expected to fall further. It is likely to reduce below 1% mark next week and closer to zero by end of March.
Thus, the new financial year 2009-10 is likely to begin with negative inflation. Experts feel this spell of negative inflation may persist for a few months and we may see 4-5% of negative inflation by July end. Does this mean India will see ‘deflation’ and its distortionary effects?
To a large extent, this spell of negative inflation is statistical in nature than a structural phenomena says Edelweiss Securities economist Siddhartha Sanyal. It is largely attributed to the high base effect. Last year, there was a steep surge in commodity and fuel prices in the corresponding months, which peaked out in August 2008. Once this high base effect wanes in later months of 2009, inflation may enter into a positive territory feels Yes Bank’s chief economist Shubhada Rao.
Not just a high base effect but also slowing consumption demand is influencing inflation numbers says Crisil’s senior economist D K Joshi. According to Mr Joshi, negative inflation i.e.: deflation is scary when it co-exists with decline in output. Unlike other developed countries, Indian economy is actually witnessing a growth. So, occurrence of negative inflation may not have disastrous impact on the economy in general at this juncture.
However, according to Ms Rao, the extent of impact of deflation on the overall economy depends on the pick up in the overall demand in the forthcoming months. During the months of negative inflation, a very little demand is expected from the private sector but a huge investment demand is expected in terms of large government’s spending on infrastructure development. It may push the overall demand and put a floor under the price. Also, possibility of more stimulus provided by newly elected government may lead to some support for demand in India says Mr Sanyal.
Waning of base effect coupled with resilient demand will push the overall inflation into the positive territory. Also, the sustained rise in prices of food articles, which are not influenced by recession, or slowdown in the economy may help inflation to enter into positive zone once again. But, the prices of industrial goods may be suppressed for a little longer on account of slowing industrial activity feels Mr Sanyal. So, the real concern lies for manufactured products.