Deflation Looms Large On The Indian Economy

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food grainsIndia is not all set to face deflation, also known as negative inflation. The official inflation rate has fallen to 0.44%, which is the lowest record since 1977. If the deflation lasts for sometime then it would turn out to be a new experience to India. Japan faced deflation for a decade in the 1990s which was termed as the “lost decade”.

The cost of food grains remain high, 9% more costlier than a year back. Although, there is zero inflation, consumers are still faced with high prices when they purchase their groceries.

The wholesale index fell by 1 point to 226.7 for the week which ended on March 7th,2009. This happens to be at the same level at which the index had been on March 29th,2008. In other words, the yearly inflation rate will turn out to be zero towards the last week of March, even the index for the present year does not fall any further. Most of the commodities are becoming cheaper and cheaper every week off late. This would mean that deflation would set in much before it is expected. The food grain prices will also come down after the rabi harvest and this would further trigger the deflationary process.

Most world economies are experiencing disinflation, which is lowering of the inflation rate. Some countries are already facing deflation. China and Japan have reported negative inflationary rates based on the latest data. US may also be heading that way as well.

Although fall in prices may be welcome by consumers, economists see this as collapse of the demand levels in the economy. Citibank claims that the decline in prices was not due to efficient economy, but due to decline in demand. This trend would weaken the economic activity and will discourage investments, which in turn would have a negative impact on the economy in the long run.

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