Food inflation gives way to deflation, prices fall 3.36%

Opinion divided whether it will prompt monetary easing in the January 24 review.

After a spree of adverse news in the early part of this financial year, the economy is moving into a somewhat better phase. For the first time in at least five-and-a-half years, India witnessed food deflation. Wholesale price-based food inflation fell to –3.36 per cent during the week ended December 24 due to a high base (20.84 per cent a year ago), a number of items witnessing a decline in prices and deceleration in the rate of price rise in others.

As the government shifted to a new base of 2004-05, new data are available only since then. Earlier, inflation used to be tracked weekly, of which food inflation was a part. At –3.36 per cent, food inflation was the lowest in five-and-a-half years according to data available with Bloomberg.

Finance Minister Pranab Mukherjee said, “Food inflation has turned negative for the first time in recent memory.”

Overall inflation had fallen into negative territory for the week ended June 6, 2009 after three decades. That time, food inflation was high at 8.7 per cent. This time, the situation is just the reverse. Overall inflation may fall, but only below nine per cent in December. Till November, overall inflation has been at a nine per cent-plus level for a year.

Food deflation is more good news the economy has witnessed after both manufacturing and services posted a recovery, according to the widely tracked HSBC Purchasing Managers’ Index (PMI) in December. If corroborated by official data, that would translate into higher GDP growth. If the disinvestment programme goes ahead, the exchequer will gain.

On whether the Reserve Bank of India (RBI) should cut rates, Arun Singh, senior economist, Dun & Bradstreet said, “The central bank should not consider a rate cut before March.” Anis Chakravarty, director, Deloitte, Haskins and Sells, said if headline inflation fell to eight per cent in December and sustained till the fourth quarter of the financial year, rate cuts should be considered.

However, Prime Minister’s Economic Advisory Council Chairman C Rangarajan said, “The environment appears to be in favour of the RBI reversing its monetary policy stance.”

Food inflation stood at 0.42 per cent a week ago. It not only fell into negative territory, it declined by a whopping 3.78 percentage points in just a week.