Inflation falls into negative territory after three decades

The inflation rate fell into negative territory for the first time in more than three decades, with analysts describing it as a temporary phenomenon since economic demand has not contracted.

Deflation marked by a fall in demand is taken seriously, but in India’s case it is principally due to the high “base effect” because crude oil prices were nearing their peak this time last year. The Indian basket of crude oil has declined nearly 50 per cent to $68.68 a barrel in the week ended June 6 this year, against $127 a barrel in the corresponding week last year.

The headline inflation rate, measured by the wholesale price index (WPI), stood at -1.61 per cent for the week ended June 6 this year against 11.66 per cent in the corresponding week last year. It was 0.13 per cent in the previous week.

WPI-based inflation is measured on an annual basis, that is a year-on-year comparison. The average inflation rate in calendar 2009 till June 6 is 1.85 per cent.

Most economists predict that deflation will last for two or three months and they do not expect any change in key policy rates by Reserve Bank of India (RBI). Adi Godrej, chairman, Godrej Group, said deflation was expected and would have a marginal impact.

Finance Secretary Ashok Chawla told reporters that the economy is improving and there was nothing unusual about deflation.

India’s Gross Domestic Product (GDP) registered a better-than-expected growth rate of 5.8 per cent in the fourth quarter ended March 2009. This along with higher industrial output numbers in April were cited as signs that the economy is in recovery mode.
 

	June 7 ‘08	June 6 ‘09
All commodities	11.66	-1.61
Primary articles	10.55	5.79
Fuel	16.25	-12.83
Manufactured products	10.28	0

“This is a temporary phenomenon due to last year’s high base and will not affect monetary policy. We expect inflation to stay in negative territory for the next two months. The rate will pick up again and by the end of this year we might see 5-6 per cent inflation,” said D K Joshi, chief economist with ratings and research firm Crisil India.

Besides, though the previous year’s high base has dragged inflation into negative territory, food items like cereals and pulses, continued to post double-digit inflation rates of 13.57 per cent and 16.77 per cent, respectively, providing no relief to the common man.

“Commodity prices and even the week-on-week rise in fuel prices might prove to be a cause of concern once the base effect wears off around September,” predicted Jyotinder Kaur, economist with HDFC Bank.

The inflation rate for the primary article category saw a 9 basis point increase to 5.79 per cent on an annual basis; however, it registered a 0.7 per decrease on a week-on week basis.