Deflation the way ahead?
Last year we have seen Inflation peaked but now with so much happening are we moving towards DEFLATION or may be an Econominc depression like 'The Great Depression" of 1929?
As India's Inflation rate is currently at 0.44%, which is 32 year low, are we all set to move into negative inflation (Deflation) When there are reports about the Fiscal deficit going to touch 14%, growth at 4.6% etc.
Thoughts welcome...
Thanks to Siddarth Tyagi for raising this question...
Well no points for guessing tht today in India we av both high supply n dwindling demand to contribute to lowering inflation or staring deflation... though i don't see it as a big concern bcos...
1. We already had a very high and over inflated base in d boom time...
2. India is still growing at a healthy rate
3. Gov. is already out with big stimulus packages and the multi million $ election saga is about to start
4. Implementation of 6th pay commission
However, western economies will still take some time to recover and get back to their buying mode... so indian exporters r likely to bear the brunt for bit longer... but thr is an increasing liquidity in the indian market (as visible from the points 2, 3 & 4 above) which should encourage the producers to look towards domestic consumers... thus maintaining supply, as the demand is likely to increase in the domestic mkt... well this is something tht shud ideally happen... thus maintaining the supply near flat and slow, subsequent increase in demand wud av resulted in a gradual shift from deflation (for few mnths) to inflation (may b frm d last quarter of 2009)...
But i suspect tht it wudn't happen this way rather producers will b over cautious. We will soon see producers cutting down on supplies to counter deflationary trends... though demand is likely to soar with increasing liquidity in d domestic mkt... This situation will mean a quicker and steeper change in commodity prices and my 5 pence on India crossing the trough (lowest point of inflation curve) and getting into inflation right frm d month of July-Aug 09.
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http://www.linkedin.com/answers/finance-accounting/economics/FIN_ECO/393594-5100076?browseIdx=0&sik=1238529999125
It does not seem as if deflation will be an issue for india. As you have already mentioned above (the 4 points), there should not be any risk of permanent deflation setting in.
ReplyDeleteAn important point to consider is that the 0.44% inflationary figure that is being quoted is that of the WPI (wholesale price index). A better figure to look at would be the CPI (consumer price index) which reflects the prices that the final consumer (guy on the street) faces. The CPI is currently at 9-10%. Anybody who looks at this figure would not believe that deflation is setting in.
The difference in the figures is because of their composition. WPI is heavily weighted by commodities and fuel prices. The prices of these have dropped considerably in the past few months and with the help of a high base from earlier, what we have got is a very low WPI figure of 0.44%.
On the other hand, prices of essential goods such as food have actually gone up, which is adequately represented by the high CPI of around 9%. Thus it can be strongly argued that we are not even close to deflation.
On the whole, I believe deflation is not a risk that India faces because of the sheer size and potential of the domestic consumer market which is increasing everyday. The first industries that should face the effects of deflation would be the FMCG, consumer durables and autos. There is no evidence till now that any of them have been affected. On the contrary, autos have posted record sales in Jan-March 09 and FMCG sales are steadily increasing.
But then, recent history has shown us that what we always thought to be improbable is no longer so. A lot depends on which government comes in and the measures that it takes to strengthen the economy.
Hey sanjan... rightly said...
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