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| Edited By: |Source: DNA |Updated: Dec 17, 2014, 05:10 AM IST
The claim that India is inflation free — at least for the time being — would possibly draw angry reactions from the readers of this newspaper. However, that statement, in some sense, is true.
Marking a “zero-WPI inflation” rate, the Whole Sale Price Index (WPI), has recorded no change in November. However, according to official figures, the prices that consumers pay are rising faster by around 7%. This difference shows the mark-up earned by the middlemen in food articles trade. Nevertheless, the next consumer price inflation index should also show some impact of the falling price trends at the whole level. And the consumer price index (CPI) should show a softer trend since food articles account for a much greater share of the CPI calculation.
The figures, which average out a lot of variations, hide more than they show. The entire spectrum of primary articles’ prices fell at varying rates, while manufactured goods prices rose by a lukewarm 2%. But for some mild rise in prices of manufactured goods, WPI would have slid into negative zone.
Vegetables and onion prices dipped sharply and wheat price marginally. These trends show the seasonal drop in prices of the food items as supplies increase during the winter months. It can safely be predicted that primary articles prices should continue to show these trends for the next three to four months.
Manufactured goods prices showed a long-term softening trend. From a peak of nearly 5% inflation rate in July this year, the current pace of inflation for manufactured goods declined to 2.04%. Industrial raw materials and minerals prices also registered a downward trend, reflecting sluggish industrial activity.
It may be argued that this softer priceline provides an ideal opportunity for recalibrating the monetary policy to provide some stimulus for growth. Do we then welcome this trend? For the time being: yes. But long-term continuation and deepening of this trend can bring on an economic crisis. Economists generally agree that tacking falling prices over a longer time is more difficult than dealing with rising prices.
Japan, for example, has been battling deflation, for over a decade now. The Japanese authorities — in vain — have been trying to reverse this by applying conventional remedies from the economists’ handbooks. But prices still continued to fall, stymieing the economy. This period is called “the lost decade” for Japan.
Western European economies are also currently facing a similar situation. A series of measures have failed to push up the inflation rate and the European Central Bank is worried that this trend might become an entrenched phenomenon. The European Central Bank (ECB) is lending huge amount of funds to commercial banks to push up growth of credit in Europe and the prices.
Admittedly, the Indian situation is not similar to the European situation. It can be safely assumed that wholesale prices should again start rising shortly when the current surplus in perishable productions runs dry by next summer. Prices should then rise again at the wholesale level.
What India needs now is a stable price regime, not prices falling at a steady rate. Such a trend would only discourage producers from improving agricultural production. A crash in prices of food items, like vegetables, fruits, onions, wheat, rice entails farmers facing a loss in income. They would cut down on their sowing next season and overall production of agro products would suffer.
India, hopefully, would not face such a predicament. The primary reason for that lies in the country’s huge population, and an ever-escalating demand. It can, therefore, reasonably be argued that we will soon be contending with escalating prices.
