India inches towards deflationary economy

China’s National Bureau of Statistics has announced that the nation’s consumer price index fell 1.6% in February from a year earlier, the first year-on-year drop in more than six years. Meanwhile, the producer price index in February dropped 4.5% from a year earlier, a steeper fall than January’s 3.3% decline.

With China officially announcing its entry into a deflationary economy, India is close on the heels to follow suit. After witnessing months of increasing inflation, people may sigh relief to see a sharp decrease in inflation but they are in for a much bigger surprise. India is soon moving into deflation zone!! But is it really a sign of relief when we are witnessing a slowdown in economy ? It may actually start a new series of trouble for the economy and drift the growth rate down further

Deflationary Economy & India

• Deflation occurs when Inflation rate falls to below Zero %. As per last data released India’s Inflation stood at 3.03 % as against 12.9% in August 2008.
• Experts are of view that India will reach deflation by Apr’09. This will be India’s first face-to-face wit deflation after March, 1976.
• The fall in inflation is primarily led by falling crude prices and commodity prices.
• Though a deflationary trend might be a welcome move for the government in an election year, this would induce further slowdown in economy if not dealt with properly

Impact of Deflationary Economy

What happens when an economy moves into deflationary trend ? For people like us, who have been born and brought up in a inflationary economy, the realities of deflationary trends might require us to understand the real impact. Deflation in commodities bring a shift in consumer buying pattern and people start deferring their buying in anticipation of further price drops. This is true even for Investments as people tend to hoard cash instead of investing in securities as they fear that the value of their investments would depreciates. This is turns stalls the growth of the economy. In this situation Banks would be forced to further reduce their lending rates to drastically low levels (even to zero if deflation persists for a long duration).

However, deflationary trends in India are expected to remain till end of the year as it counts on its ever increasing population to counter the evils of slowdown and bring back faster pace of growth. What would finally happen, lies unfolded in the arms of the Future, but India needs to prepare itself to counter with this phenomenon in such a way that the impact on growth is minimal.