The wholesale price index (WPI) based inflation went sub-zero for the first time in 35 years for the first week of June, but top policy makers and economists dismissed it as a short-term statistical phenomenon, with no real implications for either the country’s growth or its monetary policy. The inflation index fell by 1.61% for the week ended June 6 over the year-ago period, after gaining 0.13% in the previous week. Finance secretary Ashok Chawla described the trend as “unusual”, but ruled out any major policy shift. “Our assessment is that the WPI-based inflation is likely to be in the negative region for sometime to come,” he said. Deflation, an indicator of falling prices, would normally signal economic contraction. Hence, instead of rejoicing that each rupee of their income will now be worth more than a year ago, consumers may start worrying about the loss of jobs and incomes. This, plus their expectation that prices could fall further, would make them postpone purchases, depressing demand further and deepening the economic stagnation. Falling prices also mean bad news for borrowers. The real rate of interest is the nominal rate less than the rate of inflation, and deflation means a real rate of interest that is higher than the nominal rate. Hence, each rupee that you use to repay a loan would be worth more than the rupee you borrowed. Retail inflation in India, as measured by various consumer price indices, still hovers around 8% while in economies such as the US, it has dipped into negative territory, currently at-1.3%.
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