New Delhi: Inflation, which moved into the negative zone for the week ended 6 June, may continue to fall for another two months and the government would need a prudent policy to avert “an alarming situation,” financial research major Deloitte has warned.
“A continuous decline in wholesale price index, which affects the wholesale units might create an alarming situation. As due to lower demand from consumers manufacturers slash their prices to boost sales, but consumers keep deferring their purchases anticipating a further fall in prices,” Deloitte principal economist Shanto Ghosh told the agency.
To tackle the situation there is possibility that the Reserve Bank of India will go for interest rate cut but it is not likely to go for another round of fiscal measures as the current budget deficit is alarmingly high.
“The government should have more prudent policy in place which is focussed towards growth, like announcing more tax holidays, more moderation of tax and supportive policy to boost export demand,” Ghosh added.
Deloitte further warned that the fall in inflation was “likely to continue for the next two months or so as the full impact of fiscal policy measure is still to come. Once the impact of fiscal measures comes into force, it will give automatic boost to the demand.”
Inflation, which entered negative territory for the week ended 6 June , declining to minus 1.61%, recorded a similar fall three decades back.
“At present the situation is not that worrisome, but if the consumer price index follows the WPI trend then the situation is likely to turn problematic. The government’s policy measure should include both cut in interest rate and fiscal measures to boost demand,“ Ghosh said.
Citing the example of Japan, ... the economist said, there inflation rate was currently at a very low level and historically it has been a perfect example of how fall in demand would lead to a further fall in prices.
Ghosh, however, said that India could again start seeing high inflation levels by the next one and half years or by the end of 2010.
Though there is talk about base effect in inflation, he said that inflation across the world was measured on a year-on -year basis but they have not turned negative, its the softening of the prices to some extent.
No other country has negative inflation as of now, however, many are very close to zero level, Ghosh added.
Delay in monsoon is likely to affect agricultural commodities but large portion of these agricultural commodities will affect CPI and not WPI and the effect will also come by the end of this year, Ghosh added.
Terming its as a “transitory phenomenon” he said there are decent sign of revival and we can still achieve reasonable good growth rate.