New Delhi: India’s economy may be staring at deflation, at least statistically, a condition where prices come down below their level a year ago with inflation rate turning negative, taking away pricing power from companies, eroding their profit, and forcing them to lay off employees.
The situation arose with the wholesale price inflation rate turning zero in November, meaning overall prices didn’t rise from their level a year ago. In October, WPI (Wholesale Price Index) inflation was 1.77%.
Except manufactured items, prices of which rose by 2.04%, inflation of primary products and the fuel group contracted by 0.98% and 4.91%, respectively, as vegetable prices fell by 28.57% and petroleum product prices came down after global crude prices fell sharply.
WPI-based inflation was last in the negative territory in the three months from June to August in 2009.
Deflation is a real danger, said Pronab Sen, chairman of the National Statistical Commission. “More than negative numbers for primary articles and fuel group, a sequential drop of inflation of manufacturing items is the real bad news. In (the) Indian context, manufacturing inflation below 2.5-3% should be considered deflationary," he added.
Inflation of manufactured items came down for the third consecutive month, the first such occurrence since the peak of Lehman crisis in 2008. Inflation rate of textiles, food, chemicals and basic metals declined, while leather, cement wood and paper saw a sequential pickup.
However, many analysts feel an eroding base effect, especially for food items with a probable lower kharif or monsoon crop output, may see wholesale price inflation picking up again.
The latest wholesale inflation print comes at a time when India’s factory output contracted unexpectedly in October for the first time in seven months and in its worst performance in three years, while retail inflation touched a new low since the series was launched in 2012. Though the central bank now focuses solely on retail inflation, a 0% WPI inflation will add to the clamour for an interest rate cut to spur consumer demand and investment.
Data released on Friday showed retail inflation measured by the Consumer Price Index (CPI) eased to 4.38% in November compared with 5.52% a month ago, while the Index of Industrial Production shrank 4.2% in October, dragged down by manufacturing, which contracted by 7.6%.
Sen said 0% WPI inflation shows that demand pressure is starting to bite really hard in the economy and that the government needs to boost infrastructure investment as soon as possible.
Sidharth Birla, president of industry lobby group Federation of Indian Chambers of Commerce and Industry, said that while the issue of inflation is being handled well, the sharp dip in manufacturing growth reported in the latest monthly release is a matter of concern.
“The recent data on capital goods and consumer durables reflect persistent weak demand conditions. In addition, the global recovery remains scattered and this is reflected in our export growth which was seen waning in the past few months. Amidst the current situation, a cut in the interest rates will at least provide some impetus to domestic demand," he added.
Data separately released by the commerce ministry showed that merchandise exports grew in single digits at 7.27% to $25.96 billion while imports increased by 26.8% to $42.82 billion, leading to an 18-month high trade deficit, driven mainly by skyrocketing gold imports and high electronics imports.
Yes Bank Ltd chief economist Shubhada Rao said the sharp correction in global commodity prices amid structural measures in the form of restrained minimum support price hikes, fiscal consolidation, sub-potential growth and tight monetary policy are having a palliative effect on inflation metrics. “We expect WPI print to remain in the range of 0.5-1.5% over next four months and to average 3% in FY15 compared with our earlier expectation of 4.5%," she added.
Higher supply from the US, lower global demand and unwillingness on the part of Organization of the Petroleum Exporting Countries to cut supply has led crude oil prices to plummet to a five-year low at around $60 per barrel.
Citigroup India economist Rohini Malkani said the broad-based decline in inflation coupled with commodity tailwinds has clearly opened up space for monetary policy to support growth. “With CPI inflation set to track RBI’s 6% target considerably earlier than January 2016, we expect RBI to begin its easing cycle in early 2015. Overall, we expect a cumulative cut of 100 basis points by FY16, taking repo to 7%," she added.
In its monetary policy review earlier this month, the Reserve Bank of India (RBI) kept policy rates unchanged despite pressure from the government and industry lobbies to cut rates.
The central bank said that although November inflation is expected to show a further easing, “the favourable base effect that is driving down headline inflation will likely dissipate and inflation for December may well rise above current levels".
“Over the next 12-month period, inflation is expected to retain some momentum and hover around 6%, except for seasonal movements, as the disinflation momentum works through. Accordingly, the risks to the January 2016 target of 6% appear evenly balanced under the current policy stance," RBI said at the time.
The Urjit Patel panel, in a report on the possible path to be followed by the central bank on monetary policy, had recommended a retail inflation target of below 8% by January next year and 6% by January 2016.
Sakshi Arora and Garima Singh contributed to this story.