Home / News / India /  India's low inflation — the good, the bad and the ugly

India’s wholesale price index-based inflation in June, which came in at a 23-month low of 2.02%, and core inflation, at 31-month low of 0.8%, have raised concerns on whether the country has a low inflation problem now.

"Low inflation is often a good thing. But like blood pressure, it may not always be a sign of health if it keeps falling. Moderately high inflation signals growing consumption and spurs investment. Some pump-priming via lower interest rates & measures to increase consumption may help," chairman of the Mahindra Group, Anand Mahindra tweeted on Monday.

However, retail inflation that the Reserve Bank of India (RBI) tracks for monetary policy decisions in fact inched to an eight month high of 3.18% in June though core inflation slowed to 4.11%.

While a low inflation is good for consumers, it is also a sign of weak demand and thus takes away the pricing power of producers, discouraging fresh investments and job creation. So a moderate level of inflation that does not pinch the consumer and encourages business activity is usually considered good for the economy. As part of the Monetary Policy Framework, the government has mandated the RBI to keep retail inflation at 4%, within a band of 2 percentage points.

Crisil Ltd chief economist D.K. Joshi said retail inflation has dramatically come down because of low food inflation which has implications for farmers and demand in the rural areas. “When food prices go up, it (retail inflation) will also cross 4%. But right now, low inflation has given a unique opportunity to cut policy rates and prop up the economy," he added.

The RBI is often criticised for relying too heavily on the headline retail inflation in which the food basket has around 55% weight, to decide its monetary policy. Since food prices have their own seasonality and remain volatile, RBI’s inflation forecasts have often gone wrong on the higher side.

As NIPFP director Rathin Roy has often pointed out, since the current Monetary Policy Framework is up for review by March, 2021, the government and RBI should use the opportunity to comprehensively review the agreement including the inflation indicators that RBI should be targeting. This may also resolve the conflicting signals that we receive from various inflation indicators

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