Is Deflation a problem?
Inflation was a problem which we have been hearing normally over the years, and we are too new to Deflation. Is deflation a problem? You might have heard that India’s inflation figures has dropped to a negative 1.61%. We all are aware what Inflation means so normally deflation would just make the opposite of Inflation.
India witnessed the last deflation 33 years ago,(any ways I was not here to witness that) As for a normal person when we hear that its deflation it would mean that the prices have come down, but if we go to the market to find out the truth we can see that its still the same and has not made an difference, then what does this deflation figures actually mean. Don’t be confused over that in India the inflation rate is calculated on an year on year (YOY) basis on the whole sale price index.
Even so that is the case why does the prices does not come down for a common man? As far as he is concerned only with the prices of the essential commodities which is same or a bit higher than before. Inflation figures are calculated by taking around the prices of 430 products and off those some of them has diminished to a lower price when compared to the last year price. The prices of coal, copper, steel etc.. would be cited as an example.
In order to reflect the prices for the common man Inflation calculation should be done on the basis of Consumer Price Index, which is still marked at 8%. Indian Statically Organization is planning for a new method based on this principle. The deflation report which is now published is not expected to be hovering around the market for a longer time, its just a short term phenomena, which is seen due to base effect.
When deflation occurs the common man should feel happy because it would bring in most products at a lower price then why the Govt is fearing too much for the word “Deflation” when its good for the common man? You might have had a thought like this but If the prices tend to go down, it hits the supply side which would effect the companies who in turn will reduce the labor which would ignite the unemployment figures and would effect the income side of the people, which turns the economy into a recession mode, which is a dangerous situation. What is more dangerous than this is a situation that when the people are opted to believe that the prices will go down, in such a situation people would stop spending which excludes for food and medicine but all other purchases would be stopped thinking that the prices would come down again. Many of us can extend the buying of land, car, jewellery, furniture etc.. with the expectation that the prices would come down. It will also lead to situations worse.
In 1990-96 Japan was under the clutches of deflation would India be the next? NO, the chances are too little. India and China are the only two nations that have recorded growth at this time when the whole world is under the clutches of Economic slow down. Achieving a growth rate of 5.8% for 2008-09 is not a little thing at the current economic global situation. But we do not see any sense of struggle with the domestic markets. The cement, steel, auto’s are posting growth. India is expected to post a growth rate higher than 6% for the year 2009-10 period. This can be achieved if again no major problems arises from the world over.
In short if its deflation or inflation both are not good for the economy and if any one of them clutches the economy it would affect badly, India can keep a 3% rate of inflation which would be expected to gain by this year end.