Goodbye inflation, hello deflation!

New Delhi: With Inflation already at an almost seven-year low of 2.43 per cent in February, it's apparent now there would certainly be a period of negative inflation (or deflation) later this year resulting from the high inflation base of the previous year. "It is reasonable to expect deflation by April this year," Siddhartha Sanyal, vice-president of research at Edelweiss Securities, told The Indian Express. Stressing that inflation had almost hit the 8-per cent mark by end-March last year, Sanyal said inflation would almost surely turn negative some time in the first quarter of the next fiscal year.

What is surprising now, however, is not the imminence of deflation, but the possibility of negative inflation persisting for a good six months. Speaking to The Indian Express at an earlier occasion when inflation was still in 5-6 per cent range, chief statistician of India Pronab Sen had said that there might be deflation this year, but only for a very brief period. Sanyal, however, believes deflation could easily last about six months corresponding to the long phase of double-digit inflation last year set off by the hike in petrol and diesel prices by the government. "Deflation could easily last through the first half of the next fiscal with a turnaround in the second half," he said.

The wholesale price index (WPI), the main index used to measure inflation, stood at 227.8 point in April last year and rose sharply over the next few months to peak at 241.7 in early September. Correspondingly, the WPI currently stands at 227.7 as per provisional figures issued by the department of industrial policy and promotion and has been falling more or less continuously since September. If it continues the trend, the index levels could go significantly lower than those in the corresponding period last year leading to sustained deflation.

Negative inflation, which usually has severe implications for the economy, may not affect the Indian economy in the long run. "Looking at inflation in India over a one-year or two-year window, it would still come out to around 4-5 per cent," said Sanyal. Adding that prices of a lot of commodities like food articles and certain other industrial inputs are still rising gradually, he said deflation is not a grave concern for India since it is largely technical deflation rather than a structural problem.