Deflation: Now playing at a city near you
What really captures imagination and concerns of a majority of Indians are prices of daily consumables. There are wide-spead concerns that the Indian economy may go into deflation by the second quarter of financial year 2009-10 as there are fears of inflation going below zero per cent in the face of unprecedented fall in crude and commodity prices. Commodity stocks are already out of flavour.
Inflation fell to more than six-year low of 2.43 per cent for the week ended February 28 mainly on account of fall in prices of manufactured products and some food items. The wholesale price index stood at a nine-month low of 6.61 per cent from this year’s peak of 12.91%. For an analytical mind, this brings us to the question how are these figures calculated?
As for me, I have long believed that the methods that Indian Government utilizes in calculation inflation is grossly wrong. It is based more on the Wholesale Price Index (WPI) rather than the Consumer Price Index (CPI). You can learn more about both the indices here. To sum it up, the WPI doesn’t take the cost of a haircut into account, and, a fourth of the commodities used in WPI are no longer relevant to the common man. As a result, the inflation figures are grossly skewed. That said, falling inflation will give RBI more space to signal further cuts in interest rates to prop-up general demand and growth. This will trigger a revival in sectors such as automobiles, cement, steel and infrastructure and this would help an economic recovery. Yes, the worst when it comes to domestic demand will finally be over.
What worries me more that the Center might still be in denial. A fitting response in rate cuts, if delayed, will end up harming the industry in the long term.
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Tagged as CPI, Deflation, Indian Economy, Inflation, WPI + Categorized as Business, Economy