Inflation too low? Is Deflation the new worry?

Hello everyone! yesterday night I was chatting with one of my close friend at that time some issues are raised like what is the effect of financial crisis on Indian economy, what is effect of current inflation level on general pricing level of all the goods throughout economy and so on. So here I just try to brief some points which I think should be known to everyone....
But before that let me brief you some points-

INTRODUCTION-:

• Law of Supply- The law of supply states that, other things equal, the quantity supplied of a good rises when the price of the good rises.

• Law of Demand- The law of demand states that, other things equal, the quantity demanded of a good falls when the price of the good rises.
So ultimately because of rise in price or inflation supply increases (producer’s profit maximization) but at the same time demand for the product decreases (purchasing power of money decreases) which further leads to deflation.
A general decline in prices, often, caused by a reduction in the supply of money or credit. Deflation can be caused also by a decrease in government, personal or investment spending. The opposite of inflation, deflation has the side effect of increased unemployment since there is a lower level of demand in the economy, which can lead to an economic depression. Central banks attempt to stop severe deflation, along with severe inflation, in an attempt to keep the excessive drop in prices to a minimum. The decline in prices of assets, is often known as Asset Deflation. Declining prices, if they persist, generally create a vicious spiral of negatives such as falling profits, closing factories, shrinking employment and incomes, and increasing defaults on loans by companies and individuals. To counter deflation, the RBI can use monetary policy to increase the money supply and deliberately induce rising prices, causing inflation. Rising prices provide an essential lubricant for any sustained recovery because businesses increase profits and take some of the depressive pressures off wages and debtors of every kind.


WHAT FOR COMMON MEN-
Inflation has fallen from thirteen percent to close to zero in last seven months. But the common man is yet to feel this sharp fall in inflation. Why? Common man will continue to face inflation. You have to keep in mind that the inflation measured by wholesale price index (WPI) dropped on account of fall in prices of industrial inputs. Finished goods will capture this fall in prices of inputs only with a time lag. Another reason is the inflation rate for food items which is still ruling firm at 7%. Even if the prices of food items and finished goods ease there may not be a significant down side to consumer price inflation from 5%.

CURRENT SCENERIO-:
Inflation came in at 0.27% for week ending Mar 27th. From its previous level 0.44%. Nonetheless Inflation for the same period last year was at 5.66%.
Till a few months back we were rallying against RBI to take measures to reign in Inflation, but now I seem to think is this rate of fall too alarming?? I mean if we continue to fall we are risking economy to be shunned in to a spiral slowdown and then we will be worried more of Deflation. I say some Inflation is good. We are already in the RBI comfort Zone and no further fall in Wholesale or Consumer Price Index should be promoted. Why?
People's willingness to buy something today that they think will be worth less tomorrow is very low. Similarly peoples willingness to invest in something that they think will be worth less tomorrow is also very low. Hence some inflation is needed to encourage people to buy today or invest today, thinking that tomorrow it might be more expensive.
We have already seen Demand Deflation . Consumers are no longer supporting the economy, spending is lowered significantly, which makes me worry about deflation. Deflation is deadly and will further paralyze all types of commercial activity.This been said, many folks are calling for and/or anticipating another round of RBI rate cuts , government is mulling a diesel price cut which will cater to furher decrease in Inflation.

Near 0% Inflation Likely for Some Time
But with flagging demand, low inflation is becoming more like a looming threat of Deflation , as prices continue to be high, interest rates are not being pulled back by banks which all contributes to Demand Erosion( destroy gradually).
In my view the next government has its work cut out, they have to invest in building the country, Infrastructure, boosting agriculture production, giving impetus to manufacturing and also focussing on education and empowerment of the poor.
Urban development and spending power can succumb to the slowdown in lending and need to keep up with standard of living. The villagers do not have the problem of mortgages or credit cards or even car loans. They are living within their means and need to be uplifted with opportunity to contribute to the growth of Indian economy.
The sad thing is the only solution to the administration is RBI rate cuts, I suggest we stop doing so and force banks to further lower rates.
So remember Consumer’s behavior will not be affected by the subzero inflation. As per the data I have gone through buying decisions are not deferred on an aggregate levels. It is only in housing and real estate segment that people have postponed buying decision expecting a further fall in prices. With the economy growing at close to 7% the purchasing power of the consumers will increase when the prices fall. The fall in prices from an year ago period will hopefully help in reviving demand and strengthen economy. Also remember that the income for rural India has seen unprecedented growth.

jai Hind

Regards

Garvit D Dave

garvitdave87@gmail.com