Wht’s for Amm Admi- Inflation or Deflation?
Hello everyone this is my second blog after “Inflation too low? Is Deflation the new worry?” on deflationary situation in India. It is very essential to know whether this inflation calculation system and index are showing mirror image of our economy or it is just a myth.
Ever since the inflation rate as measured by the wholesale price index (WPI) slipped below 1% in March this year, the question was always ‘when’ the rate would fall into negative territory. So when it finally did slip below 0% to -1.6%, as per the WPI for the week ended 6 June, it only ended the suspense.
THE Wholesale Price Index (WPI) is a broad-based measure of inflation, widely used for policy making in India. The index, however, has been acknowledged as incomplete since it includes only goods. In order to give a complete picture of inflation, the need for a services-based index has already been recognised among policymakers.
Because we are a supply constrained economy, not a demand constrained one. One has only to look around at the phenomenal response to the Nano bookings and more recently to the Tatas’ low –cost housing offer, the mind-boggling number of cell-phone subscribers being added every month etc to realise there is no shortage of demand. There is, rather, a huge shortage of supply at the right price points. Consequently, deflation, defined as a sustained fall in prices on account of a contraction in demand is simply out of question.
If that does not convince you, then look at the consumer price index which is the measure of inflation as far as any ordinary individual is concerned. Not only is that in the range of 8-9% (8.3% as per the CPI for industrial workers and 9.5% as per the index for agricultural workers and rural labour) but prices of food items that are a major component of the consumption basket of the aam janta are still rising.
To talk of deflation and to fashion policy on the basis of this false premise would be a gross error of judgment. If the WPI inflation is negative, it is primarily because inflation in India is measured on a point-to-point basis ie the index in June 2009 is compared with that in June last year. So if the rate of inflation was high last year (as was the case in June 2008), it appears comparatively low this year. This is the so-called ‘base’ effect caused by the high base that prevailed last year and is likely to continue till August 2009 as it was in August last that inflation peaked at close to 13%. So be prepared for shelling out more when you go shopping even as prices, as per the WPI, should be dipping lower and lower. The WPI has made suckers of us all!
Garvit D. Dave
