For the most part of the last three months, high food prices have been a common topic of discussion at the dinner table. Headlines coupling onions and tears have become a staple: India's favourite bulb retails in some places at a princely Rs 80 a kg. So, when chief economic adviser Arvind Subramanian said on Monday that India was closer to "deflation", both experts and the uninitiated were bound to take note.
If there was doubt left in anyone's mind about Subramanian's message, on Thursday, junior finance minister Jayant Sinha said: "We have to be very mindful and watchful of that (deflation) and that will be put into account when RBI considers its monetary policy."
The comments come barely three weeks before the Reserve Bank of India's (RBI's) next monetary policy review on September 29. Last month, RBI governor Raghuram Rajan had kept its key lending rate unchanged at 7.25%, ignoring a chorus of calls from government officials and business leaders for cheaper loans to aid investment and household spending. He did, however, keep the door open for cutting rates if conditions were favourable and retail inflation did not gallop past the central bank's tolerable threshold of 6%.
But the CEA's use of the D word has set the cat among the pigeons in some quarters because deflation can be reflective of weak economic activity. It could be read to mean that people are putting off purchases as their incomes aren't rising, or are even falling.
At a purely conceptual level, deflation occurs when prices start to fall. Fuel prices are a case in point. In the last 12 months, crude prices have fallen sharply from about $85 a barrel to about $45 barrel currently. Consequently, retail petrol and diesel prices, which are linked to international crude prices, have also come down by several rupees a litre. To that effect, fuel prices are in a "deflation" zone.
Likewise, prices of several commodities that India imports have fallen significantly over the last one year. This may have cascaded through in the form of lower prices in several final and intermediate products that use these ingredients.
That brings us to the more fundamental question of why prices of some products are falling. Prices of goods and services are determined by the forces of demand and supply. Ceteris paribus, or other things remaining same, higher demand for goods pushes up prices. Conversely, greater supply pushes down prices. This is mostly seen in times of a glut in crops in certain seasons. In the current context, fuel prices are falling because Organisation of Petroleum Exporting Countries (OPEC), a cartel of 12 oil-producing nations that control 40% of the world's oil output, has decided to keep supplies high enough. This, along with low demand from a slowing China, has made more oil available to the world's pool for countries like India to import at lower prices.
India's wholesale inflation fell by a sharp 4.05% in July, the ninth straight monthly decline, aided by cheaper crude prices that are trading around $50 per barrel. The wholesale price index (WPI)-based inflation, the broadest measure to capture economy-wide price movement of goods, was (-) 2.36% in June, and 5.41% in July last year. Retail inflation also has moderated to a multi-year low of 3.78% in July from 5.40% in the previous month raising hopes for an interest rate cut
But is economic activity weak, and are we justified in worrying about deflation?
Probably not. Data shows India's "real" or inflation-adjusted GDP grew at 7% in the first quarter of 2015-16, slower than the last quarter, but faster than many other countries. It may not quite be true that India is in a phase of "structural deflation" as it people aren't deferring purchases.
Private final consumption expenditure (PFCE), a metric to gauge family spending, grew at 7.4% in April-June, higher than the previous year's 6.2% growth. Car sales, for instance, have grown at 7.4% during in 2015-16 so far-muted but not contracting a pace to force companies to cut prices. As European policy makers have been experiencing, it is a long and painful process to claw out of a low demand-driven deflationary situation. That's not quite the case with India, which continues to remain a global growth spot.
At a purely conceptual level, deflation occurs when prices start to fall. Fuel prices are a case in point. In the last 12 months, crude prices have fallen sharply from about $85 a barrel to about $45 barrel currently. Consequently, retail petrol and diesel prices, which are linked to international crude prices, have also come down by several rupees a litre. To that effect, fuel prices are in a "deflation" zone.
Likewise, prices of several commodities that India imports have fallen significantly over the last one year. This may have cascaded through in the form of lower prices in several final and intermediate products that use these ingredients.
That brings us to the more fundamental question of why prices of some products are falling. Prices of goods and services are determined by the forces of demand and supply. Ceteris paribus, or other things remaining same, higher demand for goods pushes up prices. Conversely, greater supply pushes down prices. This is mostly seen in times of a glut in crops in certain seasons. In the current context, fuel prices are falling because Organisation of Petroleum Exporting Countries (OPEC), a cartel of 12 oil-producing nations that control 40% of the world's oil output, has decided to keep supplies high enough. This, along with low demand from a slowing China, has made more oil available to the world's pool for countries like India to import at lower prices.
India's wholesale inflation fell by a sharp 4.05% in July, the ninth straight monthly decline, aided by cheaper crude prices that are trading around $50 per barrel. The wholesale price index (WPI)-based inflation, the broadest measure to capture economy-wide price movement of goods, was (-) 2.36% in June, and 5.41% in July last year. Retail inflation also has moderated to a multi-year low of 3.78% in July from 5.40% in the previous month raising hopes for an interest rate cut
But is economic activity weak, and are we justified in worrying about deflation?
Probably not. Data shows India's "real" or inflation-adjusted GDP grew at 7% in the first quarter of 2015-16, slower than the last quarter, but faster than many other countries. It may not quite be true that India is in a phase of "structural deflation" as it people aren't deferring purchases.
Private final consumption expenditure (PFCE), a metric to gauge family spending, grew at 7.4% in April-June, higher than the previous year's 6.2% growth. Car sales, for instance, have grown at 7.4% during in 2015-16 so far-muted but not contracting a pace to force companies to cut prices. As European policy makers have been experiencing, it is a long and painful process to claw out of a low demand-driven deflationary situation. That's not quite the case with India, which continues to remain a global growth spot.