Disinflation

Inflation no doubt hurts economy and redistributes income to the disadvantage of the poor. The rise of inflation to the 13-year high of 13 per cent in July, 2008 created a fear-psychosis of further rise in prices. The global food shortage and our dependence on import of some farm products from high-price markets on one hand and worldwide financial crisis-oriented economic slowdown on the other resulted in an inflationary pressure since the second half of 2007-08. Inflation, however, started falling since last August though at a slow pace initially. But the rate of fall in inflation in the second half of the current fiscal has been rapid and has now come down to the 32-year low of just 0.44 per cent in the week ending March 7, 2009. This is because the wholesale price index declined to 226.7 which was the same level of March 29, 2008 indicating, thereby, that the rate of year-on-year inflation in the last week of current month becomes zero even if there is no fall in the index. The salvation has brought about an economic paradox in that while the fall of inflation should normally improve economic condition of mass people through deduction of prices, food grains continue to be costlier day by day and their price level in course of one year has increased by 9 per cent. Thus, the zero rate of inflation fails to cheer the people. On the other hand, since most non-food commodities are becoming cheaper with every successive week, deflation is expectedly knocking at the door.

If inflation is uncomfortable, deflation is fearful, which the world economy of 1930s well demonstrated with its evil spell on falling prices everywhere, resulting in decline of output, employment, investment and incomes all through the economy. The fall in prices make consumers wait for further decline and the delay will force production to fall and the products are compelled to cut wages and employment to cope with the market glut. Deflation creates such a vicious circle. Japan experienced the deflationary phase in 1990s, but well coped with the situation. To counter the challenges of deflation, India has to take some additional bold steps. In spite of several monetary measures, the banks are still maintaining a high interest rate regime. The real interest rate, which is the difference between inflation rate and nominal interest rate, is still very high at which industrialists are scared to borrow funds for investment, and hence the prevailing rate of interest must decline. Apart from this, the prices of agricultural commodities, now at artificially high levels due to large price support measures, should witness a trend reversal. Further fiscal measures like reduction of taxes, inducement to invest and expenditure on infrastructure and social welfare programmes should now be undertaken larger scales, though the Indian situation is still better than most of the other countries. ASSAM TRIBUNE