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‘India has entered deflation club’

shoppingNEW DELHI: India’s prices are falling but the country doesn’t have to worry it has caught the deflation bug from richer economies.

While India’s wholesale inflation rate continues to slide—recording its biggest year-on-year decline in five-and-a-half years last month–economists say they are confident it is not caught in the kind of deflationary spiral that has hobbled the economies of Japan and the Euro zone.

On Monday the government said its wholesale price index declined 0.39% from a year earlier in January. That was only the fourth time in decades that India has reported a fall and its biggest decline since the aftermath of the 2008 financial crises.

“India has now entered the deflation club in (Asia outside of Japan) region where seven of the 10 countries already have (producer price indexes) in deflation territory,” Morgan Stanley said in a research note.

Japan is still struggling to emerge from more than a decade of declining prices and now there are even risks of China having to struggle to escape from a deflationary spiral. Deflation can hurt economies because falling prices can discourage consumers from spending and businesses from investing as they wait for prices to decline further.

India economists say the situation is different in Asia’s third-largest economy as the deflation is mainly from the decline in oil and other commodity prices and not from a lack of demand in the economy.

At least for now they welcome the lower prices as further proof that India has been able to rein in its stubborn inflation problems.

“The economy has hit a sweet spot,” said Saugata Bhattacharya, chief economist at Axis Bank.

Companies will benefit because India’s economic growth is accelerating so they will be able to use the dip in wholesale prices to either lower their prices to stimulate demand or maintain prices to boost profits, Mr. Bhattacharya said.

India recently announced that it expects its gross domestic product to expand 7.4% in the year ending March. While the new growth figures are based on new parameters that economists are still trying to figure out, that would make this fiscal year, India’s best in four years.

“We shouldn’t read too much into this,” slide in prices, said Sujit Kumar, an economist at Union Bank of India. “It’s not a structural decline [in prices] that we are seeing.”

The fall in prices will give the Reserve Bank of India confidence that it can lower lending rates to spur demand.

“Today’s data provide more evidence of subdued price pressures, and bolster the case for the [Reserve Bank of India] to loosen policy further over the coming months,” Shilan Shah, India Economist at Capital Economics, said in a research note. – From Wall Street Journal

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