India worries at slowing growth and deflation (unlike inflation)

[Naveed Yaseen]

NEW DELHI: It was less than a year ago that Indians watched inflation shoot to dizzying 13-year highs but now they are worried about deflation as growth slackens in Asia’s third-largest economy.

Deflation, in which falling prices prompt consumers to delay buying, deepening a downturn, has become a growing concern across the globe as demand for goods sinks.

India’s weakening inflation is the symptom “of a deeper malaise” with an “adverse environment” for jobs, salaries and business prompting a fall in prices, HDFC Bank Chief Economist Abheek Barua said. Inflation has tumbled from 12.91 per cent last August to 3.03 per cent, partly due to a precipitous slide in the global price of oil and other commodities. Now a slowing domestic economy is kicking in as the global financial crisis hammers exports.

Inflation will reach zero by the end of this fiscal year in March, according to Axis Bank economist Saugata Bhattacharya. Some economists forecast deflation could then set in and last until at least October. It would mark India’s first bout of deflation since March 1976, according to central bank records.

“Wholesale price levels are showing absolute declines unprecedented since the start of the (inflation data) series in 1988,” Goldman Sachs economist Tushar Poddar said. India uses the Wholesale Price Index to measure inflation because it has a broader basket of goods.

“We think deflation will be a much bigger risk for the economy in the rest of 2009, due to ongoing demand destruction and commodity price collapses,” Poddar said in a recent research note.

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