The inflation data for the month of January is out. And it has taken many by surprise. This is because India has reported negative WPI in the month. Until few months back, there was a clamour for rate cut. But the central government with a sharp focus on inflation and stability, did not concede. Does the negative inflation justify a case for rate cut now? Along with rate cut, another issue that economists are worried about is if India has joined the league of countries that face deflation. The latter is a matter of concern as it could imply that consumers will postpone thei r buying and manufacturers will stop investing, expecting a decline in the price levels in the economy.
However, we believe that deflation scare is not for India, at least, not yet. Unlike regions like Japan that seem to be facing deflation since ever and where deflation seems to be a self inflicted issue, recent decline in price levels in India is mainly on account of fall in fuel and commodity prices, both external factors. As far as common man is concerned, food prices still remain high and as vulnerable to monsoons as they have been in the past. Basically, the reason for price fall is not a lack of demand. Hence, we do not believe that India will witness a real deflation in the future. Instead, current circumstances offer great opportunities for India to implement and formulate much needed reforms to ensure a stable recovery path from here.
As far as further interest rate cut is concerned, we believe that retail inflation, and not whole sale price inflation will be a deciding factor for the same.And as suggested in an article in Firspost, the picture that retail inflation paints seems different .What this could imply is inefficiencies at various stages of the value chain from manufacturing to consumption. A real and stable growth seems unlikely unless these inefficiencies are sorted. Reforms, and not rate cut, is clearly the solution.