Business

What Price The Fall

Looming deflation, bad policies hobble chances of a fast recovery

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What Price The Fall
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"Inflation per se has really not impacted us. It is the combination of an uncertain economy and inflation that is impacting us as consumers. Frankly, it's more aboutsentiment."
Vidhya Srinivasan

Living in a three-bedroom flat in an upmarket Chennai colony. Vidhya and herhusband, who works in an IT company, say that an uncertain economy - coupledwith cuts in performance-linked salary components - is causing anxiety. with twochildren to look after, the double-income family finds itself with no surplusincome. "My grocery bill is higher, and cost of rice has more than doubled.Caution has set in, but it's not panic yet," states Vidhya.

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The irony is that this impending deflation means little to most consumers, who are not yet seeing a fall in prices of essential purchases. Economists, on the other hand, are worried about deflation, which is defined as a sustained decline in general price levels more due to a drop in demand as well as supply. So, is negative inflation good news—or bad? Will it further hurt a slowing economy, and for how long will it persist? Finally, will it mean lower prices for consumers?

The low inflation rate has much to do with last year's higher base levels of inflation—measured annually on the basis of the wholesale price index (WPI). Given the experience of countries like Japan and now the US, industry fears that during this phase of deflation—which could last anywhere from a few months to over a year—domestic demand could further contract as consumers hold back purchases in expectation of better bargains. "Deflation is a worry if it sustains for a long period—which is unlikely in India's case. By Q3 of 2009-10, we should see inflation inch up," says D.K. Joshi, Crisil's chief economist.

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"There are so many contradictions in today's market. Our business is down 20 per cent, but our raw material costs have gone up—and we haven't been able to increase prices."

Nirali Bhatt
Garment Manufacturer, Gujarat

"Even though we read that inflation has come down, I haven't felt anychange in our monthly expenses, which only seem to rise. It's forced us to spendless on luxury and leisure," says Nirali Bhatt, who runs an Indo-Westernethnic wear unit in Bhavnagar, Gujarat, with her husband Rajiv. While exhibitionhall owners charge more and raw material costs have gone up, the Bhatts haven'tbeen able to increase prices, "as we have to cater to what the marketwants".

For consumers, however, there's a disconnect, for it is not WPI, but the consumer price index (CPI)—based on retail prices—that reflects what people actually pay for goods. Both indices have different weights: food items have 15.4 per cent share in theWPI, but its share rises to 57 per cent in the CPI. So, while the dip in prices of energy fuel, steel and aluminum is being reflected in the weekly WPI data that makes the headlines, consumer price inflation gets reflected only with a lag. "It is a colossal failure of the government that there is such a disturbingly high divergence of trends in wholesale and consumer prices," states Prof Vivek Moorthy ofIIM Bangalore.

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On an average, in the last one year, prices of food articles have risen 8-14 per cent. "The inflation rate in CPI for agriculture labour has been over 10 per cent since August 2008. In January 2009, it rose to 11.6 per cent," points out agro-economist Ramesh Chand. Here, government policies have been both a bane—and a boon—for consumers.

For instance, overflowing wheat buffer stocks, three times higher than the norm, is helping the government check retail prices. On the other hand, a 33 per cent hike in the minimum support price for paddy to farmers has seen rice prices (depending on the variety) scaling highs. Commonly used Ponni rice in the South, for instance, has seen its price doubling to Rs 37.5 per kg in one year. "Inflation has gone down but not for the aam admi," says Joshi.

Though a higherMSP helps farmers meet their costs, it hits them too as "many farmers are net buyers of food produce though they may be growing food crops themselves," stressesNCAER's Ajay Sahu. To be sure, softening global prices have helped India—a major importer of many commodities like edible oilseed, pulses and crude oil. But government miscalculations haven't. For example, its estimate of domestic sugar production—originally pegged at over 22 million, but now around 16 million—is proving bitter at a time when global prices are reviving. This is reflected in high domestic sugar prices.

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"When I ask our kirana shop owner about prices, he replies that they might go up a rupee, but nothing has come down."

Surmukh Singh
Farmer, Punjab

The 26-year-old farmer from Singhpura village in Punjab's Patiala district issceptical about all the government data on falling inflation. "I cannot seeany evidence of that. Whether it is dals or cereals, most items in my localkirana shop cost the same. Sugar prices have infact gone up from Rs 19/kg to Rs25/kg now," says Singh, who owns five acres of land. The only relief forthis father of two small children is the recent cut in the price of petrol anddiesel.

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Similarly, government policy is hitting textile mills. "The textile mills in particular are faced with excess capacity as cotton is not available at economic costs. The government raised theMSP for cotton this year, making domestic supply very expensive," states Sarita Nagpal, deputy director general ofCII. Conversely, domestic crushing mills are hit due to farmers resisting selling oilseeds at low prices, leading to higher imports, states an aggrieved Solvent Extractors' Association of India.

All around, the economy seems to be grappling with not-so-good news. While exports are hit by low overseas demand, industries are retrenching labour. Uncertainty—and expectations of further fall in prices—is keeping domestic consumers away from splurging despite a dip in prices of real estate and many consumer durables. Banks continue to be wary of lending freely. A senior banker is quick to point out, "Who will take undue risks in these times when people are not sure of their jobs or business prospects?"

Of course, there's optimism that the deflationary situation will not last. This stems from sectors like commercial vehicles, mobile telephony and consumer goods, which are showing signs of reviving either due to government push or better rural demand. "Demand may revive from the second half of 2009-10 as the impact of various fiscal and monetary measures starts to be felt. Hence, we don't expect deflationary trends to take hold of the economy," says Dun & Bradstreet coo Kaushal Sampat.

Indeed, at a macro level, experts say a spell of negative inflation could be to India's advantage. "An increase in supply due to productivity improvement can result in price declines co-existing with economic activity remaining strong," says Citi India's review. A big bet is that the new government, due to take charge in May, will push ahead with efforts to perk up the economy. More immediately, Suresh D. Tendulkar, chairman of the PM's Economic Advisory Council, is optimistic "the CPI will come down post harvest in April. Pre-harvest food prices in January and February are usually higher." Perhaps, then, what goes up will actually come down.

(By Lola Nayar With Arti Sharma, Pragya Singh, Pushpa Iyengar, Chander Suta Dogra.)
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