Inflation at 30-year low, but interest rates remain sticky

Economic Bureau
Mar 20, 2009

New Delhi: From a 15-year high of about 13 per cent till September 2008, the Inflation rate based on the wholesale price index (WPI) has now slid to 0.44 per cent for the week ending March 7, the lowest level since 1977-78. The 199 basis points fall from the previous week when the rate was 2.43 per cent is the sharpest since November 1, 2008.

With inflation already at such low levels, dis-inflation or inflation in the negative territory is more or less a certainty. But there is a distinction to make between dis-inflation and deflation. In the case of deflation, there is a contraction in overall demand along with negative inflation. The Indian economy continued to grow — though at a slower pace — at 5.3 per cent in the third quarter of 2008-09.

The rapid fall in the inflation rate has renewed demands from various agencies for a further cut in interest rates and has also given more elbow room to the Government to continue with its fiscal stimulus measures. “It gives us reassurance that we can take measures to stimulate the economy,” said Planning Commission deputy chairman Montek Singh Ahluwalia, noting that negative inflation would not be good for growth.

Though the Reserve Bank of India has been loosening up the monetary policy, India Inc sees the need for a more aggressive easing. “What is particularly worrisome is that given the present inflation rate and the interest rates being charged by banks, the real rate of interest in the economy continues to be at double digits. The banks must lower the lending rates to single digit levels if economic activity is to be stimulated,” said Ficci president Harshpati Singhania.

Arvind Virmani, chief economic advisor in the finance ministry, pointed out that since September 2008 the percentage drop in the wholesale price index has been about 3 per cent. While fuel contributed 60 per cent to the decline, manufactured goods contributed about 40 per cent. “The index for primary food items, however, rose marginally by 0.2 per cent. This has, in fact, slowed down the decline in the inflation rate,” he pointed out.

According to him, this is due to a buoyant demand for food in rural India. This also partly explains the consumer price index-based inflation rate for industrial workers continuing to remain high at 9 per cent in January. “Rural areas are still a source of strength as far as demand is concerned,” he said.