Deflation in India - an extension of the index debate?

In many respects, the debate about deflation dangers in India is exaggerated or premature, though given the state of the global economy, one can never be sure of what lies ahead. This debate is also a result of the problems in constructing an accurate inflation measure for an economy as complex as India. This has been discussed earlier here and here.

The annual Wholesale Price Index (WPI) based inflation for the week ended March 7, touched its lowest in over thirty years to 0.44%, down from 2.43% for the previous week, falling across the board for all items.





This declines is however not reflected on the annual Consumer Price Index (CPI) based inflation rates — be it for industrial workers (IW), agricultural labourers (AL) or urban non-manual employees (UNME) — all of which have actually gone up since September 2008.





Despite the fall in WPI, the essential requirements like foodgrains, energy, basic services etc have clocked high relatively year-on-year inflation rates. In primary articles, the year-on-year inflation dipped to 4.4% this week against 5.8% the previous week, for food articles it fell to 7.4% from 8.3%, for fuel and power group it fell further to minus 6% from minus 5.1%, and for manufactured products it fell to 1.3% from 4%.



The WPI, with its distribution of weights, is a more accurate reflection of the national economy, while the CPI, for different categories of population - urban non-manual employees, industrial workers, agricultural labor - is a more accurate representation of the impact of price changes on the common man. However, the popular debate on inflation, especially in the last few months, has been hijacked by the WPI based figure, whose weekly release also contributes to its salience. The CPI figures are released monthly.

The complex and segmented nature of the Indian economy and the pre-dominance of local factors and the importance of temporary supply disruptions makes a pan-Indian indicator for inflation extremely difficult to construct. Further, the fact that the overwhelming majority of population, in both urban and rural areas, spend more than three-quarters of their income on just the essentials - food, energy, rent, basic services, utilities etc - means that conventional wisdom in inflation indices may not carry much relevance. The numerous imperfections in the price transmission mechanism from wholesale to retail level, is yet another reason for such indices, especially on the consumer side, not being able to accurately capture the inflation picture.

Further, in this case it is also being argued that the high inflation base last year coupled with the relative stability and slight decline this year has contributed to the low inflation rates this year.