Economy

WPI contraction spurs deflation fears

Inflation based on the wholesale price index (WPI) decelerated for the tenth consecutive month, and was -4.95 per cent in August compared with -4.05 per cent in July. At the same time, consumer price inflation for August slowed down marginally to 3.66 per cent from 3.69 per cent in July.

This follows Chief Economic Advisor Arvind Subramanian’s comments cautioning that India’s economy could be nearing deflationary territory. The data also comes two weeks before the Reserve Bank of India’s scheduled policy review meeting on September 29, where it will decide on whether to cut interest rates.

Overall, industry bodies are positive about the trend in inflation, but there is some wariness regarding deflation.

According to Jyotsna Suri, President, FICCI “Continued decline in inflation levels underscores the need for an urgent revival in consumer demand. This would lead to better capacity utilisation, which in turn would spur investments. Amidst the prevailing global headwinds, these are the most critical factors for firming up India’s growth aspirations.”

While reiterating these points and welcoming lower inflation, Rana Kapoor, President of The Associated Chambers of Commerce and Industry of India (Assocham) said “Deflation is a far greater worry than inflation considering that some fall in prices could very well result in slowing down of demand in the economy as when prices start falling, a vicious cycle of lower spending and lower demand sets in, thereby hampering growth.”

Primary articles in the WPI fell -3.7 per cent in August from -3.66 per cent in July. Within this, food article inflation was at -1.13 per cent in August against -1.16 per cent in July. CPI food inflation marginally accelerated to 2.2 per cent in August from 2.15 per cent in July.

WPI for the fuel and power category fell considerably and was -16.5 per cent in August, mainly driven by the fall in mineral oil price index which was -24.2 per cent in August compared with -19 per cent in July.

The index for manufactured goods in the WPI fell to -1.9 per cent in August from -1.5 per cent in the previous month.

The decelerating inflation and slower-than-expected GDP growth in the first quarter of the financial year has increased the pressure on the RBI from industry to cut interest rates.

Chandrajit Banerjee, Director General, CII said “The WPI has declined for the tenth consecutive month indicating slackness in economic activity across sectors. Given that CPI inflation has also been declining, the RBI needs to reduce interest rates sharply to drive a recovery in demand. CII expects the RBI to reduce interest rates by 50 basis points in the forthcoming policy with statements supporting further easing in the near future.”

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Printable version | Feb 25, 2021 11:47:23 AM | https://www.thehindu.com/business/Economy/wholesale-price-indes-wpi-inflation-falls-spurs-deflation-fears-rate-cut-hopes/article7651559.ece

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