The policymakers also join the deflation chorus in India..

The deflation chorus keeps coming in India. A drop in inflation is termed as deflationary by media every now and then. Former ECB member Lorenzo Bini Smaghi had earlier warned that one should use the two D words – deflation and depression with caution. The reason is that both suggest really difficult times for both economy and policy. However, we seem to be using the word deflation with little caution.

For instance, this time around even Economic Survey says India suffers from deflationary impulses atleast in short term:

Optimism about the medium term and gathering anxiety about near-term deflationary impulses simultaneously reign over the Indian economy. Optimism stems from the launch of the historic Goods and Services Tax (GST), the decision in principle to privatize Air India; actions to address the Twin Balance Sheet (TBS) challenge; and growing confidence that macro-economic stability has become entrenched. Optimism, even exuberance,
is manifested in financial markets’ high and rising valuations of bonds, and especially stocks. At the same time, anxiety reigns because a series of deflationary impulses are weighing on an economy yet to gather its full momentum and still away from its potential. These include: stressed farm revenues, as non-cereal food prices have declined; farm loan waivers and the fiscal tightening they will entail; and declining profitability in the power
and telecommunication sectors, further exacerbating the TBS problem. For the year ahead, the structural reform agenda will be one of implementing actual and promised actions— GST, Air-India, and critically the TBS. The macro-economic challenge will be to counter the deflationary impulses through key monetary, fiscal, and agricultural policies. The opportunities created by the “sweet spot” that recent Economic Surveys have highlighted
must be seized and not allowed to recede.

Even in RBI MPC Minutes, both Governor and Deputy Governor mention deflation in food prices:

Statement by Dr. Viral V. Acharya

Inflation prints since the last policy have turned out even lower, though there are emerging signs that certain deflating food items are on a price rebound. 

Statement by Dr. Urjit R. Patel

…….An assessment of whether the recent deflation in food items is sustainable, despite a normal monsoon, would require more hard data going forward.

There is always this confusion when the term deflation is mentioned. What people perhaps mean is disinflation but they end up calling it deflation.

Robert Ophele, then Deputy GOvernor of Banque de France clarified:

Inflation refers to a sustained increase in the general price level in an economy. It is not an instantaneous shock limited to the prices of certain goods. It is a persistent and general process. Inflation is fuelled by expectations – when workers and companies expect prices to rise, they adjust upwards their prices and wages accordingly.

Conversely, deflation is a sustained decrease in the general price level in an economy. If only certain prices fall, it is not deflation. For example, the price of laptop computers or hi-fi equipment may decrease due to technological progress, but this is not deflation.

Disinflation is a reduction in the rate of inflation or a temporary decrease in the general price level in an economy. For example, if inflation falls from 3% to 1% per year, this is disinflation. If, however, the rate of inflation falls into negative territory, to 1% per year for example, and this decrease is expected to last, this is deflation.

In a recent piece Tandit Kandu of Mint clarifies the so called deflation only on account of fruits and veggies:

The second volume of the Economic Survey released a little over a week ago by the Union finance ministry warned that the Indian economy faces deflation risks owing to the problem of over-leveraged private sector balance sheetsand other headwinds such as GST and rural distress. Concerns over deflation risks are understandable, given the recent downward trend in retail price inflation.

However, a Mint analysis suggests that the sharp drop in inflation below the Reserve Bank of India’s (RBI’s) 4% target has been driven by only two items—pulses and vegetables. The analysis shows that consumer price index (CPI), excluding pulses and vegetables, rose at the rate of 3.8% in July, much higher than the official headline figure of 2.4% inflation for the month. The re-calculated CPI is based on adjusted weights after excluding pulses and vegetables from the basket of goods and services.


Thus, there does not seem to be any imminent threat of deflation in India. A more apt characterization of the recent trends in prices may be ‘disinflation’ (a fall in the inflation rate) rather than deflation (falling prices) given that overall inflation, excluding pulses and vegetables, is close to the RBI target of 4%.

This is pretty much the story each time deflation is mentioned in India. One or two items/categories lead to decline in inflation levels and we call it deflation in India and clamoring for monetary and fiscal stimulus.  Whereas deflation is persistent decline in most prices (if not all) and there is nothing of this sort happening here.

4 Responses to “The policymakers also join the deflation chorus in India..”

  1. vikramml Says:

    I have a huge problem (yes another one) with assuming deflation as a risk or as a bad thing. Firstly, the main problem with deflation is when there is too much debt/leverage. Secondly, deflation is desirable for the common man/consumer. Third, it is automatically assumed that deflation is bad for business or economic activity but I think it is a mistake to assume that business cannot make money in a deflationary environment. The entire tech industry undergoes constant massive deflation but it is one of the most profitable industries around. Given that this is a tech-dominated period, deflation should be expected and allowed for. If we keep denying natural deflation due to tech innovation, we end up with excesses of the sort we have been seeing since the early 2000s because we are forcing leverage into other areas of the economy. And, these other sectors, especially in developed countries, don’t need much growth anyway! Note, tech sector is relatively debt-lite so it doesn’t get affected as much, +vely or -vely by monetary policy.

    I feel this assumption of “deflation is a bad thing” (no matter what the circumstances) is a sorry result of the great depression when conditions were different. We always keep fighting the old battles thereby ensuring that we overcompensate and cause the new problem on the other extreme.

    Any thoughts on the validity (or not) of this argument?

    • Amol Agrawal Says:

      Well that is the Austrian School argument all the way. They say deflation is not bad at all. The purpose of my post was to question whether we have a deflation at all? Now whether deflation is bad or good is pretty much the crux of macroeconomics. It actually led to development of the field of macroeconomics where Keynes said all these things are really bad and do a lot of harm to the economy.

  2. vikramml Says:

    Ok, the Robert Ophele link has a useful reference on this:

    “1 Bordo and Filardo “Deflation in a historical perspective” (BIS Working Paper 186 2005) advocate that deflation episodes can be put in three categories: the good, the bad, and the ugly. But, in order to be good, deflation should coincide with a major long-lasting technology and productivity boom.”

    So, can we argue that we are in a good deflation period? Coz of the tech boom? I guess I need to read that paper – should be interesting. 87 pages though!!

    I wonder if this deflation scare mongering is merely because 1) the elite don’t want their debt to go bad, which is understandable but also 2) in a domestic economy, if a company goes bankrupt, another company can pick up the pieces and the reconfiguration happens domestically, but in a global economy, one country can lose out to another and it then becomes in the interest of the government to bail out the company, especially when different countries have different levels of state support.

    Maybe… this is why we are edging towards a global economy with every country gradually over-leveraging. No one wants to back down.

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