Inflation & Deflation with reference to India

INFLATION:
Inflation is the rate at which the prices for goods and services increase. Inflation often affects the
buying capacity of consumers. Most Central banks try to limit inflation in order to keep their
respective economies functioning efficiently. Example: An increase in labor costs to
manufacture a good or offer a service or increase in the cost of raw material.
Inflation in India:
lation Rate in India averaged 5.98 percent from 2012 Inf
til 2019, reaching an all-time high of 12.17 percent in DATE VALUE un
vember of 2013 and a record low of 1.54 percent in June No
2019 3.44
2017. The RBI has retained its consumer of
ce inflation forecast for the second half of 2019-20 at 2018 3.4 pri
.-3.7% 3.5
2017 3.6
Inflation rate in India was 3.3% as of May 2019, as per the
Indian Ministry of Statistics and Program 2016 4.5
Implementation. This represents a modest reduction
from the previous annual figure of 9.6% for June 2011. 2015 4.9
Inflation rates in India are usually quoted as changes in the
2014 5.8
Wholesale Price Index for all commodities.
Many developing countries use changes in 2013 9.4
the Consumer Price Index (CPI) as their central measure of
2012 10.0
inflation. In India, CPI is declared as the new standard for
measuring inflation. CPI numbers are typically 2011 9.5
measured monthly, and with a significant lag, making
them unsuitable for policy use. India uses changes in the 2010 10.5
CPI to measure its rate of inflation.
2009 12.3

2008 9.1

2007 6.2

India: Inflation rates from 2007 – 2019

Factors to determine the Inflationary Impacts in India:
Demand factors:
It basically occurs in a situation when the aggregate demand in the economy has exceeded the
aggregate supply. It could further be described as a situation where too much money chases just
few goods.
Supply factors:
The supply side inflation is a key ingredient for the rising inflation in India. The agricultural
scarcity or the damage in transit creates a scarcity causing high inflationary pressures. Similarly,
the high cost of labor eventually increases the production cost and leads to a high price for the
commodity.

Domestic factors:
Developing economies like India have generally a lesser developed financial market which
creates a weak bonding between the interest rates and the aggregate demand. This accounts for
the real money gap that could be determined as the potential determinant for the price rise
and inflation in India.
External factors:
The exchange rate determination is an important component for the inflationary pressures that
arises in India. The liberal economic perspective in India affects the domestic markets. As the
prices in United States rises it impacts India where the commodities are now imported at a higher
price impacting the price rise.

DEFLATION:
Deflation is generally the decline in the prices for goods and services that occur when the rate of
inflation falls below 0%. Deflation will take place naturally, if and when the money supply of an
economy is limited. Example: The Great Depression in the United States that followed the US
stock market crash in 1929.

A recent example of deflation occurred in India during "The Great Recession" of 2007-2008,

where the inflation rate fell below 0%, which means that the cost of goods and services were
declining.

Deflation in India:
For a long time, India faced the ugly problem of high inflation - the rise in prices over time.
Costs jumped at a fast pace month on month. This forced the Reserve Bank of India to maintain
a high-interest-rate policy.

Now, the problem has reversed. In the past, inflation had been in the negative zone. Inflation
measured by the Wholesale Price Index (WPI) fell to negative 2.33% in March, the lowest in 65
weeks.
Just like inflation, deflation can be a continuous cycle. When prices continue to fall over time,
consumers can withhold spending money. This is because they wait to buy the goods or services
at a lower rate tomorrow. This means demands continues to fall, leading to further deflation. A
fall in sales is not good for company profits. As a result, companies too withhold investing in
new projects. All this leads to a slowdown in the economy. Countries often struggle to get out of
this deflationary spiral. Japan, for example, has struggled with deflation for nearly a decade. This
has kept its economic growth depressed.
Is India at risk?

Deflation has hit countries in Europe and Japan. Even in Asia, seven out of 10 countries
excluding Japan are facing deflation, according to a Wall Street Journal report. India has now
joined this list after reporting a fall in prices for the fifth time in decades. However, analysts
suggest there are no reasons to worry about deflation in India. This is because the demand
scenario in India is not affected. The key reason for deflation is the fall in global commodity
prices. After years of high inflation, the fall in prices could very well help improve demand for
goods and services in India. This will help accelerate economic growth further, not slow it down.