Click to play videoNew Delhi: In August last year inflation hit 12.63 per cent, the highest in 16 years. On Thursday, the figure stands at just over 3 per cent. Should consumers be rejoicing? Not really, say analysts. Deflation - a sustained fall in prices as inflation falls below zero per cent - could follow.
“What is important to recognise is why is deflation taking place, that might be little scary for common man because deflation suggest that there is so little demand in the economy that prices are actually falling,” says Chief Economist HDFC Bank Abheek Barua.
Prices of goods and services fall when there is lesser money in the system. Lack of money means consumers spend less (demand falls) this in turn affects profits earn by companies (less money) and industrial production slows down. Companies have to cut costs perhaps by job cuts.
“Jobs, salaries income growth business opportunities are in adverse environment that is why prices are coming down. Deflation is the symptom of deeper economic malice. Taking a broader perspective if deflation persists for long it can be very negative,” adds Barua.
Prices of many of these fruits & vegetables may have come down by almost half since last year. But cheaper is not always the better.
If deflation sets in, the Government will not be able to fight it for the next three to four months with the election of code of conduct already place. And with the health of the economy slipping by the day, the country may just be staring at deflation for the first time in recent history.
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