India’s Wholesale Price Inflation Enters Negative Territory, But No Risk of Deflation

India’s Wholesale Price Index (WPI) for the first week of June went sub-zero for the first time in 35 years. The fall is largely due to the high base effect caused by the sudden jump in prices of fuel and power as well as manufactured goods last year.

The WPI had reported an 11.7% rise for the first week of June 2008. The situation has changed a lot since then. Due to the bloated base, the current decline seems to be of more statistical significance.

Decline in wholesale prices however provides some scope to the Reserve Bank of India to cut interest rates again in order to offer additional stimulus to the economy. The central bank estimates that three stimulus packages already announced, along with six interest-rate cuts in last seven months, will provide a combined stimulus worth about 7% of GDP to the economy.

This makes India perhaps the only country with a negative inflation rate currently, though a number of European countries are nearing zero levels. But unlike in Europe, where demand has been contracting, India isn’t facing a deflation as industrial output remains positive, domestic consumption remains strong and the retail inflation rate measured by the consumer price index (CPI) still stands at around 8% and shows no signs of easing.

With monsoon season expected to be weaker than usual, the prices of food items are rising fast.

Government spending measures may also push the prices up in the near-to-medium term. The new Government plans to spend more on infrastructure projects and a rural jobs program, the details of which are expected in the budget slated for release on July 6.

Various economic indicators suggest that the economy bottomed out in March and is currently in a recovery mode. Prime Minister Manmohan Singh said recently that the growth rate would be at least 7% and with efforts, the country can revert to 8-9% economic growth in the medium term. Economic growth during 2008-09 dipped to 6.7% from 9% a year ago, due to the impact of the global financial meltdown.

Prospects for strong economic growth have resulted in the recent surge in prices of Indian ETFs such as PowerShares India (PIN), WisdomTree India Earnings (EPI) and iPath MSCI India ETN (INP).

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