The Hindu Business Line : When prices retreat

In a textbook scenario, a sustained fall in prices of this kind could wind down output even further, but this is India, where reality works differently

Wonders never cease, even in a downturn. Barely six months ago, the annual Wholesale Price Index-based inflation rate had scampered to 12 per cent with the index for iron and steel recording a rise of 30 per cent; primary articles climbed 11 per cent while fuel and manufacturing inflation rates were also in double digits. Now for the first time, the overall increment rate has plummeted to just 0.44 per cent with fuel prices falling and prices of manufactured goods registering a marginal increase of 1.3 per cent. For consumers that may not mean much because food prices as measured by the monthly Consumer Price Index still remain high; inflation for Industrial Workers, for instance, stays at an unyielding 10.4 per cent. For the organised economy too, it does not spell happy tidings but for entirely different reasons.

The present journey of headline inflation reflects two accompanying trends; a sustained fall in output all through the last two quarters and weakening consumer demand whose own declines have their origin not just in the global recession that has rubbed off but also in a sustained rise in interest rates till last September. In a textbook scenario, a sustained fall in prices of this kind could wind down output even further, setting in motion a vicious spiral. But this is India, where reality works differently and offers some happy tidings for the manufacturing sector contemplating a bleak future. Two policy initiatives have in all probability begun to work a positive effect; the three stimulus packages and other forms of government largesse, such as the Sixth Pay Commission and high minimum support prices for farmers have created new purchasing power; the Reserve Bank of India’s repeated reductions in the cost of credit may have prompted a revival in consumer demand. As a result key sectors such as cement and steel have seen rising sales while the automobile industry may be in for some heavy orders from city transport authorities for buses. The Nano should be followed by rival small cars, and together they should set component manufacturing humming again. In a welcome departure from the past, a number of manufacturing units are discovering the downturn as a great teacher: enterprises across size and product lines are restructuring workforce and the workplace, improving processes, thus cutting costs, and discovering new markets.

This quarter and the next may yet spill some red ink if prices and output chase each other downward. But those stray signs of growth offer the strongest case, and a decelerating inflation rate the necessary elbow room, for further rate cuts.

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