India enters deflation as economy slows

INDIA’S annual inflation rate slipped into negative territory, official data showed today, with the country’s slowing economy cutting into demand.
 
Inflation stood at minus 1.61 per cent for the week ended June 6, down from 0.13 per cent the previous week, according to the Wholesale Price Index, India’s most watched cost-of-living measure.
 
The index in August touched a 13-year high of 12.9 per cent but a period of deflation had been expected as rates tumbled, reflecting weak growth in Asia’s third-largest economy. The price crash was also a result of diving commodities costs, analysts said.
 
"To a great extent, inflation has fallen due to industrial activity slowing down in India and lower global metal and oil prices (compared to last year)," said Siddhartha Sanyal, an economist with Edelweiss Securities.
 
The negative rate was a "phenomenon that could end quickly," added DK Joshi, from rating agency CRISIL. "We are seeing oil, commodity and metal prices beginning to move up."
 
Spiralling deflation – in which falling prices prompt consumers to delay buying, deepening a downturn – has become a concern across the globe as demand for goods has dried up.
 
The central Reserve Bank of India has slashed rates six times since October last year, but some private and state-run banks have yet to make cuts despite pressure from the government.
 
India’s finance officials expect growth to slacken this year to about seven per cent – the weakest in six years – after three years of heady expansion of more than nine per cent.
 
Some independent economists forecast a 2009 figure below seven per cent and warn the economy will likely lose more steam next year, slowing to 5.5 per cent or lower.
 
The Congress party-led government will present its budget early next month and its focus is expected to be on spurring growth even at the risk of a wider fiscal deficit.
 
High inflation had badly affected India’s millions of poor as prices rose, but now lower growth threatens to hold back the nationwide development promised by the Congress alliance that won general elections last month.
 
Many food prices, including for pulses, cereals and vegetables, have continued to rise, according to the latest figures.
 
India’s bout of deflation comes as consumer prices fell in China for the fourth month in a row in May.
 
Beijing has tried to increase domestic consumption while its export-dependent economy is battered by the global crisis, which has slashed demand in overseas markets such as the US and the European Union.
 
Today’s figures mark India’s first period of deflation for 30 years, according to central bank records.