In what may help the United Progressive Alliance score brownie points ahead of general elections in April-May 2009, the WPI-based inflation rate is likely to drop to 2 per cent or even less by March 2009-end. But low inflation and a lower-than-expected moderation in growth rate may not help the domestic economy. RBI governor D Subbarao today said the inflation rate could be significantly below the previously estimated 7 per cent by the end of the current fiscal. The cut in fuel prices itself will result in a decline of 40-45 basis points. For the week-ended November 22, the inflation rate had dropped to 8.4 per cent from 8.84 per cent in the previous week. But economists said the sharp fall in the prices of global commodities, such as steel and cement, was not yet fully reflected in India. Contraction in demand which is largely a result of the global meltdown, coupled with rapidly falling international commodity and fuel prices will pull down inflation. Siddhartha Sanyal, economist with Edelweiss Securities, said India had not yet felt the full-blown impact of the sharp fall in commodity prices globally, which makes the case for a possible sharp decline in prices soon. “So far, we’ve only seen a 5-6 per cent correction in commodity prices here, whereas globally, prices have seen a much sharper fall of 30-35 per cent,” Sanyal said. Edelweiss released a report on inflation in November which estimated inflation would have dropped to 5 per cent by end of March 2009. Speaking to a news channel earlier today, A Prasanna, chief economist of ICICI Securities, too had said inflation could fall to as low as 2 per cent by the end of March.Edelweiss further noted that because of the base effect together with demand contraction, inflation could actually turn negative — deflation — during July-October 2009. “If it stays negative for a longer period, it could be very damaging for the industry and the economy as a whole,” Sanyal said. DK Joshi, principal economist and director, Crisil, said inflation was likely to be below 5 per cent by the end of March as the base effect would start kicking in by then. Not everybody, however, is convinced. Chief statistician of India Pronab Sen believes the chances of inflation turning negative any time next year are poor. “Looking at month-on-month inflation, one can see that the degree of moderation in international commodity prices has already started kicking in here as well. With the manufacturing WPI still rising, inflation can not turn negative, though it will come down sharply January onwards.”Chairman of the PM’s Economic Advisory Council Suresh Tendulkar, too, does not see prospects of deflation. “Inflation will most likely stay in the RBI’s comfort zone of 5-6 per cent next year,” he said.
