Turnaround time

The negative inflation number of 1.6 per cent showing that the Wholesale Price Index fell compared to last year reinforces the trend that has been seen since November 2008. In fact,had the statistical office been putting out the correct number,which is the seasonally adjusted month-on-month figure,as do all countries with even a modicum of a well-run statistical system,we would have clearly seen the fall in prices that has been taking place since the crisis in the last quarter of 2008. Price deflation since November has been quite sharp. When we do the required seasonal adjustment for WPI and look at the month-on-month figures for inflation we find that every single month since November has seen negative numbers. Now that the negative shock has persisted for so long,it is also showing up in the annual year-on-year growth rate. To look at early trends and the behaviour of variables such as prices it is necessary that the government and policymakers look at the correct numbers.

Second,falling prices have created a window of opportunity for the government. The oil pricing policy should have been changed many years ago but would have pushed up prices and resulted in inflation if it had been done in a period of rising prices. Now that prices are falling,this is a good time to do away with administered oil prices and link them to the market. Even if they lead to some rise in other prices as well,through linkages with the rest of the economy,it will hardly be painful if it brings price rise from a negative to a zero per cent increase.

Finally,the deflationary environment also supports an expansionary monetary policy. Given these low numbers on inflation,which are expected to continue in the future as long as low demand conditions persist,it is reasonable to expect that the RBI should now lower interest rates. In fact,doing nothing is as good as tightening monetary policy because,with the fall in prices and nominal rates unchanged,real interest rates are rising. The few green shoots of recovery that can be seen with the improvement in cement and industrial production could quickly disappear.