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No deflation risk for Indian economy as yet: Economists

NEW DELHI: The wholesale inflation may have hit a zero level, but economists feel it is too early to worry about a 'deflation' possibility, as a 'nil' rate of price rise was just a statistical phenomenon in the current scenario. 

They said that the 'base effect' was the main reason for the falling inflation, which stood at a much higher level a year ago. 

Although loosely used for a general decline in the prices from their year-ago levels, deflation is a serious risk for any economy that is caused by an overall reduction in the supply of money or credit. A deflation can take place because of the government cutting down its spending, as also because of fall in personal and investment spending. 

As per the latest government data, the wholesale price based inflation dropped to zero level in November, from 1.77 per cent in the previous month. 

Economists, however, believe this situation is not something to be worried about as one of the major reasons for the fall in inflation in India was vegetable prices, which were growing at a faster rate in the year-ago period and triggered a very high "base effect". 

However, this base effect in WPI is likely to reverse through December-January, they said. 

As per analysts at financial services major Nomura, the fall in WPI inflation was lower than market expectation and was largely driven by lower commodity prices and a favourable base effect. 

"WPI inflation eased to a five-year low of zero per cent y-o-y in November from 1.8 per cent in October, lower than market expectations. The fall was largely driven by lower commodity prices and a favourable base effect (due to the vegetable price shock last year)," Nomura said. 

Global financial services firm Citigroup believes the base effect in WPI is also likely to reverse through December and January, but given that WPI has higher sensitivity to crude/tradables the subdued trend in WPI could continue in coming months. 

Global research firm Dun & Bradstreet said the WPI inflation is likely to reverse its trend in December this year largely due to the base effect. 

The major side effects of deflation include increased unemployment, because of lower demand and increased supply of products and services, which can lead to an economic depression. 

A severe deflation can be a bigger cause of worry for a central bank, against an inflationary trend, as a persisting fall in prices can create a vicious spiral of negatives like falling profits, closing of factories, shrinking employment and incomes.

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