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Why Low Inflation in India?

Why Low Inflation in India?

Overview of this low Inflation Rate

Why Low Inflation in India?

December 2018 Inflation in India Slides to Its lowest of 18 months to 2.19% (CPI).

Inflation not Drastically slides to this extent but this was the result of many months, August inflation was 3.69 %, September inflation was 3.7 %, October inflation was 3.38 %, November inflation was 2.33% and at last the worst December inflation slides to 2.19% I.e. an all-time low of 18 months.
Why Low Inflation in India?
Constant Downward trend in Inflation


This trend of sliding inflation was different for different index ( CPI & WPI ).
CPI inflation was 2.19% ( 18 month low )
WPI inflation was 3.8% ( 8 month low )

This inflation also differentiates among the Headline Inflation index and Core Inflation Index. ( Difference between core and headline inflation is only of food and fuel as headline inflation includes all this but core inflation don’t ).

This inflation also differentiate as per the categories of item as different items have different inflation rate because the inflation in food was -2.51 %, inflation in vegetable was -16 %, inflation in clothing was 3.52 %, inflation in housing was 5.32% , inflation in fuel was 5.32% , inflation in pulses was -7.13%.
Inflation as  per Categories

As we can see from the above data that the low inflation is only due to the product related to food and agricultural products which hamper the farm sector I.e. rural sector because of this there is a stark difference in the rural and urban sector, rural inflation is 1.65% and urban inflation was 2.65%.

Why this Low Inflation is taken place?


Calibrate Tightening - It means that in this rate cycle, a rate cut is off the table and that the RBI is not bound to increase the rate at every meeting, this initiative was taken because in 2018 there were 2 rate hikes in the span of 2 months.
This step should be changed to RBI neutral stance which would definitely help RBI to increase inflation.
Dwindling Economy- Due to the hike in the Price of Brent Crude Oil simultaneously a decrease in the value of Indian Rupees, the Indian economy and all other things like Inflation Dwindles, hence resulting low inflation.
Bharat Bandh - Recently a Bharat Bandh Andolan work as oil in the fire because it made various business, school, and another stakeholder to close for some days hence a set back to the economy leading to such low inflation.
Farm Production - Due to good rain this year, farmers witness Bumper Production leading to excess supply and low demand resulting to price crash of the farm production hence low inflation.
Inflation Targeting - Due to RBI initiative to target inflation at 4% +_ 2% leads to this point of low inflation.
Cooling Demand - The demand in the Indian economy recently cools down, and as India is a demand-driven economy this set back leads to a decrease in demand but supply increase in some product and remain constant in some leading to a steep decline in price hence low inflation.
Previous weakness - Due to certain previous weakness like high unemployment, Falling public sector make the situation worse.

How this Low Inflation would affect India?


Farmer Distress - Due to this low inflation the farmer would get less for their produce leading to farmer suicide and another thing like farmer suicide and if this happens then the government would try to lure them by drafting farmer-centric, short term initiative which would again deteriorate the condition of Indian economy.
Purchasing Power - This low inflation leads to increase the purchasing power of the consumer because of which the consumer can buy more from the same amount of money.
Economic Growth - As this low inflation shows the depressed nature of the economy hence it will affect the growth of the economy.
Affects Bank - As the bank earns by providing loans and if there is low inflation prevailing then the bank would get less in return I.e. it would deteriorate the condition of Bank.
Demand - As due to this decrease in inflation the farmers would get less in return of their produce because of which their purchasing power decrease hence they now started to demand less as if this large chunk ( approx. 55%) of the population started to demand less leading to further worsening of the condition of the economy.
Philips Curve - As due to low inflation there is an increase in Unemployment a further worsening of the economic condition.

How this low Inflation Problem can be solved?


Calibrate Tightening - As this stance of RBI to remain on Calibrate Tightening should be changed to neutral one to further help the economy to sustainably grow and once more come to this Goldilocks phase.
MSP - Government should better off the farmers by providing good MSP as to make farming sustaining for the farmers and because of which the purchasing power of the farmers would increase resulting in more demand and the economy would be back on track.
Reduce Interest Rate - As principle economic advisor Sanjeev Sanyal have called for the RBI to take a re-look at the interest rate structure I.e. RBI should Decrease the Interest rate because of which there would be more liquidity in the economy which would increase the inflation.

Conclusion

As in this situation, monetary policymaking is challenged so we expect new RBI Governor to change stance from Calibrate Tightening to Neutral and Government should cater the farmers to attain the Goldilocks Phase.






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