The Indian Economist

Brings together experts from around the world to deliver insights on business & economics, culture & society and politics & world. For the Curious Mind.

Aug 23, 20153 min read

Zero inflation: Modi’s Pyrrhic victory?

By Sanjay Thapa

Edited by Madhavi Roy, Senior Editor, The Indian Economist

The self-congratulatory mode that the Modi Sarkar has got into after the latest inflation figures came down to a zero may not be as comforting as it appears initially. Last Monday, the WPI based headline rate of inflation showed a 0 percent rise as compared to that of last year November. It was also for the first time in five and a half years (last in 2009 -under UPA II), that this level has come about. The BJP, of course, has brought out its drums and is beating a cacophony by calling it as a major achievement of the Modi Sarkar in just six months of its rule. But let the reality sink in. Deflation is bad for the economy! Am sure Mr. Raghuram Rajan would concur with this view of mine.

At the surface, it might appear to be an achievement, but the fact remains that zero inflation is not good for the economy as it decelerates manufacturing growth, leading to excess and redundant labour, and thus shrinks employment and in turn retards economic growth. No wonder then that the central banks of major economies like the UK and the US are pushing inflation levels to a safer level of at least 3–4 per cent.

Mr. Rajan has been hard-nosed where his inflation targeting has been concerned. Unfettered by the dip in the manufacturing sector, and a constant appeal by corporates to give more leeway to mobilize debt through a softer interest rate on the monetary policy, Rajan has not budged. But then looking at the overall global economic situation, commodity prices have softened all over the world, and on top of that, the major contributor to inflation — fuel– has shown a record decline in the last few weeks. So call it a coincidence or a rather a touch of fortune, that ever since the Modi Sarkar has come into being, global factors have turned positive in at least these two areas.

But seen more closely, it becomes clear that the zero inflation situation will be short-lived. For the below normal monsoons this year will make their effect felt in the coming months. The Kharif sowing has been affected, and similarly even the Rabi crops, whose cultivation (as per government sources) has been far less at 470 lakh hectares this year from last year’s level of 504 lakh hectares.

There has also been a drop in several important Rabi crops in terms of sowing area. For food grains like Wheat, sowing area is at 241.91 lakh hectares as compared to last year’s 251.32 lakh hectares, while that of sowing of gram is at 71.51 lakh hectares this year while last year’s figure was 85.75 lakh hectares. Area coverage under pulses is at 111.13 lakh hectares, while last year’s sowing area coverage was 124.78 lakh hectares. Hence be prepared for the fiscal 2015–16, as there might be a return spurt of inflation.

To add to this, the drop in international crude prices may soon stop. It has already touched a three year low, and hence now it has only one way to go: up. Petrol and diesel prices have fallen by around 10 percent and 3 percent respectively in comparison to November 2013. In fact, the government increased the excise duty on diesel and petrol twice since October.

This in turn means that if the December headline inflation figures ends up being higher, then the so called ‘inflation targeting’ of the RBI would still not be achieved. And that means that the much hyped about expected ‘softening of the interest rates’ by Mr. Rajan in the forthcoming monetary policy before the Union Budget 2015–16 may still not materialize. And the zero headline inflation rate would then be a mere eyewash!

SANJAY THAPA is a senior editor and a TV/Radio commentator with over 20 yrs of experience in covering macro -economy, politico-eco & finance policies. He has been associated with leading media houses like India Today, Indian Express, Economic Times as well panelist and anchor at seminars and panel discussions in DD and AIR NATIONAL.With a masters degree in Economics with specialization in Econometrics he initially worked as SW ENGINEER at India’s leading IT MNC before he decided to switch to his much loved passion for journalism — which in fact started during his Senior Cambridge school days in Doon. Besides Economics he is an avid music aficionado and finds much pleasure in playing many musical instruments.


Originally published at on December 28, 2014.

  • The Indian Economist
  • Brings together experts from around the world to deliver insights on business & economics, culture & society and politics & world. For the Curious Mind.
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