Implications of zero inflation

Jayshree Sengupta

It is unbelievable that inflation about which we were so worried even a few months ago has come down to zero. For the last few years the monetary policy was all about controlling inflation for which interest rates were hiked umpteen times. RBI Governor Raghuram Rajan has maintained that the fear of high inflation has not yet disappeared completely. In November 2014, however, not only did the Wholesale Price Index come down to zero but retail inflation or the Consumer Price Index also was at a low of 4.4 per cent. It should bring much relief to the common man and woman because the real reason for inflation coming down is a fall in vegetable prices and of course petroleum prices.
Food inflation has come down from 15.4 per cent in November 2013 to 3.1 per cent in November 2014. Vegetable prices came down by 28.6 per cent mainly because of lower onion prices and also due to cheaper transportation costs. Overall, food inflation in November was 0.6 per cent as compared to 19.7 per cent last year. It is creditable that the Modi government has been instrumental in an increase in the supply of vegetables which has contributed to the easing of inflation.
The main contributor to the lowering of inflation, however, is the fall in petroleum prices as a result of higher supply from the US and lower global demand in the face of the unwillingness on the part of Organisation of the Petroleum Exporting Countries to cut supplies. Yet there is little rejoicing about the sudden and steep fall in inflation and already there is talk of deflation creeping up in the economy, which is always a bad sign and will lead to lower profits for the corporate sector, retrenchment and low demand. A lot of urging and nudging is going on to make the RBI change its stance and lower interest rates. While it is not a panacea for triggering a higher level of growth, it would certainly help industrialists in undertaking new investments/ innovations that could lead to enhanced competitiveness.
More worrisome according to some economists is the falling industrial growth which has shrunk by 4.4 per cent. Manufacturing growth, whose component in the Index of Industrial Production is the highest at 75 per cent, fell by 7.6 per cent.  Perhaps both factors -lack of new investment and slowing demand — are at play in bringing down manufacturing growth even though export growth has risen in the last one month. Exports grew at 7.3 per cent in November but imports rose by 26.8 per cent. Gold imports rose by 500 per cent. Imports of coal also rose.
 The slackening of domestic consumer demand has been due to the long-term inflationary trend and perhaps insecurity due to slower economic growth and lack of jobs for youth. External demand has definitely slackened due to stagnant growth in the EU and tepid economic recovery in the US.
Manufacturing growth contributes most to the creation of jobs and even though IT and service industries are the fastest growing sector in the economy, its potential for job creation is low because it often requires technical expertise and knowledge of English. Every year around 10 million people are entering the labour force, mostly young. Unless manufacturing growth is faster, jobs will not be created. Today people are worried about job security even when they have jobs and are reluctant to part with money for increasing demand for consumer durables and capital goods.
The common man or woman is worried about rising health and education expenditure. High school and college fees and exorbitant rates of hospitalisation are making everyone except the super rich cautious about spending.  Fear of resurgent inflation is also there at the back of people’s minds.
Many are, however, spending on gold which also shows their lack of confidence in the country's economic future. The substantial increase in gold imports has contributed to the widening of the trade deficit. The rupee, which is vulnerable to various fears about the current account deficit getting out of hand, is already coming down vis-a-vis the dollar. A lower rupee will help exports no doubt, but may create problems of volatility which is not good for attracting foreign investors.
The Prime Minister’s 'Make in India’ slogan is a good idea if India can bag more foreign investment and it can increase employment and output and manufacturing growth. But as is well known, various hurdles remain. The environmental clearance requirement and difficulties in land acquisition are both seen as big hurdles by investors and the government has to take a clear stand. Both land distribution and environment are important for the country's future. There will always have to be safeguards for those who lose their land to rapid industrialisation under the Land Acquisition Act 2013-Right to Fair Compensation, Resettlement and Rehabilitation, Transparency in Land Acquisition. It contains elements of land sellers' rehabilitation and employment programme and added responsibility of the buyers. This Act should be supported and not amended. The country's long-term interests have to be kept in mind and there also has to be more employment generation through higher industrial growth. It is a big challenge for the Modi government, which is committed to faster clearances and approvals and yet cannot alienate the small and tribal land owners.
The problem with slow industrial growth is that tax collections will also be poor and it raises the important question of whether the government will be able to meet the fiscal deficit target. Where will the government find the money to finance all its multi-crore projects? Various disinvestment targets have been singled out and the process could be expedited.  Selling off coal blocks is also on the agenda.
On the whole, whether the government can keep its promise of providing jobs for all, reducing subsidies through direct cash payments, having a cleaner India and having a higher manufacturing growth will have to be seen in 2015. Chances of having high GDP growth as hoped for by the Finance Minister will require much work on the industrial front, especially in providing good infrastructure. Unless industrial growth steps up, GDP growth cannot be higher.