Goldilocks or distress locked in? Deflation is hurting rural India

Weakening prices may seem good for us but mask inadequate demand and income vulnerabilities

- HIMANSHU

Last month, the Reserve Bank of India's (RBI) governor characterized the Indian economy as being in a "Goldilocks phase," implying a fortuitous period of low inflation and high growth. Factually, he was correct.

India's GDP estimate for the quarter ended in September, at 8.2%, exceeded expectations, while retail inflation measured by the consumer price index (CPI) was just 0.25%, with its rural element posting a 0.25% decline in prices.

Much of India's unexpected economic buoyancy is attributable to a deflationary trend, including a 3.5% rise recorded in agricultural output in constant prices. But our national accounts also show that growth in agriculture in current or nominal prices that is, with the effect of inflation included-was only 1.8%. For the broader primary sector, real growth was 3.1%, while nominal growth was just 1.2%. This gap was seen in some other sectors too; real growth exceeded the nominal increase. This is explained by falling prices, which inflate estimates of real growth. Since the sectors where this has played out (agriculture, construction, hotels and trade) are largely informal and employ almost two-thirds of India's workforce, it is a worrisome phenomenon.