Low inflation in India may be a sign of something far worse

By Anirban Nag

India’s policy makers are hailed for slaying the inflation dragon. But there’s a dark side to that success.

After posting double-digit inflation rates at the start of the decade, consumer-price growth has steadily declined over time to hover around 3 per cent now. While much of the recent slowdown was due to a slump in food prices, businesses are starting to worry that the data is signaling a worsening in the economy’s growth outlook.

Anand Mahindra, chairman of India’s largest tractor and SUV maker Mahindra & Mahindra Ltd., said on Monday low inflation isn’t always a good thing.

An economy with moderately high inflation “signals growing consumption and spurs investment,” he said in a Twitter post. “Some pump-priming via lower interest rates and measures to increase consumption may help.”

Mahindra’s comments were in response to a report on Monday that the wholesale prices rose at the slowest pace in almost two years in June. Figures on Friday showed consumer-price inflation accelerated to 3.18 per cent in June, though remained below the Reserve Bank of India’s medium-term target of 4 per cent for an 11th straight month.

Core inflation, which strips out volatile food and fuel prices, and is seen as an indicator of demand in the economy, slowed to an almost two-year low of 4.1 per cent in June.