AGRICULTURE PRICES
YEAR	INFLATION
1995-96	8.3
2000-1	2.9
Aug 2001	4.0
Jan 5, 2002	3.7
Percentage annual rise in prices of primary products
After onion prices shot up in 1998, the annual rise in prices of agriculture products never crossed 5%.

No matter how uniform the downward slope of the four graphs shown in these pages, most Indians will be reluctant to accept the message they convey: that the rate of inflation is falling consistently and rapidly across most items of consumption. In the second week of January, the annual wholesale price inflation slid to its lowest level in 20 years-just 1.57 per cent.

Statistical jugglery? Government propaganda? A blip on the radar screen?

Without being the devil's advocate, a few clarifications are in order. First, a falling rate of inflation doesn't mean falling prices. It means a slower rise in prices, slower than last year. That's for those who wonder why reduced inflation does not reduce their household expenditure. Inflation data is brought out exclusively by the government, as are all major economic indicators in India. When inflation flared up to 18 per cent in 1991 and then again to 13 per cent in 1994, those too were official figures. If the data was credible then, it ought to be believed now too.

MANUFACTURES PRICES
YEAR	INFLATION
1995-96	8.6
2000-1	3.2
Aug 2001	2.8
Jan 5, 2002	0.0
Percentage annual rise in prices of manufactured products
Price wars have brought down the inflation in manufactured products to zero. Expect some rise in the future.

Credibility, however, isn't the same as efficiency. Being a single representative number for lakhs of different prices, ranging from vegetables to mobile phones to petrol, the inflation index hides as much as it reveals. So when the growth rate of the wholesale price index (WPI) touched 1.57 per cent, it was a combined average of falling prices of most manufactured products, 23 per cent rise in fruit prices, a less than 1 per cent growth in price of foodgrains and a 5.5 per cent rise in fuel and power prices (see graphs).

Depending on which of these products comprised a larger share of a household budget, inflation would appear different to different people. But current prices of most products-barring electricity and fruits-are remarkably stable. That's why the average rise in the consumer price index, a better indicator of inflation for consumers, in the past one year has been only 4 per cent.

So inflation is undoubtedly low. But that isn't the good news. A better news is that, barring temporary flare-ups, inflation is expected to remain low for a long time. Most economists bet on a maximum inflation rate of 4-5 per cent, which is a good 5 percentage points lower than the erstwhile tolerance limit of 10 per cent inflation. "Inflation won't stay as low as it is today, but a persistent flare up in general prices is not likely," points out M.R. Madhavan, economist with the Bank of America. Here's why inflation will remain low:

The stock of 60 million tonnes of foodgrains is a buffer against any flare up in prices of wheat and rice. Besides, market prices (both domestic and international) of most foodgrains are lower than administered prices implying that even dismantling of the administered price regime will not trigger a hike in prices.

FUEL AND POWER PRICES
YEAR	INFLATION
1995-96	5.2
2000-1	28.5
Aug 2001	15.6
Jan 5, 2002	5.6
Percentage annual rise in prices of fuel, power and lubricants
The most volatile component of the WPI, fuel and power prices, are likely to remain stable in the next few months.

Prices of vegetables-especially onions-will shoot up when produce falls short of demand, but a more liberal import regime should take care of temporary shortages.

Intensifying local competition and threat of cheap imports will guard the price line of most manufactured products, as it has in the past five years. Though manufacturing price inflation will rise above the current level, it won't go too high.

The decontrol of petroleum prices in April 2002 will link future price movements to international prices. That will expose the economy to both positive (price reduction) and negative (price rise) oil shocks in future. But given the current global oil prices, the shocks in the immediate future will be positive.

In general, high inflation economies are rooted in what economists call high inflationary expectations and supply shortages. People expect prices to rise and advance their purchase decisions. That creates excessive demand and high prices. In the past 15 years India has transited to an economy of low inflationary expectation and fewer supply constraints. "India has entered a low inflation era for good," prophesies Surjit Bhalla, president, Oxus Research.

That's cause for worry to some, including the Reserve Bank of India (RBI). In its Currency and Finance Report released on January 12, the RBI has raised fears of a deflation (fall in the general price level, accompanied by a reduction in national income). The report says that deflation prompts consumers to postpone their spending in expectation of a fall in prices. That leads to decline in demand and a further fall in prices. This vicious cycle eventually leads to job losses and recession. The RBI estimates a growth-maximising inflation rate for India to be about 5 per cent. The implication: the current low inflation is harmful for the economy.

Some economists do not support the RBI's hypothesis. They suggest that it is not low inflation but the Government's inability to respond to low inflation that is harming the economy. Namely, the inability to cut interest rates as fast as the fall in inflation rate. Every fall in inflation rate makes real interest rates (inflation adjusted) higher, which bloats the cost of capital and reduces the incentive to invest. "The worry should be high interest rates, not low inflation," argues Bhalla.

The Chinese economy has been growing at an annual rate of 7-8 per cent for the past five years, but inflation has been less than 2 per cent, sometimes even negative. Most of the developed world has had high growth with low inflation in the 1990s. That's made possible by improved technologies and global-scale production which enables profit-making with low prices, and thus, low margins. Of course, all these economies have lower interest rates and vastly better infrastructure than India's.

The message is distressingly repetitive: speed up reforms to remove the bottlenecks to growth. What's refreshing though is the current context. Says Ashima Goyal, professor at the Mumbai-based Indira Gandhi Institute for Development Research: "Low inflation provides an opportunity to stimulate the economy without fearing high prices." That means spending on infrastructure projects, cutting interest rates and overhauling the financial market. More than anything it means having the political will to strike while the iron is hot.