Who really benefits from deepening deflation in India?

Latest data showed deflation deepened in India, with wholesale prices dropping by -4.95% compared to a year ago. This is 10th consecutive month of deflation. Price drop has pushed Reserve Bank of India to cut rates for three times already and further cut is possible once monsoon is done with.

Last year, in July prices rose by 5.4% and its more than 10% swing in the opposite side. Economists were expecting less steep drop of 4.4%.

After years of ravaging by high prices, Indians would prefer some deflation leading to price drop and benefit from drop in global commodity prices. However, this is not being the case for Indian consumers.

• In last 12 months, Crude oil prices have dropped by some 60% in international markets, while in India price has fallen only by 20-25%.
• Global Milk price has fallen close to 50%, while Indian consumers are still paying the same prices they used to a year ago.
• Price of most of the capital goods have gone up, in spite of drop in raw material and energy prices.
• Price of power has fallen by 16% as per latest wholesale price data, it has hardly been passed to consumers.

So the question naturally comes, who is benefiting from Indian deflation?

• Impact of the price drop in global terms has not completely translated as Indian Rupee has weakened by some 9.4% in last one year. INR is currently trading at 66.5 against Dollar.
   
• Rest of the benefits are being eaten by Government reducing its fiscal imbalance and companies improving debt position.

While improving fiscal imbalance is vital for a country along with improvement in companies bottom line, however this underlying transfer of household wealth to government and private sector will not prove as prudent policy going forward.