According to Dun & Bradstreet, India may slip into deflation by April 2009, driven largely by higher base effect. But D&B does not expect a pronounced deflationary trend in the Indian economy.

Deflation is a general decline in prices that is often caused by a reduction in the supply of money or credit. Will this deflationary phase in India be temporary or a long and painful phase?

In this respect, it is noteworthy to read a column by Olivier Jeanne (Professor of Economics, Johns Hopkins University; visiting Senior Fellow, Peterson Institute for International Economics and CEPR Research Fellow) proposes the organization of a round of "multilateral consultation", under the auspices of the IMF, on how to avoid worldwide deflation and hence the trap of depressionary spiral. Ineffective fiscal and financial policies mean that attention will inevitably return to monetary policy – policymakers should be prepared. Getting the main central banks to agree on a basic set of principles would reduce the fog of Knightian uncertainty prolonging the crisis. We need a multilateral consultation on how to avoid global deflation

Mr. Jeanne, under head "Monetary policy in a credit crisis", discusses monetary policy-makers should not let the economy become entrenched in a Fisherian debt-deflation spiral. He says "flexible inflation targeting" would be the right thing to do in a credit crunch. A clue for our policy makers to further reduce the rates amidst falling prices?

Complete article: We need a multilateral consultation on how to avoid global deflation

There is no need to panic, our economy is stable
http://www.dnaindia.com/report.asp?newsid=1166162
Friday, May 23, 2008 23:59 IST
There is a visible rise in the price of fuel, and there is a valid reason behind it. Since many years now, we haven't found a considerable mass of crude oil. The demand for fuel is rising day by day and there isn't an increase in the supply. So there is a rise in prices and, in turn, the common man is the one who has to suffer. This is a well-known market principle. But there is also a rise in our incomes at the same time. So I don't think it will be a problem. In spite of recession hitting the US economy, our economy is still quite stable.

Every human being has the tendency to adjust. For instance, not all people are comfortable using public transport. They will either have to adjust, or will be left with no other option but to pay more for the fuel and use their private vehicles.

This indicates the level of dependence of our population on crude oil, which then encourages a further rise in prices. With the rise in the price of crude oil, there is a rise in the standard of living at the same time. Crude oil is the best source of fuel for transportation due to its unique performance level. We need not fear about our future. Our rise in incomes will be balanced with the rise in fuel price.

V Shunmugam is chief economist,
Multi Commodity Exchange Ltd. of India.
He spoke to Shikha Shah