Inflation in
Deflation is defined as sustained decrease in general price level of goods and services, ultimately leading to increase in the real value of money.
However, in current situation deflation pacifying the problems is just another delusion.
Deflation is an aftermath of recession in the modern economy. Due to recession there is a fall in personal spending as well as government expenditure. Thus there is a drop in the how much an economy wants to buy. This leads to fall in demand. Along with deflation, rumbling stock markets and shrinking economies discourage investment and spending because the concern of surviving present situation is more important than expected future gains. Due to this, investors and buyers tend to hold money. This, again, leads to collapse in aggregate demand. With decrease in demand, the price level of products and services decrease. Because the price of goods is falling, consumers have an incentive to delay purchases and consumption until prices fall further. This further slackens the demand leading to a situation where price of the products fall below the cost of manufacturing the products. This in turn forces the companies to cut production, slash jobs and shut down business till demand picks up. This worsens the situation. This entire cycle tends to repeat itself resulting in deflationary spiral, which further deepens the recession and ultimately ends in a Great Depression.
Answer to deflation is an apt stimulus package from government and increase in personal spending. Producers and manufacturers, also, have to play their role.
Central bank should lower CRR and provide liquidity in the system. Government should spend on infrastructure and development of the country. This will provide employment which will increase the purchasing power of the consumers.
Manufacturers are trying to restore the demand by decreasing the prices of the products. At every nook and corner one comes across zillions of hoardings giving out heavy discounts on every possible item. Clothing brands have unleashed a fierce competition by giving 50-75% discounts to attract the consumers. Manufacturers of cars, two-wheelers and electronic gadgets are giving huge cash benefits. Even day-to-day amenities like vegetables, fruits, dairy preparations, bakery products, packaged products are not left out. The fuel prices have also been slashed.
A consumer should believe that this is the right time to fulfill his needs, both basic and luxurious, and spend the money rather than holding it. Also, in such competitive market a consumer will find the products at affordable prices.
Chitrang Dalal
True....we are heading towards deflation which is more dangerous than higher inflation because later can be controlled in a more easy way than the former. Also Deflation posses the threat of more job cuts and demands control measures from every section of economy.
ReplyDeleteOne thing is that probably people may come out spending a huge amount as can be seen in the interest taken by them in NANO-launched today. The measures and practices similar to one can help overcome deflation fear.
But the more important problem is the one which election possess. If we really face this deflation, then will the govt. be able to come out and bring some stimulus packages. I mean will that be against the model code of conduct. So lets wait and watch.
@ Amit
ReplyDeleteThe government cannot come out with any stimulus package now, and not because of the model code of conduct, but because nearing the elections, the government cannot take such major decisions. The existing government cannot authorize any kind of major policy/spending just before an election This is a rule the government cannot break and hence no stimulus package is expected pre-elections.
Cheers!
Sushant Bahadur