In a relatively infrequent, if not unique, occurrence in India, we are likely to see a couple of months of negative Wholesale Price Index (WPI) inflation in near future. Startling and unsettling as this might seem, this really does not have significant operational policy implications. There is no structural change in India in terms of a deflationary potential, on the lines of what was seen in Japan in the Nineties and of the potential in some developed countries.
Yes, it?s obvious that there has been a demand slowdown in India, particularly since September 2008. The shocks were multiple. A sharp drop in exports, particularly of merchandise, but even in many BPO functions, resulted in both actual job losses and fears of potential unemployment. A steadily tightening monetary policy stance till August had raised the cost of funds for banks, and the sudden liquidity crisis post the Lehman Brothers collapse caused costs to shoot upwards, when liquidity suddenly dried up. Fears of increasing defaults (and losses) on banks retail loan portfolios squeezed interest sensitive segments (like cars and consumer durables), which had been major drivers of demand growth. Increasing inventories and fears of sustained drought in demand led to postponing of capex plans for expanding capacities, which hit investment demand as well.
But as Chart 1 shows, the current collapse of INFLATION (emphasis added) is just a return to a ?new normal?, as the current jargon goes. The last year and half were extraordinary in terms of commodities inflation, much of it probably fuelled by speculation. This element of the price rise had come to en end in September. 
Chart 2 shows that the expected period of negative inflation is probably largely a statistical artefact of the momentum. In addition, the global collapse of industrial inputs prices have had a strong effect on Indian prices; India remains a price taker in global terms, and domestic producers have lost their pricing power in the slowdown.
In terms of the WPI index itself (which represent the actual price levels), it has already begun to creep up. In fact, if anything, ground realities (as a casual check of market prices of consumables and backed by CPI inflation measures) suggest a much worse inflationary situation. Prices of staple foods, edible oils, vegetables, onions, dal, and other daily household consumables remain higher than even the worst periods of last year. Those segments that are relatively shielded from global pressures, where high transport costs make imports unviable, are already responding to signs of increasing demand. We are already starting to hear news reports that cement companies raising prices in many zones. These trends are shown in Chart 3, which compares three measures of inflation, two of which are widely followed (the WPI and CPI).
The third measure, the GDP deflator, gives more cause for thought. This is conceptually the most comprehensive and the most representative of inflation measures and is probably closest to the measure that is followed most closely by the Federal Reserve (the Personal Consumption Expenditure inflation). This is the measure used to translate nominal GDP measures into a real (inflation adjusted) one, whose growth we follow religiously. We do not understand the measure too well, but to the extent our belief in real GDP growth is justified, seems to be tracking WPI inflation quite well, thereby lending credibility to WPI inflation. We should also remember that our view of on-ground inflation as consumers of staples is also probably a blinkered view, coming from where it hits our wallets hard. From the systemic viewpoint of overall economic activity, which includes all sorts of manufacturing, construction and service activities, prices have dropped.
The author is vice-president, business and economic research, Axis Bank. These are his personal views