Topic: GS3 – Indian economy.
- India’s Wholesale Price Index (WPI) showed deflation for the seventh consecutive month in October.
What is deflation?
- Definition: Deflation is a decrease in the general price level of goods and services in an economy over time.
- Opposite of Inflation: While inflation represents a rise in prices, deflation indicates a decline.
- Impact on Economy: Deflation can lead to reduced consumer spending as people anticipate lower prices in the future.
- Business Impact: Businesses may experience falling revenues and profits, leading to cost-cutting measures and potential job losses.
- Debt Challenges: Deflation increases the real burden of debt as the value of money rises, making it harder for borrowers to repay loans.
- Central Bank Response: Central banks may implement monetary policies, such as lowering interest rates, to counter deflation and stimulate economic activity.
- Risk of Deflationary Spiral: Persistent deflation can lead to a cycle where falling prices and demand create a self-reinforcing negative economic cycle.
- Factors: Deflation can be caused by factors such as decreased consumer demand, technological advancements, or a credit crunch.
Question: Discuss the economic implications of deflation on a nation’s economy. Examine the challenges faced by businesses, individuals, and policymakers during a period of deflation.