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Aditi Panda, Senior Columnist
Introduction
Deflation can be described as the fall of overall price levels in an economy. This includes a dip in the prices of goods and services that a consumer may purchase daily. A consumer would now require lesser currency to purchase each individual item. When there is less money circulating in the economy compared to the available goods and services, prices tend to fall.
Two major indicators of deflation:
1. Consumer Price Index – measures the overall change in prices with regard to a particular set of goods and services over time. It quantifies the average change over time in the prices paid by urban consumers for a basket of goods and services. CPI is primarily used for inflation measurement, to help formulate and adjust monetary policy, wage adjustments, etc.
2. Producer Price Index- measure the average change in the selling price of goods and services received by their producers. Unlike the Consumer Price Index (CPI), which focuses on the prices consumers pay for goods and services, the PPI focuses on the prices producers receive. PPI is primarily used for inflation measurement, supply chain analysis, and making business decisions.
Deflation in China
In a recent economic development that has caught the attention of global markets, China, the world's second-largest economy, has slipped into deflation, sending warning signals throughout the world economy.
After its stringent lockdown protocol which had left the Chinese people in despair, came to an end, the hope for a quick recovery for the country was never realized. COVID-19 not only wreaked havoc in people’s lives but also destroyed several supply chains creating imbalances in supply and demand in various sectors.
Furthermore, the ongoing debt reduction campaign that has tightened credit and thus reduced spending adds to the conundrum. At its core, the campaign aimed at addressing the mounting debt crisis in China but when paired with other current factors has massively backfired on the Chinese economy. The major indicators of inflation dipped. China’s CPI dipped 0.3% YoY in July 2023 making it the first dip since February 2021 and the PPI declined for the tenth consecutive month by 4.4% surpassing the predicted 4.1% decline.
A significant pillar of its economy is the now-stagnant, China’s property market. As property developers face mounting debts, it has dampened the demand for real estate. This has led to a ripple effect, slowing down various other industries such as construction, manufacturing, and related sectors.
Chinese exports to the US dropped by 23.7% in June indicating the lifting of reliance on Chinese products as well as cooling of demand. China's foreign investment gauge has plummeted to a 25-year low in the second quarter, indicating that China does not remain in a good position for foreign investment. The growing presence of Communist Party members in corporations and a focus on state-run enterprises have contributed to decreased domestic productivity and increased uncertainties for the private sector.
How does this affect the Indian Economy?
Negative Implications
As the 3rd largest importer of Indian goods, the slowdown of the Chinese Economy creates the eventual problem of a slowdown in the Indian export sector. India's exports, already grappling with pandemic-related disruptions, could face additional challenges if China's reduced consumption impacts its demand for Indian goods. If this situation were to occur, it could damage India’s export-led recovery.
Positive Implication
As investment slows down in China, India could potentially emerge as the new manufacturing hub for the globe, as investors seek stable and attractive markets. In response to China's deflation, Indian authorities might need to adjust their strategies to ensure stability and sustainable growth.
Implications for the Global Economy
There are potential repercussions of China's deflation on the world economy. First, it may start a deflationary spiral in which dropping prices cause consumers to spend less, which prompts businesses to further cut prices to attract customers. Due to this cycle, there may be a decline in business earnings and economic activity, which could cause economies to enter an economic downturn.
As a significant consumer of products and commodities, China's declining demand may also have an impact on international markets. Companies and nations that export commodities may see a drop in revenue, which will influence both domestic economies and global trade flows. Global supply chains may encounter new difficulties if China's economic recession worsens. These supply systems are already under stress from pandemic-related interruptions.
Conclusion
Declining trade, a shaky property market, and deflationary pressures are all posing challenges for China's economy. These issues are linked, which emphasizes the need for comprehensive and efficient policy solutions to guarantee stability and sustainable growth. Both local and foreign players are watchful in assessing the effects and potential routes for recovery as China's economic problems continue to draw attention. The outcomes of these efforts will undoubtedly have implications not only for China but for the global economy as well.
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