Need more steps to ease liquidity squeeze, says demand-recession hit India Inc.

According to government data released Thursday, the wholesale price index (WPI), India's most widely watched inflation measure, sank to 0.44 percent for the week ended 7 March, 2009, as compared to 2.43 percent for the previous week and 7.78 percent during the corresponding week of the previous year.

The inflation rate had touched a 13-year high of 12.91 percent last August due to global slump and slowdown in domestic demand.

A close look at the latest data reveals that decrease in prices of some primary articles and fuel, power, light and lubricants resulted in the sharp fall in inflation rate.

According to a government statement released by the Finance Ministry, this is the steepest drop since November 2008.

"In the last 30 years, there is no record of inflation falling this low since 1977-78," the statement said.

However, according to industry lobby groups, this was not completely unexpected but cautioned that despite low inflation rate the common man as well as private corporate sectors continued to suffer due to liquidity squeeze.

According to Federation of Indian Chambers of Commerce and Industry (FICCI) president Sarsh Pati Singhania, the latest inflation data is not "entirely unexpected."

"The fact that WPI has come down to 0.44 percent on a year on year basis despite prices of food articles going up by 7.3 percent on a year-on-year basis shows that inflation in case of other products has declined significantly. The high base effect also has a role to play in this case as inflation stood at 7.78 percent during the corresponding week of the previous year," Singhania said.

"Looking at the weekly variation in the price indices, we see that prices of primary articles, both food and non-food products, have indeed moderated," he said, adding that "the fall in prices in the case of primary articles is largely supply driven as reports from different parts of the country show that market arrivals for different agricultural products have been reasonably good."

However, the beneficial effects of low inflation rate are yet to be enjoyed by the common man, Singhania said.

"What is particularly worrisome is that given the present inflation rate and the interest rates being charged by banks, the real rate of interest in the economy is at double digit levels," he said.

"The RBI (must) further ease the monetary policy to aid the industrial sector. Further, in view of the evolving situation the banks must shed their conservative stance with regard to lending to corporates and consumers. The banks must lower the lending rates to single digit levels if economic activity is to be stimulated. In fact the RBI and the government should embolden and incentivize the banks to direct resources for productive purposes," he added.

Sajjan Jindal, president of the Associated Chambers of Commerce and Industry of India (ASSOCHAM) said that despite inflation rate slipping to a record 0.44 percent, its reflection on primary food articles was yet to noticed because the weightage of inflation on them was still between 6-7 percent.

The reduced inflation had shown its impact on prices of metals especially copper, zinc, aluminium and even in steel and cement and also manufactured goods whose prices had come down, Jindal said.

However, "The impact of lower inflation has yet to come to primary food articles. The only concern is that the common man is yet to benefit from this record inflation rate. It is likely to take some time," Jindal said.

"It will take some time to reduce the weightage of inflation on prices of essential commodities," he said, adding that only a sharp decline in food prices would help close the gap between the wholesale and consumer price indexes.

According to Confederation of Indian Industry (CII) director general Chandrajit Banerjee, "a lack of demand with high levels of inventory...has led to downward pressure on commodity prices."

"We need more credit flow (for) industry," he said.