Low inflation and low employment

The classic definition of inflation is too much money chasing too few goods. If the inflation rate is falling, by this definition it follows that ‘too little money’ is chasing the goods. Then, a falling inflation rate may not be such good news after all.
Could this be happening in India, where the Wholesale Price Index-based inflation has dropped to its 13-month low? Is loss of income at home supplementing the key global factor — the falling price of crude oil — to push down the inflation rate?

Unemployment factor

In the last few months, as the financial crisis began to bite all manner of industries have been handing out the pink slip to their employees. Even those managing to remain in their job have taken massive salary cuts. Unemployment/wage uncertainty could be one of the factors responsible for the loss of confidence of bankers to lend. Could unemployment have a role in the falling inflation rate especially when it is becoming pervasive, cutting across sectors? The International Labour Organisation has said that by its most optimistic scenario, this year would end with 18 million more unemployed people across the world than at the end of 2007.
With some lag, India is beginning to feel the pressure on the job front. The labour-intensive export sector is the worst hit. Textiles, and gems and jewellery industries, whose main markets are the recession-hit economies of the US and Europe, are among the badly affected. In a written reply to the Lok Sabha, the Corporate Affairs Minister, Mr Prem Chand Gupta, said five lakh jobs were lost in the September-December 2008 quarter. The Commerce Ministry and export organisations put the figure even higher. According to them, since last September, some one million workers have lost jobs. Another half a million are likely to be laid off by March as units across the country cut production. Equally hard hit are the computer services companies that derive 85 per cent of their revenues from exports to America and Britain, and 30-40 per cent from financial-services work. No day passes without some IT company or the other announcing layoffs. The situation could be worse in the unorganised, support services areas, such as shops and restaurants or household-help.
According to Assocham’s annual ‘Employment assessment Report 2009’, the average job creation declined by 38 per cent in the October-December 2008 quarter compared to July-September period. This is in sharp contrast to the sequential growth rate of 124 per cent in July-September and 238 per cent in April-June. As the economic growth decelerates, key employment generating sectors such as IT/BPO, financial services, are witnessing a reduction in job creation. The once booming sectors such aviation, media, hospitality and retail are also badly affected.

Drop in demand

The effect of such job (income) losses and pay-cuts has been on demand for goods and services. According to Assocham’s Eco Pulse study earlier this month, demand growth has been hit across sectors. According to the study that analysed 11 sectors based on the results of 222 companies, the average drop in demand growth in the third quarter of the fiscal across all sectors was 10 per cent; the range was from 18 per cent to 50 per cent. The sectors worst hit were steel, auto, auto components and textiles. People either have no money to buy or those who have are postponing (that is, hoarding money) their buying because of the economic uncertainties ahead.
In fact, the worrying aspect of a recession is the sustained drop in demand leading to deflation that is often caused by a drop in the supply of money or credit. It is also caused by a contraction in spending, by government or people. Deflation tends to raise unemployment, causing a vicious spiral. All this is happening in India. Just to avoid the deflation trap nations are pumping money into their economies disregarding the deficit they are accumulating. This is to stimulate spending and to keep the inflation from falling below a certain level as to become a disincentive to produce.