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China enters into ‘Deflation’

Published: 24th Aug, 2023

Context

China's economy has now entered a period of deflation.

What is deflation?

  • Deflation is a general decline in prices for goods and services, typically associated with a contraction in the supply of money and credit in the economy.
  • During deflation, the purchasing power of currency rises over time.
  • Impact:
    • Deflation benefits consumers because they can purchase more goods and services with the same nominal income over time.
    • However, economists are often concerned about the consequences of falling prices on various sectors of the economy, especially in financial matters.
      • For instance, deflation can harm borrowers, who can be bound to pay their debts in money that is worth more than the money they borrowed, as well as any financial market participants who invest or speculate on the prospect of rising prices.

How does this scenario impact India?

Core inflation refers to the price changes of goods and services excluding the volatile food and energy sectors.

  • The impact of China's export deflation is extending to India, resulting in a moderation of core inflation.
  • Benefits: This scenario benefits India due to its robust export pricing and the deflationary environment in China.
    • This dual effect not only curbs global disinflation in traded goods but also exerts downward pressure on core inflation within India.
  • Flip-side: China is one of the biggest importers of iron ore from India. It imports almost 70 percent of iron-ore from India and hence, a slower economy for China would mean the amount of import into China from India could fall.

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