Deflation in simple terms means reduction in price level over a period of time. Deflation is negative growth in the yearly inflation rate. For example if the price of commodity 'X' was Rs.100 a year ago, the same commodity is available for lesser than 100 say 95 Rs. Now you may think that this is favorable since prices fall but this is a double edged sword. Since the prices decline, consumers have an incentive to delay purchases and consumption until prices fall further, which in turn reduces overall economic activity - contributing to the deflationary spiral. This idles capacity, so investment also falls, leading to further reductions in aggregate demand. This is the deflationary spiral and it could destroy a country's economy. India would not be able to acheive the already low GDP growth rate of 7.1% if deflation sets in.
Inflation has tumbled from 12.91 percent last August to 0.44 percent, partly due to a precipitous slide in the global price of oil and other commodities. Deflation in India, a result of the economic crisis and a subsequent cut in domestic demand, is threatening to lower growth in production and investments. Goldman Sachs economist Tushar Poddar says "We think deflation will be a much bigger risk for the economy in the rest of 2009... due to ongoing demand destruction and commodity price collapses" It could last till the end of 2009.
What is the way out..? The Reserve Bank of India should cut interest rates further to initiate purchase. The Government should introduce measures to spur demand and consumption. People should be urged to spend more money rather than holding it. Elections are a good news as far as spending money is considered..!
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