A fiscal boost could act like a deflation vaccine

Context: Falling of Indian wholesale inflation below zero in May along with uncertainty caused by the Pandemic necessitates a fresh look for a prudent fiscal measure to contain deflation.

Demand and supply shock due to pandemic: 

• Unlocked India may see a sudden rise of production outstrip consumption, this could send prices sliding at the retail level.
• As retail fuel rates kept under control, Sustained deflation would make it harder for us to haul the economy out of its slump. 

How a deflationary scenario could threaten the stability rupees: 

• Likelihood of defaults - A gain in the currency’s internal value would increase the real burden of debt on all borrowers, making it harder for them to pay back. 

• Lenders saddled with idle cash - It would also deter businesses and households from taking fresh loans.

• Fall of interest rate - our monetary policy is eased in line with falling inflation.

• Deflationary spiral - a wave of deferred spending could depress demand even more, as spenders sit on their money and wait for prices to fall further.

Conclusion: In such case government should inject money where it is most effective could help keep inflation positive.