The fall in annual rate of inflation to 2.53 per cent is due to a perceptible fall in food product prices and easy trends of other primary commodities following a record agricultural production.

Previous low of 2.4 per cent was recorded way back in March 1982, official sources said adding that the inflation had touched the 14-year low at 3 per cent in the week ended June 12.

Inflation rate, based on the wholesale price index (WPI) declined by 0.47 percentage points to 2.53 per cent (provisional) from three per cent (P) recorded in the previous week. The rate was 7.6 per cent in the corresponding week a year ago.

The sharp fall in inflation rate is mainly on account of a good agricultural production last year with food grain production expected to reach a record 203million tonnes, finance ministry sources said.

The sources said with a normal monsoon forecast in the current year, general price level was likely to remain stable in the coming months. However, inflation based on final index calculated on a point to point basis stood at 4.3 per cent for the week ended April 24 as against 3.9 per cent calculated on provisional index.

Despite the fall in inflation rate, WPI for all commodities (base: 1981-82=100) rose by 0.1 per cent to 357.2 (provisional) from 356.8 (P) Last week. The overall index declined during the week mainly on account of a fall in index for primary food articles compared to the previous week.

According to Amit Mitra, secretary general of Ficci, "This is the last phase of the lag-effect of the fall in wholesale price indices, and, as such, inflation will henceforth turn around and rise rather steeply."

A recovery has to be a function of higher demand, which in turn should lead to a rise in prices and hence a higher rate of inflation.

"The worldover, low inflation rates correspond to low economic growth, and any further fall would only mean destabilisation of the Indian economy at this point of time," says DH Pai Panandikar, economist with RPG Foundation.Moreover, expectations of further good news with the achievement of a record low inflation rate are unwarranted. For example, experts rule out any further softening of interest rates. Unforeseen expenditure by the government in terms of provisions for the Lok Sabha elections as well as the Kargil conflict is deemed to add to the fiscal pressure, making it difficult to reduce interest rates.

"The fiscal deficit is poised to be no less than Rs 100,000 crore for the current year," says BB Bhattacharya of the Indian Institute of Economic Growth. At this rate, the fiscal deficit is estimated to end close to around the level of 7 per cent of GDP.

Coupled with this is the excess expenditure that the government is faced with. This would create substantial pressures for more government borrowings. "TheKargil conflict and Lok Sabha elections will definitely put pressure on the fiscal front," says Mitra.

Moreover, banks and financial institutions already have expressed their unhappiness with lower interest rates as they are facing a substantial pressure on interest rate spreads. This once again makes lower interest rates an improbability in the short run.

There is also a school of thought that feels that there is latent "restructuring" in the private sector, particularly in the wake of overseas dumping in core sector items like steel, chemicals and drugs. "In due course, this restructuring is bound to bring about changes in demand as well as counter the price disadvantages in the Indian sector," says Mitra. "This in turn would stoke demand and hence a reversal in the trend of prices."Even at the current level, the inflation rate is based on provisional data. The final data is likely to show a different picture.

"On an annualised basis, inflation would average at about 5-6 per cent for the year," saysPanandikar.

Mitra also feels that the reduction in inflation rates may not be directly related to the global deflationary scenario. Says he: "We may not be party to the global deflation phenomenon wholly as we are still a relatively closed economy--particularly in the area of import and exports. Thus, the Indian economy is unlikely to be affected the same way as those in the rest of the world."

In fact, many economists feel that the government deserves little credit for the current decline in the rate of inflation. As Bhattacharya puts it: "Credit goes to the rain gods!"

For instance, on the monetary side, money supply is high at 17-18 per cent, which would have normally added to price escalation.

All said and done, the fall in the inflation rate to a 17-year low is being seen by many as more of a statistical phenomenon than anything else.

Firstly, the basket of commodities upon which the annual inflation rate is computed is outdated, say experts. And secondly, the point-to-point method ofcomputation itself, that is, the comparison of indices of the current period to those of the previous period, only gives a highly biased picture.For instance, the minuscule fall this year when compared to the high indices of last year, which was a bad year, was bound to lead to distorted picture, say experts.

This is, in fact, further corroborated by the trend in the more realistic consumer price index which has shown a wide variance as compared to the WPI-based inflation rate. As per the data based on the consumer price index, the rate of inflation is still ruling at around the seven to eight per cent.