India's economy has slipped into deflation, according to its closely watched wholesale price index, but officials and analysts said the first decline in wholesale prices in 30 years did not signify a contraction in demand.

India's wholesale prices levels fell 1.6 per cent during the week ending June 6, compared with their 13 per cent increase the previous week, the first time since the financial year ending March 1978 that the index has fallen.

Ashok Chawla, the finance ministry's top official, said the price drop did not signify a deterioration in India's overall economic conditions, however, nor would it lead to any shift in economic policy.

“These numbers do not reflect any contraction of demand,” he said. “In fact, we are doing well and the country is on the path of improved economic performance.”

Rohini Malkani, chief economist at Citigroup, said the declining price levels were largely statistical and caused by the sharply lower fuel prices. However, she said India still faced inflationary pressures. “You will see negative numbers for the following weeks, but by year-end we do expect inflation to go back to around 4 per cent,” Ms Malkani said. “It's not like deflation because of no demand and people slashing prices.”

Amit Mitra, the secretary-general of the Federation of Indian Chamber of Commerce and Industry, said the decline in the price of some items, including basic metal alloys, machine tools and machines, reflected a slowdown in investment.

A year ago, Indian policy-makers were battling inflation, which peaked at nearly 13 per cent in August. While wholesale prices may have fallen, consumer prices remain a concern, at about 8 per cent higher than last year.

With the first weeks of India's monsoon season drier than usual, prices of some basic foodstuffs are fast shooting up in some urban areas, as traders snap up supplies in anticipation of a poor harvest.

Mr Mitra said persistent high food prices highlighted the need for the government to adopt policies “to enhance the supply of critical food items”.

India's economy grew 6.7 per cent in the financial year ended in March, a significant slowdown from the 9 per cent average annual growth recorded for the previous few years.