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The Hindu
3 days ago
- Business
- The Hindu
Is the Indian economy perfectly balanced?
A few weeks back, India's Finance Ministry declared the Indian economy to be in a 'Goldilocks situation' — a rare alignment of moderate growth, subdued inflation and supportive monetary conditions. Analysts too, taking a narrow, quarterly view of the Indian economy conceded, marking this as a 'mini-Goldilocks moment' for its macroeconomic position, spurred by 7.6% GDP growth, peaking interest rates and stable corporate earnings. A few other macroeconomic observers pointed out that India exiting FY2024 as a $3.6 trillion economy with an underlying growth of over 7.6% projects a buoyant macroeconomic backdrop for 2025. Yet beneath the veneer and hyper-optimistic outlook lies a more complex reality for India's macroeconomic position. More astute observers of the Indian economy with historical data, question this so-called golden equilibrium which disguises underlying structural imbalances. Inflation and stagnant wage growth A closer look at Chart 1 reveals a nuanced story behind headline price stability. While the Consumer Price Index (CPI) indeed showed a commendable deceleration, falling from 4.8% in May 2024 to 2.82% by May 2025, hinting at inflation within the Reserve Bank of India's (RBI) comfort zone, the path to this point and the underlying dynamics, warrant significant scrutiny. Throughout much of 2024, the Consumer Food Price Index (CFPI) consistently ran significantly higher than general inflation. For instance, in October 2024, when CPI (General) peaked at 6.21%, CFPI surged to an alarming 10.87%. Even in August 2024, with CPI at 3.65%, CFPI stood at 5.66%. This persistent divergence is critical because food accounts for nearly half of the consumption basket of an average Indian household, particularly within lower-income groups. High and volatile food inflation, driven by factors like unseasonal rains, supply chain disruptions and global commodity price fluctuations, severely erodes the purchasing power of the common citizen. Economists like Dr. Pronab Sen have argued that policymakers such as the RBI should focus on core inflation rather than headline CPI inflation, because core inflation excludes volatile food and fuel prices and better reflects the sustained burden of price increases across essentials like housing, education, transport, and personal care. For an average family, the meaning of 10% food inflation is a direct and painful cut in real income, forcing them to either compromise on dietary quality, incur debt or drastically reduce other essential expenditures. The eventual dip in CFPI to 0.99% by May 2025, while welcome, must be viewed in the context of the preceding periods of severe pressure. The volatility itself creates uncertainty and hinders household budgeting and savings, directly countering the stability implied by a 'Goldilocks' environment. This inflationary pressure on essentials directly impacts the everyday reality captured in Chart 2 which delivers one of the most compelling arguments against the 'Goldilocks' perception. This data powerfully illustrates the chasm between nominal salary hikes and the actual improvement in purchasing power. For instance, in 2023, while the average salary increase was a respectable 9.2%, the real wage growth stood at a mere 2.5%. More critically, in 2020, real wage growth turned negative, registering -0.4%, even as nominal salaries saw a 4.4% rise. Even the 2025 projection of 4% real wage growth against an 8.8% average salary increase indicates that half of the nominal gain is still being eroded by inflation. This numerical gap translates into a tangible daily struggle. A 9% salary hike sounds promising, but if inflation is 7%, their actual ability to buy goods and services only increases by 2%. This 'silent squeeze' diminishes household savings, forces families to cut back on discretionary spending, and can lead to increased reliance on debt, particularly for those in sectors like IT product and services, manufacturing, engineering, and consumer industries, which usually hand out lower hikes. Income inequality The International Labour Organization (ILO) and various labour economists have consistently pointed out challenges vis-à-vis job quality and stagnant real wages in many emerging economies, including India. Without substantial and sustained growth in real wages, the consumption demand, which is a critical driver for the Indian economy, remains constrained, undermining the foundations of a truly buoyant and broad-based economic recovery. This unevenness in economic gains also finds reflection in Chart 3, which offers a glimpse into income distribution. The Gini coefficient, a measure of inequality, shows fluctuations over the decade, starting at a high of 0.489 in AY13, dipping to 0.435 in AY16, and forecasted at 0.402 for AY23. While a declining Gini coefficient on taxable income might suggest some improvement, it is crucial to recognise the limitations. Taxable income primarily captures the formal sector and those above a certain income threshold, potentially missing the vast informal sector and the broader distribution of wealth. A recent essay by ORF authors Garima Nain and Ria Kasliwal describe India's post-pandemic economy as a multi-speed or K-shaped recovery, where certain segments, particularly the affluent and those in specific industries, thrive, while others lag. While the number of billionaires in India has surged, real wages for many at the lower end of the income spectrum have remained the same. This persistent inequality can undermine social cohesion, limit access to quality education and healthcare for a large segment of the population, and ultimately stifle long-term inclusive growth. When a significant portion of the population feels left behind, despite robust GDP numbers, the notion of a universally beneficial 'Goldilocks' state becomes deeply questionable. Adding to these domestic pressures, Chart 4 showcases the government's fiscal position and its trajectory. While there's a clear commitment to fiscal consolidation, with the fiscal deficit projected to decline from 6.4% in 2022-23 to 4.4% in 2025-26 (budget estimate), and the revenue deficit decreasing from 4% to 1.5% over the same period, the absolute levels of these deficits remain substantial. The primary deficit, which indicates the current year's borrowing excluding interest payments on past debt, is also projected to fall from 3% to 0.8%. However, for a developing economy like India, sustained high deficits can pose several macroeconomic challenges. They necessitate significant government borrowing, which can potentially crowd out private investment by increasing demand for funds and putting upward pressure on interest rates. This could deter private businesses from investing and expanding, thus limiting job creation and overall economic growth. Furthermore, a high public debt-to-GDP ratio (which stood at around 81% for the general government in 2022-23, significantly above the fiscal responsibility and budget management Act target of 60%) implies a substantial portion of future revenues will be diverted to servicing this debt. For the average citizen, this translates into reduced fiscal space for critical public spending on social sectors like education, healthcare, and infrastructure, or potentially higher taxes in the future to manage the debt burden. Complicating the goldilocks narrative Taken together, these critical indicators, volatile food inflation eroding purchasing power, persistent income disparities despite growth, stagnant real wages for the majority, and a tight fiscal space, paint a picture far more complex than the harmonious 'Goldilocks' narrative suggests. The so-called macro sweet spot is not universally experienced, and therefore, its underlying fragilities are becoming increasingly apparent. The socio-economic realities on the ground, consistently analysed by a broad spectrum of economists, reveal that the journey towards inclusive and sustainable prosperity for all Indians remains an uphill climb. Indeed, for those willing to look beyond the headlines and delve into the granular data, the myth of the macro sweet spot is cracking open. The allure of a 'Goldilocks' economy, while comforting, risks obscuring the lived realities of millions. True economic equilibrium transcends mere GDP numbers or headline inflation targets; it's fundamentally about how these aggregate statistics translate into tangible improvements in daily lives. When real wages stagnate against rising costs, when growth disproportionately benefits a select few, and when the government operates under significant fiscal constraints, the promise of a 'just right' economy rings hollow for the common household. India's true economic strength will not be defined by fleeting perceptions of balance, but by its capacity to foster genuinely inclusive growth, bolster real incomes, and build robust fiscal resilience for all its citizens. It is in addressing these profound challenges, rather than embracing a superficial sweet spot, that India's sustainable economic future lies. Deepanshu Mohan is Professor of Economics and Dean, O.P. Jindal Global University (JGU) and Visiting Professor, London School of Economics (LSE). Ankur Singh contributed to this column.
The Print
4 days ago
- Business
- The Print
RBI keeps repo rate steady at 5.5% amid US tariff concerns
This comes after the MPC had reduced the repo rate by 50 basis points to 5.5 per cent in the previous policy meeting held in June. The RBI Governor stated, 'After a detailed assessment of the evolving macroeconomic and financial developments and outlook, the MPC voted unanimously to keep the policy record under the Liquidity Adjustment Facility unchanged at 5.5 per cent. Mumbai: In a unanimous decision the Reserve Bank of India (RBI) Monetary Policy Committee (MPC) has kept the repo rate unchanged at 5.5 per cent in its August policy meeting. The decision was announced by RBI Governor Sanjay Malhotra on Wednesday. The Monetary Policy Committee (MPC), which met on the 4th, 5th, and 6th of August, carefully reviewed the latest economic and financial conditions before taking this decision. The Governor said that all six members of the MPC voted unanimously to maintain the repo rate under the Liquidity Adjustment Facility at 5.5 per cent. The reason for the earlier rate cut was the easing of inflation. Earlier he stated that both near-term and medium-term inflation levels are now within the RBI's comfort zone. He also highlighted that food inflation has remained soft, which gives the central bank more flexibility in its decisions. Retail inflation in India has continued to fall and has now reached its lowest level in more than six years. According to the Ministry of Statistics, the year-on-year inflation rate based on the Consumer Price Index (CPI) for June was 2.10 per cent (provisional), a drop of 72 basis points compared to May 2025. This is the lowest CPI inflation rate since January 2019. Food prices have also dropped. The Consumer Food Price Index (CFPI) for June showed a year-on-year inflation rate of (-) 1.06 per cent (Provisional). In rural areas, the food inflation rate was (-) 0.92 per cent, while in urban areas, it was (-) 1.22 per cent. Wholesale inflation has also turned negative. The Wholesale Price Index (WPI) for June stood at (-) 0.13 per cent, compared to 0.39 per cent in May. The Ministry of Commerce and Industry said the negative WPI was due to lower prices of food items, mineral oils, basic metals, crude petroleum, and natural gas. Governor Malhotra added that the economic outlook looks positive. 'The monsoon season is progressing well, and the upcoming festival season usually increases economic activity. Combined with supportive government and RBI policies, this situation bodes well for the Indian economy in the near term,' he said. (ANI) This report is auto-generated from ANI news service. ThePrint holds no responsibility for its content. Also read: India's response to Trump is an emotional one. Tariff damage is psychological
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Business Standard
5 days ago
- Business
- Business Standard
RBI lowers inflation forecast to 3.1% for FY26; growth outlook unchanged
The Reserve Bank of India (RBI) on Wednesday sharply lowered its inflation forecast for 2025-26 to 3.1 per cent from 3.7 per cent earlier, citing easing food prices, a favourable monsoon, and adequate foodgrain stocks, while keeping its growth outlook steady at 6.5 per cent. The Monetary Policy Committee (MPC) projects inflation at 2.1 per cent in the second quarter (Q2) of FY26, 3.1 per cent in the third, and 4.4 per cent in the fourth. For the first quarter of FY27, inflation is expected to rise to 4.9 per cent as base effects fade. June inflation lowest in 77 months The revision comes amid a marked cooling in prices. India's retail inflation, measured by the Consumer Price Index (CPI), fell to 2.1 per cent in June 2025 from 2.82 per cent in May, the lowest reading since January 2019, according to the Ministry of Statistics and Programme Implementation. RBI Governor Sanjay Malhotra pointed out that this was the lowest in 77 months, stating that a 'Large favourable base effects combined with steady progress of the southwest monsoon, healthy kharif sowing, adequate reservoir levels and comfortable buffer stocks of foodgrains have contributed to this moderation [in inflation],' he said. 'On the supply side, a steady south-west monsoon is supporting kharif sowing, replenishing reservoir levels and boosting agriculture activity,' the RBI governor said, but warned of weather-related risks. Food inflation in June Food inflation, measured by the Consumer Food Price Index (CFPI), turned negative in June for the first time in over six years — at -0.92 per cent in rural areas and -1.22 per cent in urban areas — down from 0.95 per cent and 0.96 per cent, respectively, in May. The ministry attributed the decline to a favourable base effect and lower prices across categories, including vegetables, pulses, cereals, meat and fish, sugar, milk, and spices. Wholesale price pressures have also moderated, with the Wholesale Price Index (WPI) inflation slipping into negative territory at -0.13 per cent in June from 0.39 per cent in May, mainly due to falling prices of food articles, fuel and power, and basic metals. Growth forecast for FY26 at 6.5 per cent The gross domestic product (GDP) growth forecast for FY26 remains at 6.5 per cent, with quarterly estimates of 6.5 per cent in Q1, 6.7 per cent in Q2, 6.6 per cent in Q3, and 6.3 per cent in Q4. Growth for Q1 of the next financial year, FY27, is projected at 6.6 per cent. The RBI said robust services and construction activity, government capital expenditure, and improving rural demand will support momentum, though external demand risks persist. CRR cut to be effective from Sept The MPC reiterated that the 100-basis-point reduction in the cash reserve ratio (CRR), first announced in June, will be implemented in four tranches of 25 basis points each on September 6, October 4, November 1, and November 29, 2025. Governor Malhotra said the measure will 'ensure adequate liquidity in the banking system to support credit growth and smooth financial market functioning.'
The Hindu
5 days ago
- Business
- The Hindu
RBI MPC keeps repo policy rate unchanged at 5.5% in August meet
In an unanimous decision the Reserve Bank of India (RBI) Monetary Policy Committee (MPC) has kept the repo rate unchanged at 5.5% in its August policy meeting. The decision was announced by RBI Governor Sanjay Malhotra on Wednesday (August 6, 2025). The Monetary Policy Committee (MPC), which met on the 4th, 5th, and 6th of August, carefully reviewed the latest economic and financial conditions before taking this decision. Also Read: Monetary Policy Committee meeting LIVE: RBI keeps repo rate unchanged at 5.5% The Governor said that all six members of the MPC voted unanimously to maintain the repo rate under the Liquidity Adjustment Facility at 5.5%. The RBI Governor stated, 'After a detailed assessment of the evolving macroeconomic and financial developments and outlook, the MPC voted unanimously to keep the policy record under the Liquidity Adjustment Facility unchanged at 5.5%.This comes after the MPC had reduced the repo rate by 50 basis points to 5.5% in the previous policy meeting held in June. The reason for the earlier rate cut was the easing of inflation. Earlier he stated that both near-term and medium-term inflation levels are now within the RBI's comfort zone. He also highlighted that food inflation has remained soft, which gives the central bank more flexibility in its decisions. Retail inflation in India has continued to fall and has now reached its lowest level in more than six years. According to the Ministry of Statistics, the year-on-year inflation rate based on the Consumer Price Index (CPI) for June was 2.10% (provisional), a drop of 72 basis points compared to May 2025. This is the lowest CPI inflation rate since January prices have also dropped. The Consumer Food Price Index (CFPI) for June showed a year-on-year inflation rate of (-) 1.06% (Provisional). In rural areas, the food inflation rate was (-) 0.92%, while in urban areas, it was (-) 1.22%. Wholesale inflation has also turned negative. The Wholesale Price Index (WPI) for June stood at (-) 0.13%, compared to 0.39% in May. The Ministry of Commerce and Industry said the negative WPI was due to lower prices of food items, mineral oils, basic metals, crude petroleum, and natural gas. Governor Malhotra added that the economic outlook looks positive. 'The monsoon season is progressing well, and the upcoming festival season usually increases economic activity. Combined with supportive government and RBI policies, this situation bodes well for the Indian economy in the near term,' he said.
News18
5 days ago
- Business
- News18
RBI keeps Repo Rate unchanged at 5.5% in August policy meet
Mumbai (Maharashtra) [India], August 6 (ANI): In a unanimous decision the Reserve Bank of India (RBI) Monetary Policy Committee (MPC) has kept the repo rate unchanged at 5.5 per cent in its August policy meeting. The decision was announced by RBI Governor Sanjay Malhotra on Monetary Policy Committee (MPC), which met on the 4th, 5th, and 6th of August, carefully reviewed the latest economic and financial conditions before taking this decision. The Governor said that all six members of the MPC voted unanimously to maintain the repo rate under the Liquidity Adjustment Facility at 5.5 per RBI Governor stated, 'After a detailed assessment of the evolving macroeconomic and financial developments and outlook, the MPC voted unanimously to keep the policy record under the Liquidity Adjustment Facility unchanged at 5.5 per comes after the MPC had reduced the repo rate by 50 basis points to 5.5 per cent in the previous policy meeting held in reason for the earlier rate cut was the easing of inflation. Earlier he stated that both near-term and medium-term inflation levels are now within the RBI's comfort zone. He also highlighted that food inflation has remained soft, which gives the central bank more flexibility in its inflation in India has continued to fall and has now reached its lowest level in more than six years. According to the Ministry of Statistics, the year-on-year inflation rate based on the Consumer Price Index (CPI) for June was 2.10 per cent (provisional), a drop of 72 basis points compared to May 2025. This is the lowest CPI inflation rate since January prices have also dropped. The Consumer Food Price Index (CFPI) for June showed a year-on-year inflation rate of (-) 1.06 per cent (Provisional). In rural areas, the food inflation rate was (-) 0.92 per cent, while in urban areas, it was (-) 1.22 per inflation has also turned negative. The Wholesale Price Index (WPI) for June stood at (-) 0.13 per cent, compared to 0.39 per cent in May. The Ministry of Commerce and Industry said the negative WPI was due to lower prices of food items, mineral oils, basic metals, crude petroleum, and natural Malhotra added that the economic outlook looks positive. 'The monsoon season is progressing well, and the upcoming festival season usually increases economic activity. Combined with supportive government and RBI policies, this situation bodes well for the Indian economy in the near term," he said. (ANI)
