Low Inflation in India: Fiscal Challenges and Nominal GDP Growth Impact

Low Inflation in India Latest News

• Recent data showed CPI inflation at 2.07% and WPI inflation at 0.52% in August, offering relief to households. 
• However, such low inflation complicates the government’s budget calculations and fiscal management, making revenue mobilisation harder even as consumers benefit from stable prices.

Understanding Inflation

• Inflation refers to the general rise in prices across an economy, often triggered by increased supply of money. 
• Rising input costs, such as oil or food, also push prices higher, reducing the value of money.
• The primary effect is erosion of purchasing power—the same amount of money buys fewer goods and services. 
• While wages may adjust, most people end up spending more on essentials like food and rent.

Benefits of Inflation

• Moderate inflation can stimulate economic growth when resources are underutilised. 
• More spending fuels production and jobs. Keynes argued it prevents the Paradox of Thrift, where falling prices discourage spending. 
• Inflation also eases debt burdens, as repayments are made with less valuable money, benefiting debtors and fixed-rate homeowners.

Who Benefits Most

• Debtors and homeowners with fixed-rate mortgages.
• Workers in secure jobs less vulnerable to cuts.
• Holders of foreign currencies, who gain from weaker domestic currency.

When Inflation Becomes Harmful

• High inflation reduces purchasing power, risks layoffs, and raises borrowing costs, making big purchases like homes unaffordable. 
• Fixed-income workers and investors in long-term bonds also lose, as returns fail to keep up with rising costs and interest rates.

‹ ›

Low Inflation and Government Finances

• While real GDP growth rose to 7.8% in April–June 2025, nominal GDP growth fell to 8.8%, below the government’s budget assumption of 10.1%. 
• Nominal GDP, influenced by inflation, is key for revenue projections and fiscal planning.

Budget Expectations vs Reality

• The 2025–26 Budget assumed India’s nominal GDP would reach ₹357 lakh crore, with tax revenue expected to grow nearly 11%. 
• However, persistently low inflation has weakened nominal GDP growth, straining revenue mobilisation.

Impact on Tax Collections

• With WPI inflation averaging 0.1% and CPI inflation at 2.4% this fiscal, subdued price growth has slowed tax inflows. 
• Between April–July, gross tax revenue rose just 1% year-on-year, while net tax revenue fell 7.5%.
• Although low inflation benefits consumers, it weakens the government’s balance sheet. 
• Sluggish nominal GDP growth is already impacting finances, making it difficult to meet FY26 budget targets.

Challenges in Meeting Nominal GDP Growth Targets

• Nominal GDP growth often diverges from Budget assumptions. 
• In the last 13 years, actual growth has fallen short nine times, though in three of the last four years, it exceeded expectations.

Revised Base and Budget Assumptions

• The GDP for 2024–25 was revised upward by 2% to ₹331 lakh crore. 
• This reduces the required growth for 2025–26 to 8% to meet the Budget’s target of ₹357 lakh crore.

Fiscal Implications

• Achieving the nominal GDP projection is critical for maintaining fiscal indicators. 
• The fiscal deficit target of 4.4% and debt-to-GDP ratio of 56.1% hinge on meeting this number, provided the deficit stays within estimates.

Concerns for FY26

• Economists expect nominal GDP growth to fall below the Budget’s 10.1% estimate, with Morgan Stanley projecting just 8.3%. 
• This implies continued slowdown after April–June’s 8.8% growth.
• Upcoming reductions in Goods and Services Tax (GST) rates are expected to lower prices and inflation. 
• While beneficial for consumers, this will likely further suppress nominal GDP growth.

Low Inflation: Causes and Concerns

• Low inflation is not inherently negative; its impact depends on the cause. If driven by oversupply, it signals healthy demand, but if due to weak demand, it is worrisome.
• An RBI study showed that in April–June, private companies’ sales grew 5.5%, while net profits surged 17.6%; in manufacturing, profits rose 27.7% against sales growth of just 5.3%, aided by lower global commodity prices.
• Despite strong margins and cash reserves, corporate investment (capex) remains weak. 
• Economists warn this indicates subdued demand rather than productivity-driven efficiency, raising concerns about India’s growth momentum.

Source: IE | IP