{"id":64560,"date":"2025-09-22T11:03:41","date_gmt":"2025-09-22T05:33:41","guid":{"rendered":"https:\/\/vajiramandravi.com\/current-affairs\/?p=64560"},"modified":"2025-09-22T11:03:41","modified_gmt":"2025-09-22T05:33:41","slug":"low-inflation-in-india-fiscal-challenges-and-nominal-gdp-growth-impact","status":"publish","type":"post","link":"https:\/\/vajiramandravi.com\/current-affairs\/low-inflation-in-india-fiscal-challenges-and-nominal-gdp-growth-impact\/","title":{"rendered":"Low Inflation in India: Fiscal Challenges and Nominal GDP Growth Impact"},"content":{"rendered":"<h2><b>Low Inflation in India Latest News<\/b><\/h2>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Recent data showed CPI inflation at <\/span><b>2.07%<\/b><span style=\"font-weight: 400;\"> and WPI inflation at <\/span><b>0.52%<\/b><span style=\"font-weight: 400;\"> in August, offering relief to households.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">However, such low inflation complicates the government\u2019s <\/span><b>budget calculations and fiscal management<\/b><span style=\"font-weight: 400;\">, making revenue mobilisation harder even as consumers benefit from stable prices.<\/span><\/li>\n<\/ul>\n<h2><b>Understanding Inflation<\/b><\/h2>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Inflation refers to the general rise in prices across an economy, often triggered by increased supply of money.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Rising input costs, such as oil or food, also push prices higher, reducing the value of money.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The primary effect is erosion of purchasing power\u2014the same amount of money buys fewer goods and services.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">While wages may adjust, most people end up spending more on essentials like food and rent.<\/span><\/li>\n<\/ul>\n<h3><b>Benefits of Inflation<\/b><\/h3>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Moderate inflation can stimulate economic growth when resources are underutilised.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">More spending fuels production and jobs. Keynes argued it prevents the Paradox of Thrift, where falling prices discourage spending.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Inflation also eases debt burdens, as repayments are made with less valuable money, benefiting debtors and fixed-rate homeowners.<\/span><\/li>\n<\/ul>\n<h3><b>Who Benefits Most<\/b><\/h3>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Debtors and homeowners with fixed-rate mortgages.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Workers in secure jobs less vulnerable to cuts.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Holders of foreign currencies, who gain from weaker domestic currency.<\/span><\/li>\n<\/ul>\n<h3><b>When Inflation Becomes Harmful<\/b><\/h3>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">High inflation reduces purchasing power, risks layoffs, and raises borrowing costs, making big purchases like homes unaffordable.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Fixed-income workers and investors in long-term bonds also lose, as returns fail to keep up with rising costs and interest rates.<\/span><\/li>\n<\/ul>\n<h2><b>Low Inflation and Government Finances<\/b><\/h2>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">While real <\/span><a href=\"https:\/\/vajiramandravi.com\/upsc-exam\/gross-domestic-product-gdp\/\" target=\"_blank\"><span style=\"font-weight: 400;\">GDP<\/span><\/a><span style=\"font-weight: 400;\"> growth rose to 7.8% in April\u2013June 2025, nominal GDP growth fell to 8.8%, below the government\u2019s budget assumption of 10.1%.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Nominal GDP, influenced by inflation, is key for revenue projections and fiscal planning.<\/span><\/li>\n<\/ul>\n<h3><b>Budget Expectations vs Reality<\/b><\/h3>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The 2025\u201326 Budget assumed India\u2019s nominal GDP would reach \u20b9357 lakh crore, with tax revenue expected to grow nearly 11%.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">However, persistently low inflation has weakened nominal GDP growth, straining revenue mobilisation.<\/span><\/li>\n<\/ul>\n<h3><b>Impact on Tax Collections<\/b><\/h3>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">With WPI inflation averaging 0.1% and CPI inflation at 2.4% this fiscal, subdued price growth has slowed tax inflows.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Between April\u2013July, gross tax revenue rose just 1% year-on-year, while net tax revenue fell 7.5%.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Although <\/span><span style=\"font-weight: 400;\">low inflation benefits consumers, it weakens the government\u2019s balance sheet<\/span><span style=\"font-weight: 400;\">.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Sluggish nominal GDP growth is already impacting finances, making it difficult to meet FY26 budget targets.<\/span><\/li>\n<\/ul>\n<h2><b>Challenges in Meeting Nominal GDP Growth Targets<\/b><\/h2>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Nominal GDP growth often diverges from Budget assumptions.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">In the last 13 years, actual growth has fallen short nine times, though in three of the last four years, it exceeded expectations.<\/span><\/li>\n<\/ul>\n<h3><b>Revised Base and Budget Assumptions<\/b><\/h3>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The GDP for 2024\u201325 was revised upward by 2% to \u20b9331 lakh crore.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">This reduces the required growth for 2025\u201326 to 8% to meet the Budget\u2019s target of \u20b9357 lakh crore.<\/span><\/li>\n<\/ul>\n<h3><b>Fiscal Implications<\/b><\/h3>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Achieving the nominal GDP projection is critical for maintaining fiscal indicators.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The <\/span><b>fiscal deficit target of 4.4% and debt-to-GDP ratio of 56.1%<\/b><span style=\"font-weight: 400;\"> hinge on meeting this number, provided the deficit stays within estimates.<\/span><\/li>\n<\/ul>\n<h3><b>Concerns for FY26<\/b><\/h3>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Economists expect nominal GDP growth to fall below the Budget\u2019s 10.1% estimate, with Morgan Stanley projecting just 8.3%.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">This implies continued slowdown after April\u2013June\u2019s 8.8% growth.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Upcoming reductions in Goods and Services Tax (GST) rates are expected to lower prices and inflation.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">While beneficial for consumers, this will likely further suppress nominal GDP growth.<\/span><\/li>\n<\/ul>\n<h2><b>Low Inflation: Causes and Concerns<\/b><\/h2>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Low inflation is not inherently negative; its impact depends on the cause. If driven by <\/span><b>oversupply<\/b><span style=\"font-weight: 400;\">, it signals healthy demand, but if due to <\/span><b>weak demand<\/b><span style=\"font-weight: 400;\">, it is worrisome.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">An RBI study showed that in April\u2013June, private companies\u2019 sales grew <\/span><b>5.5%<\/b><span style=\"font-weight: 400;\">, while net profits surged <\/span><b>17.6%<\/b><span style=\"font-weight: 400;\">; in manufacturing, profits rose <\/span><b>27.7%<\/b><span style=\"font-weight: 400;\"> against sales growth of just <\/span><b>5.3%<\/b><span style=\"font-weight: 400;\">, aided by lower global commodity prices.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Despite strong margins and cash reserves, corporate investment (capex) remains weak.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Economists warn this indicates <\/span><span style=\"font-weight: 400;\">subdued demand rather than productivity-driven efficiency, raising concerns about India\u2019s growth momentum<\/span><span style=\"font-weight: 400;\">.<\/span><\/li>\n<\/ul>\n<p><b>Source:<\/b> <a href=\"https:\/\/indianexpress.com\/article\/explained\/explained-economics\/low-inflation-problem-government-budget-targets-10256765\/\" target=\"_blank\" rel=\"nofollow noopener\"><span style=\"font-weight: 400;\">IE<\/span><\/a><span style=\"font-weight: 400;\"> | <\/span><a href=\"https:\/\/www.investopedia.com\/ask\/answers\/111414\/how-can-inflation-be-good-economy.asp\" target=\"_blank\" rel=\"nofollow noopener\"><span style=\"font-weight: 400;\">IP<\/span><\/a><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Low inflation in India benefits consumers but strains government finances, weakens nominal GDP growth, and complicates Budget targets.<\/p>\n","protected":false},"author":18,"featured_media":64581,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[18],"tags":[2826,60,22,59],"class_list":{"0":"post-64560","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-upsc-mains-current-affairs","8":"tag-low-inflation-in-india","9":"tag-mains-articles","10":"tag-upsc-current-affairs","11":"tag-upsc-mains-current-affairs","12":"no-featured-image-padding"},"acf":[],"_links":{"self":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/posts\/64560","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/users\/18"}],"replies":[{"embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/comments?post=64560"}],"version-history":[{"count":0,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/posts\/64560\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/media\/64581"}],"wp:attachment":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/media?parent=64560"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/categories?post=64560"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/tags?post=64560"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}