Why in News: Retail inflation in August 2025 eased to 2.1%, staying within RBI’s comfort band, while growth remained robust — signaling a favourable shift in India’s macro outlook from high inflation–low growth to low inflation–high growth.
Current Inflation Trends
- Retail inflation (Aug 2025): 2.1% – within RBI’s comfort band (2–6%).
- Food prices: Sharp contraction in vegetables (–15.9%) and pulses (–14.5%), aided by NFSA’s free foodgrain supply.
- Other necessities: Clothing, housing, fuel – stable with declining inflation compared to July.
- GST cuts (Sept 2025): Expected to further reduce consumer prices.
Why the Outlook Matters
- Stability for households: Low food inflation combined with NFSA support protects vulnerable groups, reducing inequality.
- Policy space for government: Declining inflation gives fiscal room for welfare spending without stoking price rise.
- Monetary policy flexibility: A benign inflation trajectory allows RBI to consider rate cuts to stimulate investment.
Structural Drivers of the Shift
- Supply-side measures: Food security interventions and GST rationalisation reduce structural price pressures.
- Global energy environment: Lower crude prices limit imported inflation, insulating India from volatility.
- Domestic reforms: Multidisciplinary educational push, start-up ecosystem, and resilient consumption sustain growth momentum.
Challenges Ahead
- Data credibility: Questions on GDP and inflation estimation may affect policy trust.
- External uncertainties: Geopolitical risks, oil shocks, and global slowdown could reverse the trend.
- Distributional concern: Aggregate stability may mask rural distress or employment fragility.
Significance
- A low inflation–high growth cycle strengthens India’s case as a global investment destination.
- Reflects synergy between fiscal prudence and monetary management.
- Yet, sustainable stability demands attention to climate-linked food volatility, job creation, and productivity gains.
Conclusion
India’s current macroeconomic phase offers optimism, but long-term stability will depend on resilient institutions, diversified energy strategy, and inclusive growth policies.
UPSC Relevance
GS-III (Indian Economy): Growth–inflation dynamics, monetary policy, food security, GST reforms.
Mains Practice Question
Q.India appears to be entering a phase of low inflation and high growth. Discuss the opportunities this presents for fiscal and monetary policy, and the risks that need to be managed.