Indian Express, Sep 22, 2025

Key Arguments

1.    Falling Inflation as a Double-Edged Sword

○     Inflation, measured by CPI and WPI, has fallen sharply. While this is positive for households (as purchasing power increases), it creates challenges for the government’s fiscal arithmetic.

○     Low inflation pulls down nominal GDP growth, which is the base for tax collections and fiscal deficit calculations.

2.    Growth Angle and Budgetary Stress

○     Real GDP growth figures are not sufficient for fiscal management; nominal GDP growth matters more for revenues.

○     Government budget assumptions for 2025–26 are based on higher nominal GDP projections, but actual outcomes may fall short, widening fiscal deficits.

3.    Link between Inflation and Fiscal Arithmetic

○     Lower inflation leads to weaker nominal GDP growth, which results in subdued tax buoyancy.

○     This directly impacts fiscal deficit targets and debt-to-GDP ratios.

4.    Concerns Raised by Economists and RBI Data

○     Economists expect nominal GDP to fall well below Budget estimates (from 8.3% to possibly 6.9%).

○     RBI’s latest profit transfer indicates structural pressures, while private investment remains tepid.

5.    Is Low Inflation Bad?

○     The article argues low inflation is not inherently bad but becomes problematic when it drags nominal GDP growth below expectations.

○     Weak demand and subdued commodity prices show structural weakness in the economy.

Author’s Stance

●     Cautious-critical: While acknowledging consumer benefits of low inflation, the author emphasizes risks to government finances and fiscal stability.

●     The article implicitly supports the view that moderate inflation is necessary for healthy economic growth and fiscal balance.

●     The stance leans toward fiscal conservatism—warning about deficit and revenue shortfalls rather than celebrating consumer gains.

Possible Biases

●     Pro-Government Fiscal Lens: The focus is largely on government revenue and deficit targets, not on broader welfare implications for citizens.

●     Understates Consumer Relief: While benefits to households are acknowledged, they are overshadowed by concerns about fiscal arithmetic.

●     Growth-Oriented Bias: Assumes that subdued inflation equals weak demand, without exploring supply-side improvements (like productivity gains)

Pros and Cons

Pros

●     Provides a clear link between inflation, nominal GDP, and fiscal health.

●     Uses data (nominal vs real GDP growth rates, RBI transfers) to strengthen the argument.

●     Highlights the fiscal risks of overestimating nominal GDP.

Cons

●     Overemphasis on fiscal constraints, underplaying positive social impact of lower inflation.

●     Limited exploration of structural reforms that could decouple growth from inflation.

●     Risks creating a perception that low inflation is inherently negative, without nuance.

Policy Implications

1.    Fiscal Management

○     Budget assumptions need more realistic nominal GDP projections.

○     Greater reliance on non-tax revenues, disinvestment, and expenditure rationalization.

2.    Monetary Policy

○     RBI may retain accommodative stance if inflation remains subdued.

○     Interest rate cuts could stimulate demand but risk destabilizing financial flows.

3.    Structural Reforms

○     Productivity-driven growth should be emphasized to avoid dependence on inflation-led GDP growth.

○     Investment in infrastructure and export competitiveness can counter low inflation drag.

Real-World Impact

●     Consumers: Relief in daily costs, better household savings.

●     Government: Lower revenues, stress on deficit targets, possible cutbacks in welfare/capital expenditure.

●     Private Sector: Mixed impact—cheaper borrowing but weak demand may limit expansion.

●     Investors: Concerns about fiscal deficit may impact bond markets and sovereign ratings.

Relevance to UPSC GS Papers

●     GS Paper III (Economy): Inflation, GDP growth, fiscal deficit, monetary policy.

●     GS Paper II (Governance): Implications for government welfare spending and fiscal federalism.

●     Essay/GS Paper IV (Ethics in Economics): Balancing consumer welfare with fiscal prudence.

Balanced Summary and Future Perspectives

The editorial highlights the paradox of low inflation—beneficial for households but challenging for fiscal management. While falling prices aid consumers, they constrain government revenues by reducing nominal GDP growth, threatening fiscal deficit targets. The stance is fiscally conservative, focusing more on macroeconomic stability than consumer welfare.

Future Perspective:

●     India must balance inflation management with productivity-led growth.

●     Budget assumptions should be more conservative, with buffers for revenue shortfalls.

Structural reforms in tax administration, manufacturing competitiveness, and investment climate are crucial to sustain growth without relying on inflation.