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14 Aug 2025 : Limited gains

Editorial 1: ​Limited gains

Context

A brief dip in inflation offers little lasting benefit.

 

Introduction

India’s inflation landscape has shifted dramatically in recent years, moving from levels above the RBI’s comfort bandto well below it. July 2025 retail inflation reached its lowest point since 2017, driven mainly by a drop in food prices. While this provides short-term relief, underlying growth challenges and structural weaknesses mean the economic picture remains mixed.

 

Shift in Inflation Dynamics

  • Two years ago, inflation was above the RBI’s 2%–6% comfort band; now it is below the lower limit.
  • July 2025 retail inflation: 1.55%, the lowest since June 2017.
  • Drop largely driven by a contraction in food prices, not a statistical fluke.

 

Significance of the Base Effect

  • Base effect in July was low: food inflation in July 2024 was already at a 13-month low.
  • A further contraction this year means genuine price reduction rather than an effect of high prior-year prices.

 

Drivers of Continued Low Inflation

  • Improved sowing conditions.
  • Good monsoon progress.
  • Favourable base effect from late 2024’s inflation surge.
  • Core inflation (excluding food and fuel) at 4.1%, matching RBI’s target.

 

External Risks to Price Stability

  • Possible risk if India shifts from Russian crude to costlier Gulf oil, though government says national interest comes first.
  • The Trump–Putin meeting could ease recent tariff-related pressures.

 

RBI’s Inflation Forecast

  • Inflation expected to start rising only from January 2026.
  • Short-term outlook is positive, but complacency is discouraged.

 

Signs of Economic Growth Slowdown

  • Index of Industrial Production at a 10-month low; capital and consumer goods output is weak.
  • GST revenue growth slowed to single digits in June–July 2025.
  • Gross direct tax collections contracted this financial year.
  • Car sales to dealers hit an 18-month low in June.
  • UPI transactions fell month-on-month three times in 2025, signalling weak demand.

 

Risks to GDP Outlook

  • RBI still projects 6.5% GDP growth for FY2025–26, but this may be overly optimistic.
  • Even if the U.S. removes new 25% tariffs, the existing 25% duties could still cut GDP by 0.2 percentage points.
  • Growth remains too fragile to ignore such potential losses.

 

Structural and Demand-Side Challenges

  • Persistent structural issues in the economy.
  • Subdued demand despite low inflation.
  • Temporary price relief won’t translate into long-term growth without deeper reforms.

 

Conclusion

India’s low inflation offers breathing space for monetary policy and household budgets, but it cannot mask economic fragility. Weak demand, sluggish industrial output, and structural bottlenecks pose risks to sustained growth. Without addressing these challenges, the current price stability may prove temporary, and the nation’s growth momentum could falter despite favourable short-term economic conditions.