India's economy is widely celebrated for entering a 'Goldilocks' phase of robust growth coupled with low inflation. However, a closer look reveals this favourable macroeconomic picture is masking significant distress in the crucial rural economy, where deflationary pressures are squeezing incomes and demand.
The Deflationary Reality Behind High Growth Numbers
Reserve Bank of India Governor recently described the Indian economy as being in a "Goldilocks phase," a characterization backed by impressive data. The GDP growth for the quarter ending September 2025 stood at a stellar 8.2%, while retail inflation, measured by the Consumer Price Index (CPI), was a mere 0.25%. In rural areas, CPI actually recorded a 0.25% decline in prices.
This economic buoyancy is partly attributed to deflation. For instance, agricultural output grew by 3.5% in real terms. However, when measured in nominal terms (including inflation), the growth was only 1.8%. This gap between high real growth and low nominal growth, caused by falling prices, is evident in other informal sectors like construction and trade, which employ a majority of India's workforce.
Agriculture Bears the Brunt of Falling Prices
The deflationary trend is starkly visible in wholesale markets. The Wholesale Price Index (WPI) has been negative for four of the last six months. Critically, food article prices have declined for seven consecutive months, affecting staples from cereals and pulses to vegetables.
Agriculture appears to be the hardest hit. Wholesale prices for major crops like pulses, oilseeds, and cotton have now fallen below the government's official Minimum Support Prices (MSPs). Soyabean prices have been particularly affected. This price crash is devastating for farmers, whose incomes are simultaneously pressured by rising input costs, including more expensive fertilizers.
Data indicates that real farm incomes per cultivator have been declining since 2016, with no sign of reversal. Recent reports also point to an increase in agricultural loan defaults, underscoring the severe financial stress.
The Looming Demand Crisis and Policy Imperative
This sustained period of weakening prices, the longest in six years, signals a deeper problem of declining incomes and stagnant demand, especially in rural India. While government measures have often targeted urban taxpayers, the rural economy has been largely overlooked. The restructuring of rural employment guarantee schemes may further reduce the limited safety net for the rural poor.
The central challenge for policymakers is to revive domestic demand. Economists argue that the most effective solution is to raise income levels across the board, with a focused increase in fiscal spending directed at rural regions. Without such intervention, the current phase of low inflation and high growth risks morphing into a damaging demand slump, jeopardizing the economy's long-term health.
