For two consecutive months, India's headline inflation has registered at less than 1 per cent, a figure that might seem positive at first glance but is ringing alarm bells among economists. The Consumer Price Index (CPI) data, while low, presents a complex conundrum with wide-ranging implications for the country's economic stability and growth trajectory.
The Perception vs. Reality of Low Inflation
The current low CPI inflation rates, recorded for November and December 2025, are partly attributed to a statistical base effect from high numbers in the previous year. However, ground reality tells a different story. According to RBI surveys on inflation perception, households in November perceived inflation at 6.6 per cent, expecting it to rise to 7.6 per cent three months ahead. This significant gap between official data and public perception highlights a trust deficit and underscores the nuanced nature of the price situation.
Six-Fold Economic Implications of Sustained Low Inflation
The persistently low inflation figure, with the December 2025 number likely around or below 1 per cent, creates multiple challenges across sectors.
First, it creates a policy dilemma for the Reserve Bank of India (RBI). The Monetary Policy Committee (MPC) had lowered the repo rate in December 2025 when inflation was low and growth was buoyant. As the committee prepares for its next deliberation in February 2026, the scenario remains similar, logically calling for another rate cut. The critical question is: what happens when inflation inevitably rises due to the low base effect? Will the RBI be forced to reverse course and hike rates abruptly?
Second, and most critically, negative food inflation hurts farmers. Despite a very good production for kharif crops, farmers face the prospect of lower incomes when food inflation turns negative. Reports indicate that for crops like soybean and pulses, market sales in October and early November were below the Minimum Support Price (MSP). This directly impacts rural incomes, constrains spending power, and could dissipate the potential benefits of initiatives like GST 2.0, creating adverse ripple effects throughout the rural economy.
Third, the manufacturing sector loses pricing power. Low inflation, particularly on the wholesale side, is not good news for manufacturers as it signifies an inability to raise prices. While higher output boosts profits, stable or increasing prices are crucial. The core component of CPI saw higher inflation mainly due to products like gold, while it remained low for manufactured goods, indicating an erosion in pricing power for producers.
Fourth, government tax collections face pressure. Lower inflation has already contributed to a slowdown in Goods and Services Tax (GST) collections, a trend also impacted by lower tax rates. A persistent low-inflation environment raises serious questions about the sustainability of growth in tax revenues, which is vital for public expenditure.
Fifth, it complicates fiscal management. Low inflation has led to a situation where nominal GDP growth is only marginally higher than real GDP growth, compared to an average difference of 3-4 percentage points in the past. Low nominal growth makes meeting fiscal deficit targets more challenging. All eyes will be on what nominal growth number the government uses when projecting fiscal numbers for Financial Year 2026-27 (FY27).
Sixth, the distributional impact is uneven. While some sections of households may benefit from lower prices, producers, especially in agriculture and manufacturing, are adversely impacted. This creates an unbalanced economic recovery.
The 4 Per Cent Inflation Target: A Necessary Buffer
Economists like Madan Sabnavis, Chief Economist at Bank of Baroda, argue that a certain level of inflation is essential for a growing economy. The minimum amount of inflation needed to keep the economy ticking is around 4 per cent—which is also the official target for monetary policy. This buffer allows for wage growth, protects producer margins, and facilitates easier debt servicing.
In essence, the sub-1 per cent inflation, while seemingly a marker of price stability, masks deeper structural concerns. It threatens farmer livelihoods, weakens industrial pricing, strains government finances, and ties the hands of policymakers. As India navigates this phase, the focus must be on achieving a balanced, sustainable inflation rate that supports both consumers and producers, ensuring broad-based economic growth.
