By Ajit Ranade
On 1 February, the Finance Minister will present the Union Budget for the next fiscal year against a macroeconomic backdrop that would be the envy of the world. India’s growth forecasts have been revised upwards by major institutions like the IMF. The quarterly GDP numbers suggest upward momentum. And consumer inflation has drifted to strikingly low levels, even lower than the RBI’s comfort band. This combination of high growth and low inflation is a “sweet spot” called a Goldilocks economy. The temptation is to conclude that macroeconomic management is fine and that the task of policy is simply to preserve the trajectory.
However, a more careful reading is warranted. Not because the headline numbers are “wrong”, but because the forces producing them are uneven, potentially reversible, and not fully aligned with growth that leads to inclusive prosperity. The Budget should therefore treat the current configuration as a window to strengthen foundations, not as a reason to relax.
The first issue is to understand the current “low inflation.” In October 2025, the inflation was as low as 0.25%. A significant part of this disinflation is explained by food prices, which have moved from double-digit inflation in October 2024 to outright deflation a year later, turning negative 5%. Food has high weight in the CPI basket and that’s why the latter is low. This consumption reality still dominates food inflation. The “core” inflation outside of food and fuel has been stubbornly higher, close to 4%. This low CPI inflation tells us more about agricultural price cycles, supply conditions and weak underlying demand.
That is why the monetary policy debate has an unusual note of caution and not of jubilation. One member of the RBI’s Monetary Policy Committee argued that inflation that is “too low” may not be healthy for a developing country, because it can be symptomatic of weak demand. This warning deserves attention in fiscal policymaking too. Low inflation driven mainly because farm prices have stagnated or fallen does not mean that it will last.
The second issue is of farm wages. Food deflation lowers the CPI, but it can also compress incomes for farmers. Low food inflation can therefore coexist with rural distress because food producers do not benefit as much. This becomes relevant for the Budget because the credibility of high growth depends on demand being broad-based. If rural incomes and wages stagnate, consumption remains fragile. If consumption is fragile, private investment has less reason to accelerate. The current moment, therefore, should be read not simply as “macro stability achieved,” but as a possible signal that the growth process is uneven — strong in some segments, weak in others.
An important warning sign, and perhaps the most consequential concern is the persistence of weak rural wage growth. Analyses of rural wage trends show that over multiple years, nominal rural wages have grown modestly, but real wages have been flat to negative for long stretches. When food prices were rising sharply as in 2023-24, they were eating up the modest growth in nominal wages, causing real wages to remain stagnant. The stagnation of real rural wages is over several years from before the COVID period.
This could be due to two factors. First, labour supply has expanded — including rising female labour force participation. This is as much due to rural distress, and the need to augment household income. It is worth noting that 57% of employment created under NREGA was taken up by women. Second, India’s growth in recent years has been less labour-intensive. Output rise was due to vigorous growth in capital spending, mostly by the public sector. Output can rise without proportionate increases in employment and wage bargaining power. The Budget must treat rural earnings as a core macro variable.
A third concern is external: the rupee’s relative weakness and the latent risk of imported inflation. The rupee has depreciated even as CPI inflation remains near zero. The immediate question is why the pass-through has been muted. Part of the answer is that food deflation — a domestic phenomenon — has dominated the CPI story, and crude oil prices have been relatively steady. But muted pass-through today does not guarantee muted pass-through tomorrow. Farm prices can turn quickly; and price pressures in metals and precious metals can seep into costs and inflation expectations.
When food inflation drops from a high positive number to a negative one, next year’s comparisons become more likely to show a rebound, which is a base effect. In addition, the CPI basket is scheduled for revision. The Budget’s macro assumptions should not be built around the expectation that 0–2% inflation is a “new normal.”
Finally, there is nominal GDP growth. When inflation is exceptionally low, the gap between real and nominal GDP narrows sharply. This has immediate fiscal implications because tax collections track nominal, not real, aggregates. If nominal growth underperforms, revenue buoyancy disappoints, and expenditure pressures remain. In an environment of heightened welfare expectations, the fiscal deficit arithmetic becomes harder. And if deficits widen unexpectedly, they can become inflationary and currency-negative, reinforcing the very risks policymakers hoped to avoid. The Budget should hence be pragmatic and resilience-building.
First, construct macro assumptions that anticipate normalisation. It is safer to assume inflation returns towards the 4% with upside risk. Second, treat rural earnings and employment-rich growth as central objectives. The Budget should emphasise interventions that raise earning capacity — rural infrastructure, irrigation and storage, value-chain development, rural non-farm clusters, and MSME credit ecosystems — rather than treating rural stress as a welfare-only issue. Third, public capex is still needed, but it should tilt toward job creation, for instance focusing on housing, logistics, urban public services, and decentralised energy. Fourth, recognise that currency stability is partly a fiscal credibility function. Fifth, be precise in public communication. Low inflation is not the same as low cost of living — a point often missed in political debates. If citizens feel their lived costs remain high and wages remain weak, they will distrust macro narratives, however technically correct the indices may be.
India’s current combination of strong real growth and very low measured inflation is unusual — and in parts, welcome. But it rests heavily on food price dynamics and favourable base effects, while the labour market — especially rural wages — continues to show strain. The rupee and commodity prices add external uncertainty. And low nominal GDP growth can complicate fiscal arithmetic. The Finance Minister’s challenge, therefore, is not to celebrate or to fear the moment, but to interpret it correctly. It is an opportunity to strengthen the conditions that make growth inclusive and durable — rising wages, broad-based consumption, steady investment, and credible fiscal assumptions, before the inflation cycle turns again.
The writer is a noted economist
