Growth, inflation, financial stability: It’s a season of major trade-offs for India’s policymakers

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Subscribe to enjoy similar stories. For India, the January-March quarter is a critical period marked by major data releases (such as revised and advance GDP estimates), key policy decisions (the Union Budget and the last monetary policy review of the year), and significant documents (the Economic Survey). However, given an uncertain global environment and limited policy flexibility, the current quarter will also bring difficult trade-offs as policymakers strive to balance competing priorities.

Here are some of the key dilemmas they face: The shockingly low GDP growth of 5.4% for July-September 2024 has raised concerns about a potential cyclical downturn, primarily driven by weakening consumption demand. A mix of slowing wages, high inflation, and inadequate job creation has dampened urban consumer sentiment. The Reserve Bank of India’s (RBI) consumer confidence survey indicates that sentiment remains fragile and has yet to return to pre-pandemic levels, with households hesitant to spend on non-essentials.

Slower growth typically calls for expansionary fiscal and monetary policies. The upcoming Union Budget is expected to stimulate demand, either by increasing disposable incomes (through tax relief or targeted transfers) or reducing costs (such as tariff cuts). However, the government’s commitment to fiscal discipline limits its ability to provide significant stimulus—especially with economic growth already falling short of budgetary projections.

Monetary expansion faces similar constraints. While a year of interest rate hikes followed by a prolonged pause has helped contain inflation, it remains above the 4% target. Persistent food inflation is the primary culprit, which has become deeply entrenched in recent months.