For India's long-run economic growth, capital formation stands out as the single most significant variable.....

 The single most significant variable in India's long-run economic growth rate is widely considered to be capital formation (investment), which includes physical capital (infrastructure, machinery) and human capital (education and skills). Technological progress and innovation play a crucial, complementary role by enhancing the productivity and efficiency of this capital and the workforce.

The Most Significant Variable: Capital Formation

Economic literature and empirical studies identify capital formation as the primary driver of economic growth in developing countries like India.

Increased Productive Capacity: Capital formation, or Gross Fixed Capital Formation (GFCF), increases an economy's capacity to produce goods and services. Investments in infrastructure (roads, railways, power plants) and machinery directly expand production potential.

Enhanced Labour Productivity: When workers are equipped with more and better capital goods (e.g., advanced machinery, better technology), their productivity increases, leading to higher output per person.

Attracting Foreign Investment: A high rate of domestic capital formation and a conducive investment climate attract Foreign Direct Investment (FDI), which brings in additional capital, advanced technologies, and managerial expertise, further fueling growth.

While other factors like a large domestic market, demographic dividend, and policy reforms are important, investment acts as the stream through which these potential benefits are realized and magnified into sustained long-term growth.

The Role of Technological Progress and Innovation

Technological progress and innovation are not separate drivers but essential enablers that profoundly influence the effectiveness and returns of capital and human resources, ensuring sustained growth.

Productivity Enhancement: Innovation is a key determinant of productivity growth. New and improved methods of production, enabled by technology, allow for more output from the same or fewer inputs.

Creation of New Industries: Technological advancements lead to the creation of entirely new sectors and markets. In India, the rapid growth of the IT and services sector, the digital economy (UPI, e-commerce), and the emerging green energy sector are prime examples of this phenomenon, contributing significantly to GDP, exports, and employment.

Human Capital Development: Technology drives the need for a skilled workforce, thus encouraging investment in education and training in areas like AI, data science, and biotechnology. This enhances the quality of human capital, which in turn fuels further innovation.

Efficiency in Governance and Services: Digital India initiatives, for example, have streamlined governance, increased financial inclusion (Aadhaar, Jan Dhan accounts), and improved logistics (GST, FasTag), reducing inefficiencies and costs across the economy.

Conclusion

For India's long-run economic growth, capital formation stands out as the single most significant variable, as it directly expands the economy's productive capacity. Technological progress and innovation are not merely supplementary; they are critical in making this capital formation efficient and sustainable, acting as the modern engines that shift the entire production function upward and inject dynamism into the economy. Without continuous innovation, capital accumulation alone would face diminishing returns. The synergistic combination of robust investment and rapid technological adoption is essential for India to achieve its goal of sustained, high economic growth and transition into a developed economy.

How long the private sector capital formation and investment is lagging in INDIA and when it is expected to expedite?

Private sector capital formation in India has been lagging since the global financial crisis of 2007–08, with the trend becoming more pronounced from 2011–12. While the investment rate peaked at around 27% of GDP in 2007–08, it dropped significantly, reaching a low of 19.6% in 2020–21.

Recent data from 2025 shows cautious signs of a turnaround, with some projections indicating an upturn. The complete and sustained revival is still expected to take some time.

Duration of the lag

The slowdown in private investment can be traced back to the post-2008 period and persisted for over a decade.

Peak and Decline (2007–2012): Private investment peaked around 2007–08 and declined steadily from 2011–12, following the previous investment cycle.

Government-driven growth (2014 onwards): After 2014, overall investment stayed below 30% of GDP. Growth during this period was primarily fueled by government spending and private consumption, rather than private capital investment.

Post-pandemic slump (2020–2021): Private investment fell further during the COVID-19 pandemic, hitting a low of 19.6% of GDP in 2020–21.

Persistent weak sentiment (2024–2025): Despite recent high GDP growth rates and government incentives like corporate tax cuts, private businesses have remained hesitant to invest significantly in fresh projects.

Factors contributing to the delay

Multiple factors have prolonged the lag in private investment:

Weak consumption and demand: The accelerator theory of investment states that investments are dependent on demand. After the global financial crisis, and especially since the pandemic, weak consumer demand, particularly among the rural and middle classes, has dampened business confidence.

Balance sheet problems: Following the credit boom of the mid-2000s, both corporations and banks faced stressed balance sheets and high non-performing assets (NPAs). This led companies to focus on deleveraging, while banks were cautious about disbursing credit.

Policy uncertainty: Investors are wary of shifting government policies and require stability for long-term projects. Concerns over policy stability have contributed to the prolonged slump in private investment.

Global headwinds: Lingering global economic uncertainty, geopolitical tensions, and supply chain disruptions have led businesses to adopt a cautious "wait-and-see" approach.

Projections for expediting investment

While a definitive timeline is hard to predict, recent reports indicate a potential acceleration, though with a degree of caution.

2025-26 outlook: A forward-looking survey on private sector capital expenditure (capex) shows firms' intentions for 2025–26, though some caution is noted. The Reserve Bank of India (RBI) has also noted that private capex is expected to grow by 21.5% in 2025–26.

Gradual pickup: Analysts suggest it may take up to two years for a more definite and sustained picture to emerge, with investment expected to gradually pick up across sectors.

Manufacturing boost: Some data indicates that the manufacturing sector is leading the recovery, with investment intentions rising by 40% for 2025–26.

Public investment foundation: Large-scale government capital expenditure on infrastructure is a key factor, as it is expected to "crowd in" private investment by providing the necessary support infrastructure. However, the impact of public spending is often lagged.

In summary, while the private investment slowdown has been a concern for over a decade, recent indicators suggest a revival is on the horizon. The timing, however, depends on strengthening consumer demand, maintaining policy stability, and resolving global economic uncertainties.

Multiple factors have delayed Trump's tariffs from translating into significant overall inflation.....

 Multiple factors have delayed Trump's tariffs from translating into significant overall inflation, though some consumer prices have already risen. The full inflationary effect is expected to appear later in 2025 and into 2026 as initial buffers diminish. While overall inflation has been slower to accelerate, reports indicate that prices for specific consumer goods have already risen due to the tariffs. For example, the September 2025 CPI report noted that apparel prices saw a 0.7% increase, and durable goods rose by 0.3%. A recent survey also revealed that a significant majority of Americans are reporting an increase in their household costs compared to the previous year. S&P Global analysts have stated that as companies exhaust their options, a growing share of the costs will be passed on to consumers via higher prices.

Reasons for delayed inflationary impact

To avoid losing sales, many U.S. companies have absorbed some or all of the increased costs from tariffs by accepting lower profit margins. However, analysts anticipate that this will be temporary and companies will pass on more costs as margins shrink. Businesses "front-ran" the tariffs, importing large volumes of goods before the duties took effect, pushing imports to near-record levels. As companies deplete this pre-tariff inventory, higher-priced, tariffed goods will eventually replace them on store shelves. U.S. importers have been able to mitigate costs by shifting their sourcing to lower-tariff countries. This "substitution effect" has kept the realized tariff rate lower than the announced rate. Ongoing trade negotiations have led to delays and a complex patchwork of varying tariff rates, which has created uncertainty. Temporary pauses, like the one with China, and exemptions for certain sectors, such as semiconductors and pharmaceuticals, have reduced the overall economic shock. Inflation metrics measure the entire economy, and tariffed goods are only a portion of this. Disinflationary trends in other parts of the economy, such as slowing wage growth and lower housing costs, have partially offset the price increases caused by tariffs. The Federal Reserve has also been weighing these conflicting pressures when setting interest rates. Tariffs were rolled out unevenly throughout 2025, and it takes several months for cost increases to fully filter from raw materials to final consumer goods. Economists predicted the main impact would be felt in the second half of 2025, a forecast supported by recent data showing a gradual uptick in inflation.

Short-term tariff absorption tactics

In the initial phase, businesses take several steps to avoid raising consumer prices. Companies attempt to negotiate lower prices with foreign suppliers to offset the tariff increase. In a 2025 study on steel imports, foreign exporters absorbed almost half of the tariff burden by gradually lowering their prices. Businesses may draw from existing stockpiles of untariffed goods to delay or moderate price increases. This approach is temporary, as inventory eventually needs to be replaced at higher costs. To manage public perception and minimize customer loss, some companies selectively absorb costs on their most price-sensitive products while holding off on raising prices. They may instead increase prices on premium goods with less elastic demand. Firms may look for cost-saving measures within their supply chain and other operations to mitigate the impact of tariffs.

Long-term tariff pass-through

S&P Global analysts have indicated that a growing share of the costs will be passed on to consumers as companies exhaust their options. While some price increases may appear immediately, larger and more widespread increases are expected later, especially as companies face higher costs when they restock. If an entire industry is affected by tariffs, the overall increase in import costs can push prices up across the board. This can limit the competitive risk of being the first to raise prices. In business-to-business transactions, companies may use a transparent tariff surcharge mechanism to show that a specific fee is due to the tariff and can be removed later. This approach is less common in consumer-facing retail.

Consequences for consumers

When companies run out of options to absorb tariff costs, consumers face several consequences. As seen in the September 2025 CPI report, prices for goods like apparel and durables have already increased. S&P Global analysts anticipate that this trend will continue and become more widespread. Increased costs for consumers can slow down economic growth by reducing purchasing power. This can affect household budgets, particularly those with lower incomes who spend a higher percentage of their earnings on necessities. Domestic production might increase, but consumers could face fewer imported product choices. A 2025 study suggested that in some cases, trade liberalization decreased product variety.

When tariffs or other trade barriers make imported goods more expensive, domestic manufacturers can raise their prices as well, because they face less competition from cheaper foreign goods, which can lead to higher prices for consumers even when buying domestically produced items, essentially allowing them to "price-gouge" due to reduced competition. When imported goods become more expensive due to tariffs, consumers are more likely to opt for domestically produced alternatives. This gives domestic manufacturers less pressure to keep their prices low to compete with cheaper imports, allowing them to increase prices without significantly losing customers. Domestic manufacturers may also take advantage of the higher prices of imported goods by raising their own prices slightly, even if their production costs haven't changed substantially. This is known as the "price umbrella effect" where the higher price of imported goods sets a ceiling for domestic prices. Consumers ultimately bear the burden of higher prices. They have less choice and may need to pay more for similar goods, regardless of whether they are buying domestically or imported products. Increased prices due to tariffs can contribute to overall inflation in the economy. Higher prices for both imported and domestic goods can decrease consumer purchasing power. If other countries retaliate with tariffs on domestic exports, it can further harm the economy. Based on the information provided, companies are absorbing the initial cost of tariffs through strategies like altering supply chains, negotiating with suppliers, and using existing inventory. However, analysts have noted that as these options are exhausted, a larger share of the costs will be passed on to consumers. 

The US is seeking to sell more oil to trading partners.....

 The US is seeking to sell more oil to trading partners by increasing energy trade and collaboration, particularly with allies like India and European nations. This effort is partly driven by a desire to reduce global reliance on Russian oil, with the US government linking energy deals to demands for partners to curb their purchases of Russian crude. The US has secured several long-term agreements, including a multi-year deal with the EU and a long-term LNG contract with Japan.  The US is pushing for greater energy trade with India, including crude oil and LNG, and is using trade negotiations as leverage to encourage India to decrease its imports of Russian oil. The US has secured several long-term energy supply contracts with allies, such as a multi-year pledge from the European Union and a 20-year LNG deal with Japan. The US administration has used trade measures, such as tariffs, to pressure countries to reduce their purchases of Russian oil, which it sees as a way to cut Russia's revenue. The US is positioning itself as a key partner in helping allies meet their energy security goals, which includes expanding its role as a supplier of oil and natural gas. The United States' rise as a major oil supplier has fundamentally shifted global energy markets, altering oil prices, diminishing OPEC's market control, and introducing new geopolitical dynamics. When the U.S. emerges as a major oil supplier, its increased production tends to push global oil prices lower, challenge the market power of OPEC, and increase price volatility. The overall effect is a more dynamic and competitive global oil market.

Economic consequences

An increase in global oil supply due to high U.S. output, driven largely by shale production, puts downward pressure on oil prices. This counters the effects of production cuts by other suppliers like OPEC+, potentially leading to price stabilization but also increased volatility. The low elasticity of both oil supply and demand contributes to more dramatic price swings. When prices are high, production surges. When they fall, companies may need to continue production to recoup investments, exacerbating market gluts. High-cost producers, particularly U.S. shale operators, face more competition and financial pressure. This drives the need for profitability, even as higher production costs and lower global prices squeeze profit margins. Cheap oil could reduce the appeal of alternative energy sources, potentially slowing investment in renewables and electric vehicles (EVs).

Geopolitical consequences

The growth of U.S. production has decreased the market power of the Organization of the Petroleum Exporting Countries (OPEC). Its ability to control prices through production cuts is less effective with a non-member country flooding the market. This has forced OPEC+ to adjust its strategies to maintain market share. For oil importers like India and China, the U.S. as a supplier offers increased diversification away from traditional partners, especially in response to U.S. sanctions against Russian energy companies. This provides leverage to the U.S. but also exposes importers to different geopolitical risks, such as U.S. trade tariffs and the potential for a foreign-policy pivot. The U.S. has used its energy position to wield geopolitical influence, particularly regarding sanctions on adversaries like Russia. A president may even use exports to pressure allies into committing to fossil fuel imports, though this can disrupt economic stability and climate goals. The U.S.'s growing energy independence may reduce its incentive to protect oil interests in traditional energy-rich regions like the Persian Gulf. This could alter its security guarantees for allies in the Middle East over the long term.

Challenges for the US and market volatility

The U.S. oil industry is driven by numerous private actors rather than a single government entity. This can make production less predictable than that of state-owned enterprises, contributing to market volatility. As U.S. oilfields like the Permian Basin age, producers are moving to less profitable acreage. This means higher costs for oil extraction, particularly for smaller companies. Maintaining profitability often requires higher oil prices. Political shifts in the U.S. can create regulatory uncertainty for the oil and gas industry, especially concerning environmental standards and trade policies. For any major oil-producing country, large fossil fuel resources can bring economic volatility and a heavy reliance on a single commodity. While the U.S. has a diversified economy, the oil and gas sector still experiences significant boom-and-bust cycles.

Downward pressure on prices

The principle of supply and demand dictates that an increase in overall supply—in this case, from the U.S. shale oil boom—tends to decrease prices, all else being equal. As a large supplier, the U.S. competes directly with OPEC and other exporters for customers in key markets, especially in Europe and Asia. The U.S. shale industry is more flexible than conventional oil producers. When prices rise, U.S. producers can increase output relatively quickly, adding supply to the market and capping further price increases. A significant oversupply of oil in 2025—due in part to resilient U.S. and Brazilian production—has contributed to market surpluses and downward pressure on prices, according to the International Energy Agency.

Weakened OPEC influence

Historically, OPEC, led by Saudi Arabia, has acted as a "swing producer," adjusting production to stabilize global oil prices. The U.S. shale industry now offers a major counterweight to OPEC's market control. Increased U.S. exports mean less market share for OPEC countries. As the U.S. increased its oil production between 2008 and 2023, OPEC members saw their share of the global market shrink. OPEC's ability to manipulate prices through production cuts has been significantly weakened. In 2014, OPEC attempted to "kill" U.S. shale by flooding the market to drive down prices, but U.S. producers proved more resilient than expected. The rise of U.S. production was a key factor in the formation of the OPEC+ alliance, which includes Russia and other major exporters, to more effectively manage global supply.

The emergence of the U.S. as a major supplier does not guarantee stable, low prices. The global market can still experience significant volatility, but with different dynamics. The risk of oversupply increases with a highly responsive U.S. shale industry competing with OPEC and other producers. This could lead to sudden price drops. For the U.S. specifically, a drop in oil prices hurts the domestic oil industry and its workers, whereas it benefits consumers through cheaper gas. This makes the U.S. economy more directly exposed to price swings than when it was a major oil importer. The quick investment cycle of shale production makes it highly sensitive to near-term prices, in contrast to the longer-term investment horizons of traditional oil projects. This can lead to rapid adjustments that add to market volatility. U.S. supplier status provides new foreign policy leverage but also introduces new economic relationships. For oil-importing countries, a diverse supplier base that includes the U.S. enhances energy security and reduces dependency on more volatile producers. U.S. sanctions against oil producers like Russia and Venezuela can have a greater impact when the U.S. and its allies can offer alternative sources of supply. A global competitor in the oil market creates new winners and losers. As U.S. oil finds customers, it takes market share from traditional suppliers, forcing them to adapt.

A further Fed interest rate cut holds the potential to stoke inflation by increasing the money supply and encouraging a spending and borrowing spree.....

 A further interest rate cut by the Federal Reserve (Fed) could fuel inflation and inflation expectations by encouraging a flood of spending and investment into an already strong economy. In contrast, rate cuts are conventionally used to stimulate growth when the economy is sluggish. The risk of stoking inflation is particularly high when a country's economic growth is already robust.

How interest rate cuts spur inflation

Encourages borrowing and spending: The Fed lowers the federal funds rate, which is the interest rate banks charge each other for overnight loans. This action causes other interest rates to fall throughout the economy, including mortgage rates, car loans, and credit card rates. This makes borrowing cheaper for both businesses and consumers, encouraging increased spending and investment.

Decreases savings incentive: Lower interest rates diminish the return on savings accounts and bonds. This disincentivizes saving and motivates individuals and businesses to spend or invest their money elsewhere in pursuit of higher returns, further increasing the money supply in the economy.

Boosts asset prices: As investors seek higher returns, they may shift money from low-yield bonds and savings into assets like stocks and real estate, inflating prices in those markets. This can also create a wealth effect, where individuals feel wealthier and increase their spending.

Weakens the currency: A cut in interest rates can weaken the value of the U.S. dollar relative to other currencies. A weaker dollar makes imports more expensive, which contributes to inflation. Conversely, it makes U.S. exports cheaper for foreign buyers.

Why inflation expectations matter

Changes in interest rates influence not just current inflation but also future expectations of inflation. These expectations can become a self-fulfilling prophecy.

Behavioral changes: If the public and businesses expect higher prices, they will change their behavior. Workers will demand higher wages to keep up with the rising cost of living, and companies may raise prices in anticipation of higher costs and demand. This cycle of rising wages and prices further fuels inflation.

Fed credibility: A key responsibility of the Fed is to maintain price stability, with a long-term inflation target of 2%. If the Fed is perceived as cutting rates too aggressively or at the wrong time, it could lose credibility in its commitment to fighting inflation. This can unmoor inflation expectations, making it more difficult to control prices in the future.

The Phillips Curve: This economic model describes an inverse relationship between unemployment and inflation. The logic is that as employment increases and approaches its "maximum" level, the labor market becomes tighter. This drives up wages and ultimately leads to higher inflation. Cutting rates to ensure maximum employment when the labor market is already strong risks pushing inflation beyond the Fed's target.

The Fed's balancing act

The Fed's actions are complicated by its "dual mandate" to promote both maximum employment and stable prices. This requires balancing the risks of a weakening job market against the risk of reigniting inflation.

In one scenario, the Fed may cut rates in response to a softening labor market, as J.P. Morgan projected in September 2025. However, if inflation remains elevated due to other factors (such as tariffs or supply-chain issues), further rate cuts could lead to a tough choice between supporting jobs and controlling inflation.

In another scenario, if the economy is already near or at full employment, as some recent reports suggest, further rate cuts are more likely to have an inflationary impact than to stimulate real growth.

Conclusion

A further Fed interest rate cut holds the potential to stoke inflation by increasing the money supply and encouraging a spending and borrowing spree. This effect is magnified when the economy is already robust. Critically, these rate cuts can also influence inflation expectations, a powerful driver of actual price increases. The challenge for the Fed lies in balancing its dual mandate of promoting maximum employment and stable prices, especially when these two goals pull policy in different directions. The risk is that misjudging the economy's strength could cause the Fed to lose credibility as a bulwark against inflation, further destabilizing prices.

Welfare programs signal a shift from an empowering growth-based model to a more palliative, subsidy-dependent one.....

 The rate of poverty reduction was significantly faster and arguably more inclusive in the 2004–2014 period than from 2014 to 2025, despite both decades experiencing periods of high inflation and pressures on real wages. While poverty has continued to decline in the more recent decade, the pace has slowed, and the causes for the reduction have shifted from broad-based economic growth to government-led welfare programs.

Comparison of poverty reduction in India      

Pace of Poverty Decline Faster.        

2004–2014 period

The annual rate of rural poverty reduction was 2.32 percentage points between 2004–05 and 2011–12, which was three times the rate of the preceding decade.      

2014–2025 period

After 2015, the pace of poverty reduction slowed significantly compared to the previous decade.

Economic Drivers      

2004–2014 period

Rapid, broad-based growth. The economy grew at around 8% annually, driven by rising savings and investment rates. This rapid growth created high-quality, non-agricultural jobs.   

2014–2025 period

Slower economic growth. The GDP growth rate was lower than in the preceding decade, and macroeconomic policies did not drive investment at the same pace.

Real Wages and Income

2004–2014 period

Real wages increased. Despite periods of high inflation, non-farm job creation led to tightening in the rural labor market and raised real wages. Increases in minimum support prices and the MGNREGA program also supported rural wages.           

2014–2025 period

Real wages faced pressure. Real wage growth was much slower, and some evidence suggests that real wages for a large portion of the workforce barely grew or declined. A high percentage of the workforce continues to work in the informal economy with low wages.

Job Creation and Employment          

2004–2014 period

Strong job creation. About 7.5 million non-agricultural jobs were created annually, allowing millions to move out of agriculture. Urban and youth unemployment were low.      

2014–2025 period

Weak job creation. The pace of non-agricultural job creation declined. There is also evidence of a reversal, with some youth returning to agriculture, and youth unemployment has more than doubled.

Inflation Impact         

2004–2014 period

Inflation impact was offset by wage growth. While inflation was a factor, its impact was largely offset for many by increases in real wages and employment.  

2014–2025 period

Intensified vulnerability. High and persistent inflation, particularly in food prices, severely impacted low- and middle-income families and threatened poverty gains, as growth in real wages did not keep pace.

Key Intervention        

2004–2014 period

Economic growth. The primary driver was robust economic growth creating jobs and increasing income. Government programs like MGNREGA supplemented these effects.      

2014–2025 period

Welfare programs. A significant portion of the recent poverty reduction, particularly in the multidimensional index, is attributed to large-scale government welfare schemes that provide food, housing, and other basic services.

Poverty Measurement

2004–2014 period

The Tendulkar line estimates a sharp decline between 2004–05 and 2011–12, with the number of poor falling by 137 million.   

2014–2025 period

Multidimensional poverty has also declined significantly between 2014 and 2023, with NITI Aayog reporting 24.82 crore people exiting poverty. However, some observers question whether the multidimensional index fully captures the impact of low real wages.

Conclusion

The data suggests that the 2004–2014 period saw a more effective and economically broad-based model of poverty reduction. A combination of rapid, investment-driven economic growth and rising real wages, supported by targeted programs, pulled large numbers of people out of poverty. In contrast, poverty reduction in the 2014–2025 period was driven less by market-led job creation and real income growth and more by state-led welfare transfers. While these welfare programs were critical in preventing a reversal of poverty gains amid higher inflation and stagnant real wages, they signal a shift from an empowering growth-based model to a more palliative, subsidy-dependent one. As a result, the pace of poverty reduction slowed, and a large segment of the population remains vulnerable to economic shocks.

While inflation can reduce the real value of taxes, it also discourages investment.....

 Lower inflation expectations are better because they provide stability for businesses and consumers, leading to more predictable planning and sustained economic growth. While inflation can reduce the real value of taxes, it also discourages investment and can lead to higher interest rates, so managing it is crucial for short-term growth. India can boost short-term growth with lower inflation by ensuring monetary policy aligns with the goal of stable prices, which in turn supports domestic demand and investment.

Why lower inflation expectations are better

Promotes economic stability: Lower and stable inflation expectations allow businesses and consumers to plan for the future with more certainty, as they don't fear a rapid erosion of their purchasing power or a sharp increase in future costs.

Encourages long-term investment: Businesses are more likely to invest in new projects when they can predict future costs and revenues more accurately. High inflation can create uncertainty and make long-term investment less attractive.

Avoids negative effects of high inflation: High inflation can reduce profit margins, complicate financial planning, and lead to a "wage-price spiral" where wages increase to match prices, further fueling inflation.

Anchors inflation: Once inflation expectations are anchored at a low level, it is easier for the central bank to maintain price stability. This is a key goal of the Reserve Bank of India's (RBI) flexible inflation targeting framework, notes the IMF.

How lower inflation boosts short-term growth

Boosts domestic demand: With lower inflation, the real value of disposable income is higher, leading to increased consumer spending, which is a key driver of GDP growth, according to PIB reports.

Facilitates monetary policy: Lower inflation gives the central bank more room to maneuver. The RBI can cut interest rates to stimulate the economy, and these cuts have a more significant impact in a low-inflation environment, as seen in the projected rate cuts in 2025, says this PIB report.

Reduces the impact of high tax costs: The value of certain taxes, such as fixed penalty rates for late tax payments, is eroded by high inflation, making it less of a deterrent, notes the IMF. While this may seem like a short-term benefit, it distorts the tax system and is not a sustainable driver of growth.

Conclusion

Lower inflation expectations are beneficial because they create a stable and predictable economic environment that fosters investment and growth. While inflation can reduce the real value of taxes, this is a negative consequence of high inflation that also hurts businesses and consumers. By keeping inflation low, India can boost short-term growth through increased consumer spending and more effective monetary policy, while simultaneously creating a foundation for long-term economic stability and prosperity.

The primary reason these items remain outside of GST is the resistance from state governments who fear significant revenue loss and the loss of fiscal autonomy.....

 Integrating key recurring costs like fuel, electricity, real estate, and alcohol into India's Goods and Services Tax (GST) framework is a complex and contentious issue. While including them could increase household savings and investment by reducing the cascading tax effect and potentially lowering costs, significant challenges, especially for state revenues, have kept these items outside the GST ambit. Bringing these high-value items under GST could lower the overall tax burden for consumers and businesses, potentially leading to increased disposable income for savings and investment. The current system taxes these items multiple times. Fuel and alcohol, for instance, have central excise duties and state-level VAT, which are levied on top of each other. Integrating them into GST would replace these multiple taxes with a single levy, reducing the final price for consumers and the cost for businesses. If applied at a lower, uniform rate, consumers would see immediate savings. For example, some estimates suggest that taxing petrol and diesel at the highest GST slab could still significantly reduce their prices. The reduction in recurring expenses like fuel and electricity, which affect both households and businesses, would free up more money for savings and investment. Lower logistics and manufacturing costs for businesses, achieved through the ability to claim input tax credit (ITC) on fuel and electricity, could spur industrial growth and make India more competitive.

The items mentioned are currently taxed outside of the GST regime. Petroleum products like petrol and diesel are a major source of revenue for both the central and state governments. The center levies an excise duty, while states impose their own Value Added Tax (VAT), leading to widely varying prices across the country. While the electricity supplied by utility companies is exempt from GST, related services like installation and maintenance attract GST. Taxes on electricity are levied by state governments. The sale of completed properties with an occupancy certificate falls outside the scope of GST. However, GST is applicable to the sale of under-construction properties. Alcoholic liquor for human consumption is constitutionally excluded from GST. State governments retain full control over its taxation through excise duties and VAT, which is a major source of their revenue. While many essential food items like fresh produce and unprocessed grains are exempt from GST, processed and packaged food items are taxed at various GST rates (e.g., 5%, 18%).

The primary reason these items remain outside of GST is the resistance from state governments who fear significant revenue loss and the loss of fiscal autonomy. Fuel and alcohol are major sources of tax revenue for state governments. Bringing them under a standardized GST would mean sharing this revenue with the central government, which states are reluctant to do. High taxes on alcohol and fuel allow both the central and state governments to manage revenues and influence consumption patterns, a power they are unwilling to cede. In the case of fuel, international crude price volatility means that central and state governments currently adjust duties separately to manage prices. Integrating fuel into a single GST rate could complicate fiscal policy. The exclusion of fuel and alcohol from GST means that businesses cannot claim input tax credit on them. This breaks the seamless credit chain, a core objective of the GST framework.

Integrating these sectors into GST could be a double-edged sword for household savings and investment, but the prevailing view suggests a net positive if managed correctly. If managed effectively, the integration of these sectors could lead to lower prices, increased disposable income, and higher household savings and investment. The potential increase in costs for some items or compliance burdens for businesses could have a negative effect, though reforms like those introduced in September 2025 aimed to address some of these issues by simplifying tax slabs. Ultimately, while the potential for increased savings and investment exists by bringing these high-cost items into GST, the political and economic challenges related to state revenues and fiscal policy remain a major hurdle.

Risk management strategies like hedging are indispensable for financial stability.....

 Hedging is an important part of a company's feasibility report in India, especially for businesses with international operations, exposure to commodity price fluctuations, or significant debt. Since a feasibility study assesses all potential risks and the financial viability of a new project, it must include an analysis of strategies to mitigate financial risks like hedging.

How hedging is included in a feasibility report

Hedging is not a standalone section but is incorporated into the overall risk assessment and financial analysis. Key areas in the report where hedging is addressed include:

1. Financial feasibility

This section evaluates if the project is economically justifiable and includes financial projections for costs, revenues, and profitability. For businesses with risk exposure, such as to fluctuating currency or commodity prices, an effective hedging strategy is critical for ensuring that these projections are stable and predictable.

For example, an airline company's feasibility report for a new route would factor in the cost of fuel. Its financial projections would be based on a plan to use hedging instruments like futures contracts to lock in fuel prices, thus minimizing the financial risk from potential price hikes.

2. Risk assessment

This is a core component of any feasibility study that identifies potential risks and outlines mitigation strategies. For companies exposed to market risks, a hedge is a primary way to control this exposure.

Foreign exchange risk: For an Indian company that exports or imports goods, or has international financial transactions, the report must analyze the risk from fluctuating currency exchange rates. It should detail the hedging strategy, such as using forward or futures contracts, to protect cash flows and profitability.

Commodity risk: If a project relies on commodities like oil, a feasibility report would assess the risk of price changes. The plan to hedge against this risk using financial instruments is an essential part of the risk assessment.

3. Managerial and organizational feasibility

This section examines if the management has the capacity and structure to support the project. This can include the company's ability to develop and execute complex hedging strategies effectively.

A feasibility report provides a comprehensive and objective evaluation of a proposed project's viability, covering market, technical, and financial aspects. Given the significant market volatility in India and globally, risk management strategies like hedging are indispensable for financial stability. Including a well-defined hedging plan in a feasibility report provides a clear picture of how the company intends to mitigate risks, protect its projected cash flows, and ensure the project's long-term sustainability. For businesses with exposure to foreign currency, interest rates, or commodity prices, the inclusion of a hedging strategy transforms the report from a simple viability check into a robust and realistic business plan that inspires confidence in investors and lenders.

Hedging creates certainty in repayment obligations....

 Indian businesses can benefit from lower external borrowing costs and Masala bonds primarily by accessing a new pool of capital at potentially lower rates. When combined with strategic hedging using currency derivatives, they can minimize foreign exchange risk, increase financial stability, and free up capital for core business activities.

Benefits from lower borrowing costs and Masala bonds

Lower borrowing costs through external sources like External Commercial Borrowings (ECBs) and Masala bonds directly boost an Indian company's financial health.

Access to competitive rates: International interest rates are often lower than domestic rates, allowing companies to reduce their overall cost of capital. This makes new projects more profitable and improves a company's bottom line.

Reduced currency risk with Masala bonds: Unlike traditional ECBs denominated in foreign currencies, Masala bonds are rupee-denominated. This shifts the currency exchange risk from the Indian issuer to the foreign investor, protecting the Indian company from losses if the rupee depreciates.

Diversification of funding sources: Tapping international markets allows companies to diversify their funding beyond domestic banks. This is particularly valuable during periods of tight domestic liquidity.

Access to a broader investor base: Issuing Masala bonds on international exchanges, such as those in London or Singapore, gives Indian companies access to a wider pool of foreign investors. This can increase demand for their debt and potentially lower borrowing costs.

Increased financial flexibility: Longer maturity periods, often available with ECBs and Masala bonds, give companies more flexibility for long-term strategic planning and capital-intensive projects.

Benefits of hedging external borrowing with currency derivatives

For companies that choose foreign currency ECBs, hedging with derivatives is a crucial strategy for mitigating the currency risk and securing the low-cost borrowing benefits.

Derivative strategy    

How it benefits Indian businesses

Forward contracts      

Allows a company to lock in an exchange rate for a future date, creating certainty for its future payments. This is suitable for managing transaction-specific risks like an upcoming loan repayment.

Currency swaps          

Enables a company to exchange a foreign currency liability for a domestic one for a specified period. This offers a longer-term hedge against exchange rate volatility by effectively converting a foreign currency loan into a rupee-denominated one.

Currency options       

Gives the company the right, but not the obligation, to buy or sell a foreign currency at a predetermined price. This offers protection against an unfavorable movement in the exchange rate while retaining the ability to benefit from a favorable movement.

Synergistic benefits and strategic outcomes

By combining the lower costs of external borrowing with astute hedging strategies, Indian businesses can unlock several strategic advantages.

Enhanced balance sheet stability: By mitigating the risk of large, unpredictable liabilities from currency fluctuations, companies can protect their balance sheets and credit ratings. This financial stability signals strength to investors and creditors.

Hedging creates certainty in repayment obligations. With more predictable cash flows, a company can better plan for future investments, expansion, and operations. The combination of a lower cost of capital and stable financial planning enables companies to price their products and services more competitively, both domestically and internationally. Diversifying funding and hedging against currency risk reduces a company's sensitivity to domestic interest rate cycles and market conditions. A proactive approach to risk management enhances an Indian company's appeal to foreign investors. It demonstrates sophisticated financial management, which can further open doors to more international capital.

For education to serve as a catalyst for equity, it must address the systemic barriers that perpetuate inequality.....

 To foster an equitable and inclusive society, providing quality education for all, especially in STEM fields, is vital for both individual empowerment and national economic growth. By equipping a diverse populace with skills relevant to burgeoning industries like IT, manufacturing, and healthcare, a nation can reduce inequality and become more globally competitive. A fully subsidized, knowledge-focused education policy in India could significantly boost development and economic growth by creating a highly skilled workforce, fostering innovation and entrepreneurship, and increasing overall national productivity, leading to higher real incomes for its citizens. This investment in human capital would strengthen India's economic foundation, attract more investment, promote diverse industrial growth, and ultimately contribute to higher GDP and reduced poverty.

Benefits for India's Economy and Development

A well-educated population is more productive, creative, and capable of performing complex tasks, which is essential for a thriving economy. Education fosters an environment where new ideas and businesses can flourish, driving technological advancements and new industries. An educated and skilled workforce commands better employment opportunities and higher wages, leading to increased real incomes for individuals and a reduction in poverty rates. A more educated workforce contributes directly to higher national productivity and GDP growth rates. A skilled talent pool makes a country more attractive for domestic and foreign investment, further fueling economic growth. Ensuring access to quality education for all, regardless of socioeconomic background, promotes greater equity and a more inclusive society. Investing in education, especially in STEM fields, equips the nation to develop and compete in sectors like IT, manufacturing, and healthcare.

Investing in STEM education

As industries advance with technologies like AI, automation, and big data, a STEM-literate workforce is essential. Investments in STEM education can address skill gaps and ensure the workforce is equipped for the jobs of the future. STEM education fosters critical thinking and problem-solving skills, which are crucial for innovation. This can fuel scientific discovery, technology breakthroughs, and entrepreneurship, leading to new industries and job creation. Nations that prioritize STEM education and R&D are more likely to lead in innovation and remain competitive in the global market. Fostering partnerships between educational institutions and industries helps align the curriculum with market needs. Initiatives like internships and mentorship programs provide students with real-world experience.

Focus on IT, manufacturing, and healthcare

Targeted educational investments can be tailored to the specific needs of high-growth sectors. The IT sector relies heavily on a skilled workforce in areas like artificial intelligence, data science, and cloud computing. Education can integrate digital literacy and coding from an early age and offer specialized programs to prepare students for these roles. As the manufacturing sector evolves with Industry 4.0, education must shift to emphasize emerging technologies like robotics, IoT, and data analytics. Vocational training programs can provide the hands-on, practical skills needed for modern, technology-centric manufacturing roles. The healthcare industry is being transformed by digital technologies and personalized care. Specialized programs, like IIT Delhi's Executive Programme in Healthcare for Industry 5.0, are crucial for training professionals in health-tech, big data analytics, and AI applications.

For education to serve as a catalyst for equity, it must address the systemic barriers that perpetuate inequality. Education must be accessible to all, irrespective of socioeconomic background, gender, or location. For instance, a child in a low-income family is far less likely to have access to quality early childhood education or tutoring services. Schools must foster an atmosphere of acceptance and respect for all students. Inclusive education practices, such as differentiated instruction and culturally responsive teaching, benefit both marginalized students and society as a whole. Because students start from different baselines, equity requires different levels of support to achieve the same outcome. This includes dedicated resources for underserved schools, targeted programs for marginalized groups, and support for learners with special needs. Education is a powerful tool for social mobility that helps individuals from disadvantaged backgrounds secure better employment and improve their livelihoods. This economic empowerment helps break the intergenerational cycle of poverty. Quality education can reduce societal inequalities linked to income, caste, and gender. By exposing students to diverse perspectives and backgrounds, it promotes tolerance and strengthens social bonds. Investing in education, particularly in STEM fields, is a strategic priority for developing new industries and driving economic growth. A larger number of educated and employable individuals leads to increased employment and higher wages, resulting in greater overall income tax collection for the government. This increased tax revenue can then be reinvested into further strengthening the education system, infrastructure, and other crucial sectors, creating a virtuous cycle of growth and development.

By adopting a dovish hold, the RBI sought to manage global risks while supporting the domestic economy.....

 Low inflation and the anticipation of lower interest rates help India offset the drag from tariffs by reducing production costs and boosting consumer spending. The government's recent GST rate cuts on key items and potential further tax reductions, alongside stable prices, reduce business costs and increase purchasing power, supporting domestic demand. Additionally, the Reserve Bank of India (RBI) has policy space to cut interest rates if tariffs significantly hinder growth, making credit cheaper for businesses and individuals, thereby stimulating investment and consumption to counterbalance reduced exports. The Reserve Bank of India's (RBI) decision to keep interest rates steady while signaling a supportive, or "dovish," stance toward future growth. This is done to counteract potential negative impacts on the economy, specifically from new tariffs.

How Low Inflation Helps

Lower inflation means input costs for businesses, such as raw materials and energy, are more stable or decreasing, improving profit margins and potentially leading to lower consumer prices. With lower inflation, the purchasing power of consumers is maintained or enhanced, encouraging them to spend on goods and services. Low inflation provides the Reserve Bank of India (RBI) with the "policy space" to reduce interest rates to support growth without immediately risking overheating the economy.

How Low Interest Rates Help

Lower interest rates make borrowing cheaper for businesses, encouraging them to invest in expansion, new technologies, and capital projects, which drives economic growth. Lower rates reduce the cost of loans for homes, cars, and other durables, making them more affordable and encouraging greater consumer spending. Lower rates improve the flow of credit and liquidity in the economy, benefiting sectors like MSMEs and manufacturing.

How Policy Expectations Help

The expectation of further interest rate cuts, or a "dovish hold" by the RBI, signals continued monetary policy support for growth in the face of tariff-related headwinds. A stable and supportive policy framework, with lower interest rates expected, allows businesses and consumers to plan with greater certainty, boosting confidence and investment.

How Fiscal Measures Complement Monetary Policy

The government's recent reductions in Goods and Services Tax (GST) rates on essential goods and services directly boost consumer spending and reduce business costs, creating a strong domestic counter-force to tariff impacts. The combined effect of lower prices from inflation and reduced taxes stimulates domestic consumption, which can help offset the negative impact of reduced exports due to tariffs.

Dovish vs. dovish hold

A central bank signals that it is prioritizing economic growth and employment over controlling inflation. This is typically done by lowering interest rates, which makes borrowing cheaper and encourages spending. This occurs when a central bank like the RBI holds the main policy rate (the repo rate) unchanged but adopts communication that signals its bias toward future easing. It is a "wait-and-watch" approach that allows the central bank to assess evolving economic conditions before committing to a rate cut.

Key elements of the RBI's recent dovish hold

The RBI's actions and commentary on October 1, 2025, illustrate this strategy. The RBI's Monetary Policy Committee (MPC) kept the repo rate unchanged at 5.5% for the second consecutive meeting. The RBI revised its GDP growth forecast for FY26 upwards to 6.8% (from 6.5%) while simultaneously lowering its inflation forecast to 2.6% (from 3.1%). This created more space for potential rate cuts. The central bank acknowledged that higher US tariffs on Indian exports could weigh on growth in the coming quarters. By highlighting lower inflation and external headwinds, the RBI indicated it could cut rates in the future if growth staggers. This is the "dovish" element of the "hold."

By adopting a dovish hold, the RBI sought to manage global risks while supporting the domestic economy. New US tariffs on Indian goods threaten to hurt exports and overall economic growth. By maintaining an easy monetary stance, the RBI provides continued support for domestic consumption and investment to offset this external pressure. Lower interest rates reduce borrowing costs for both individuals and businesses. This encourages higher consumption and investment, stimulating economic activity. In the real estate sector, for example, a stable or falling repo rate supports lower home loan rates, boosting buyer confidence. The RBI's primary mandate is to keep inflation within its target range of 4% (with a +/- 2% band). By revising its inflation forecast down, the RBI's dovish hold signals confidence that it can support growth without risking an uncontrolled rise in prices. The dovish tone and potential for future rate cuts tend to boost market sentiment. The stock market, for instance, often reacts positively to news of a dovish monetary policy.

A RBI interest rate cut provides a multi-faceted stimulus for exports...

 An interest rate cut by the Reserve Bank of India (RBI) can significantly boost exports by making Indian goods cheaper for foreign buyers due to currency depreciation, reducing borrowing costs for domestic businesses to improve their competitiveness, and spurring economic growth which increases demand for exports. While the benefits for India are substantial, the extent of this help depends on other economic factors and global conditions, as rate cuts are not a "magic bullet" for growth, notes former RBI Governor Raghuram Rajan.

How a Rate Cut Helps Exports

Currency Depreciation:

A lower interest rate can lead to a weaker Indian Rupee against other currencies, making it cheaper for foreign buyers to purchase Indian goods and services, thereby increasing demand and exports.

Cheaper Borrowing for Businesses:

Lower interest rates reduce the cost of taking loans for businesses. This allows them to invest in new projects, expand operations, and become more competitive, leading to increased production and export potential.

Economic Stimulation:

Lower borrowing costs for consumers and businesses can boost overall economic activity and demand. A stronger domestic economy also supports the growth of export-oriented industries.

Improved Liquidity for Banks:

A rate cut can be coupled with other measures, such as a Cash Reserve Ratio (CRR) cut, to inject more funds into the banking system. This increased liquidity enables banks to lend more, supporting credit growth and investment.

Potential for Growth

Increased Competitiveness:

With lower borrowing costs and a weaker currency, Indian businesses can offer their products at more attractive prices on the international market, boosting their export volumes.

Job Creation:

Higher business investment and increased production, driven by easier access to credit, can lead to job creation and a virtuous cycle of economic growth.

Factors to Consider

Inflation:

While rate cuts are a tool for growth, they can also contribute to higher inflation, which could offset some of the benefits of a weaker currency.

Global Economic Conditions:

The effectiveness of rate cuts is also influenced by external factors like global trade disruptions, the volatility of oil prices, and global demand for Indian goods.

Market Expectations:

The actual impact of a rate cut can depend on whether the size of the cut meets market expectations.

In summary, a RBI interest rate cut provides a multi-faceted stimulus for exports by improving both the cost-competitiveness of businesses and the international price of Indian products, ultimately contributing to economic growth.

Real wages and income are crucial for economic growth....

 Real wages and income are crucial for economic growth as they represent workers' purchasing power, fueling demand for goods and services. While rising real wages can boost economic activity, keeping long-run inflation expectations anchored is vital to prevent a wage-price spiral. Low and stable inflation expectations help maintain the value of these real gains, ensuring that increased wages translate to increased consumption and stable investment, thereby fostering sustainable growth.

Role of Real Wages and Income in Economic Growth

Drives Demand: Rising real wages and income increase consumers' purchasing power, leading to higher demand for goods and services. This increased demand stimulates production and encourages businesses to invest and expand, a key driver of economic growth.

Improves Standard of Living: Real income is a direct measure of an individual's standard of living, as it reflects the quantity of goods and services they can afford. When real incomes rise, people can afford a greater quantity of goods, improving their quality of life and overall well-being.

Facilitates Productivity: Higher real wages and incomes can be a result of or a contributor to increased labor productivity. A more productive workforce can lead to lower production costs, which, in turn, supports higher real wages and further growth.

Stabilizes Consumption: When real incomes are stable or rising, consumers can rely on consistent purchasing power, leading to more stable and predictable consumption patterns.

Impact of Low Long-Run Inflation Expectations

Prevents Wage-Price Spirals: Low and stable inflation expectations are crucial because they prevent workers from demanding constant nominal wage increases to keep pace with anticipated inflation. This reduces the likelihood of a wage-price spiral, where rising wages lead to higher prices, which then leads to demands for even higher wages, perpetuating a cycle of inflation.

Maintains Purchasing Power: With low inflation expectations, nominal wage increases translate directly into real gains in purchasing power. This means that workers' money buys more goods and services, not less, which is essential for sustainable consumer demand.

Encourages Long-Term Investment: Low and stable inflation fosters a predictable economic environment, which is more conducive to long-term investment. Businesses can make better investment decisions without the uncertainty of rapidly eroding currency values or disruptive price changes.

Supports Financial Stability: Lower inflation expectations also reduce the risk of asset repricing and financial volatility. This helps banks maintain their equity and lending capacity, which is vital for funding economic activity and growth.

Conclusion

Real wages and income are essential for driving economic growth by boosting demand and improving living standards. However, sustained growth requires that these real gains are protected by a low-inflation environment. Keeping long-run inflation expectations anchored is paramount because it prevents the erosion of real income through a wage-price spiral and ensures that any increases in nominal wages translate into genuine improvements in purchasing power. A stable price environment supports greater business investment, financial stability, and ultimately, the conditions for robust and sustainable economic expansion.

The 2014-2025 period contrasts with the earlier decade, showing a slowdown in real wage growth....

 India's 2004-2014 period saw higher real wage growth, particularly in agriculture, contrasted with 2014-2025 which experienced a significant slowdown and even real wage declines in rural areas, attributed to factors like agricultural terms of trade shifts, demonetization, and GST. While overall income grew, productivity and effective management of inflation are key to sustaining real wage increases. The period since 2014 has shifted from high inflation to a low-inflation environment, a positive sign for real wage growth if productivity can keep pace and ensure inclusive economic outcomes.

Real Wage and Income Trends

2004-2014: This period exhibited strong real wage growth across various sectors, with real agricultural wages increasing by around 4.4% annually and rural non-agricultural wages by 3%.

2014-2025: The trajectory shifted significantly, with real rural wages declining in many occupations. This slowdown coincided with events like back-to-back droughts in 2014-15, demonetization, the introduction of GST, and a general slowdown in the economy.

Role of Inflation

2004-2014: While overall income grew, the higher-growth period could have benefited from moderate inflation.

2014-2025: This period marked a successful transition from a high-inflation to a low-inflation environment. Benign inflation is crucial for supporting real wages, as it ensures that the purchasing power of wages doesn't erode quickly.

Role of Productivity

Both Periods: Productivity is a primary driver of real wage growth, as increased output per worker allows for higher wages without driving up prices.

2014-2025: A lack of significant employment growth (jobless growth) despite economic expansion has been a concern. For real wages to increase sustainably, especially in the post-2014 era, higher productivity is essential to create more and better-paying jobs.

Conclusion

The 2014-2025 period contrasts with the earlier decade, showing a slowdown in real wage growth despite a more favorable, lower-inflation environment. To improve real wages and income for a larger section of the population, particularly in rural areas, policies need to focus on accelerating productivity growth, fostering robust employment creation, and managing the benefits of low inflation to ensure inclusive development.

The Reserve Bank of India (RBI) needs to cut interest rates to combat a slowdown caused by tariff issues.....

Lowering interest rates can stimulate domestic demand when facing tariffs and reduced export demand by making borrowing cheaper for consumers and businesses, encouraging investment in domestic production and services, and increasing disposable income for households. This makes it more attractive to spend and invest rather than save, potentially offsetting the negative impacts of a trade slowdown. However, the effectiveness depends on the severity of the tariff shock, the responsiveness of consumers and firms to lower prices, and the overall health of the domestic economy.

How Lower Interest Rates Can Help

Cheaper interest rates make it less expensive for consumers to take out loans for big purchases like homes and cars, and for businesses to borrow for expansion or new equipment. Lower borrowing costs increase household disposable income, which can lead to higher consumer demand for goods and services. Lower interest rates decrease the cost of capital, making more investment projects profitable and encouraging businesses to invest in domestic production. This is particularly helpful when export demand is down, as businesses can focus on the domestic market. Lower rates can increase the value of assets like housing and stocks, potentially creating a "wealth effect" that encourages more spending. Lower interest rates can make a country's currency less attractive to foreign investors, potentially leading to a depreciation of the currency. A weaker currency can make domestic goods cheaper for foreign buyers, partially offsetting the impact of tariffs, and can make imports more expensive for domestic consumers, further encouraging the purchase of local goods.

Rate Cut for Domestic Demand

Tariff hiccups (potential challenges from trade policies or tariffs) could be slowing down domestic demand in the economy. A rate cut by the RBI would lower borrowing costs for banks. This encourages banks to offer lower interest rates on loans to consumers and businesses, making it cheaper to borrow for things like cars, homes, and business investments. Increased borrowing leads to more spending and investment, thus boosting domestic demand.

Low Inflation Expectations for Supply and Real Incomes

The RBI must maintain low long-run inflation expectations. A stable and predictable price environment, characterized by low inflation, incentivizes businesses to invest and increase their production of goods and services. When prices are stable or declining (due to increased supply), the real value of money increases, meaning a single unit of currency can buy more goods and services. With lower prices, consumers' nominal wages and incomes can buy more, effectively increasing their real wages, incomes, and overall wealth.

Limitations and Considerations

The effectiveness of lower interest rates depends on the magnitude of the negative impact from tariffs and reduced export demand. The policy's success also depends on the underlying strength of the domestic economy and how responsive consumers and businesses are to lower prices. Monetary policy effects are not instantaneous; it takes time for interest rate changes to fully transmit through the economy.

The Reserve Bank of India (RBI) needs to cut interest rates to combat a slowdown in domestic demand caused by tariff issues. A rate cut makes borrowing cheaper, stimulating spending and investment by consumers and businesses. Concurrently, the RBI should focus on keeping long-term inflation expectations low, which can increase the production of goods and services by providing a stable economic environment. Lowering prices through increased supply also boosts real wages, incomes, and wealth by increasing the purchasing power of money. A short-term measure is to boost spending and investment by lowering borrowing costs and stimulating demand and a long-term strategy is to create a stable environment for increased production and stable prices, which ultimately increases the purchasing power of money.