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.