The Virtuous Spiral: How Low Borrowing Costs Fuel Endless Economic Momentum.....

In an era where central banks wield unprecedented influence over global markets, a quiet revolution is unfolding in the political economy of growth. Low borrowing costs, often engineered through monetary policy, are not merely a temporary salve for sluggish economies but the catalyst for a self-reinforcing cycle that drives high supply, suppresses prices, boosts demand, and propels sustained expansion. This dynamic, rooted in the interplay between government intervention, corporate investment, and consumer behavior, challenges traditional fears of inflation and stagnation, suggesting instead a future where prosperity begets even lower costs of capital. As policymakers grapple with post-pandemic recoveries and geopolitical tensions, understanding this cycle offers a blueprint for engineering enduring booms.

At the heart of this phenomenon lies the mechanics of low interest rates, typically set by central banks like the Federal Reserve or the European Central Bank to stimulate activity during downturns. When borrowing becomes cheap, businesses flood the market with investments in production capacity, ramping up supply across sectors from manufacturing to technology. This surge in output naturally exerts downward pressure on prices, making goods and services more affordable for consumers. With lower prices comes heightened demand, as households and firms alike capitalize on the bargains, further accelerating economic growth. This growth, in turn, generates jobs, raises incomes, and bolsters tax revenues, creating fiscal space for governments to maintain or even deepen accommodative policies. The result is a virtuous loop: robust growth signals stability to lenders and investors, justifying continued low borrowing costs and perpetuating the cycle. Unlike vicious deflationary spirals that plagued economies in the past, this model hinges on balanced supply keeping pace with demand, preventing overheating while fostering innovation and efficiency.

Historical precedents abound, illustrating how this cycle has powered transformative eras of prosperity. In the postwar United States of the 1950s, the Federal Reserve maintained relatively low interest rates amid a backdrop of industrial expansion and subdued inflation.  As factories hummed with production fueled by cheap credit, supply boomed in automobiles, appliances, and housing, driving down costs for the burgeoning middle class. This affordability sparked unprecedented consumer demand, with household spending surging and unemployment dipping below 4 percent. The ensuing growth not only rebuilt a war-torn economy but also reinforced low borrowing costs, as strong fiscal health allowed the government to issue debt at minimal yields, sustaining the boom for over a decade. Similarly, during the dot-com era around 2000, low rates set by the Fed encouraged massive investments in technology infrastructure.  Tech firms scaled up supply through rapid innovation, slashing prices on computers and internet services. Demand exploded as businesses and consumers embraced the digital revolution, leading to full employment and productivity gains that kept inflation in check at around 1.9 percent. This growth feedback loop convinced markets of long-term stability, keeping borrowing costs depressed even as the economy peaked.

More recent examples underscore the cycle's relevance in today's political landscape. In the late 2010s, particularly 2018 and 2019, the U.S. economy exemplified this dynamic under a regime of near-zero rates post-Great Recession. With borrowing cheap, corporations invested heavily in supply chains and automation, holding inflation to 1.5-2 percent while unemployment hovered around 3.7 percent. Demand flourished through consumer confidence and export growth, creating a self-sustaining expansion that pressured the Fed to delay rate hikes, thus ensuring future low costs. On a global scale, China's rapid ascent in the early 2000s drew on similar principles, where state-directed low-interest loans flooded manufacturing sectors, boosting supply and exporting deflationary pressures worldwide. This not only lowered global prices but also ignited demand in emerging markets, fueling China's GDP growth above 10 percent annually and locking in low borrowing costs through accumulated reserves. Even in Europe, post-2014 negative interest rates by the ECB spurred supply in renewable energy and infrastructure, curbing prices and stimulating demand amid austerity debates, hinting at a cycle that transcends borders.

Yet, this cycle's political dimensions cannot be ignored, as governments play a pivotal role in its initiation and maintenance. Through fiscal stimulus paired with monetary easing—as seen in Keynesian approaches during crises—policymakers can ignite the loop, but sustaining it requires deft navigation of international trade, regulation, and inequality.  For instance, subsidies for green technologies in the EU have amplified supply in sustainable goods, keeping energy prices low and demand high, while reinforcing commitments to low rates for climate goals. However, risks lurk if supply lags, as evidenced by temporary disruptions like supply chain bottlenecks, which can briefly interrupt the flow. Nonetheless, when aligned, these elements create a political economy where growth dividends fund social programs, reducing populist pressures and stabilizing regimes.

In conclusion, the self-reinforcing cycle of low borrowing costs, abundant supply, subdued prices, vigorous demand, and resilient growth offers a compelling vision for the future of global economies. By drawing lessons from postwar booms, tech revolutions, and modern recoveries, policymakers can harness this dynamic to foster inclusive prosperity, ensuring that today's low rates pave the way for tomorrow's even lower ones. As the world navigates uncertainties from trade wars to technological shifts, embracing this virtuous spiral could transform potential stagnation into an era of unbounded potential.

Lowering Inflation Expectations to Safeguard India's Long-Run Employment Amid Surging Government Spending.....

In the bustling economic landscape of India as of February 20, 2026, the recent Union Budget for 2026-27 has ignited debates on how ambitious government spending plans intersect with persistent inflationary pressures and the quest for sustainable job creation. Finance Minister Nirmala Sitharaman unveiled a budget emphasizing fiscal prudence with a deficit target of 4.3% of GDP, while ramping up capital expenditure to 12.2 trillion rupees—a 11.5% increase from the revised 10.96 trillion rupees in 2025-26—to fuel infrastructure and domestic manufacturing. This comes against a backdrop of nominal GDP growth projected at 10% for the fiscal year, with real growth estimates hovering between 6.8% and 7.2%. Yet, as consumer price index (CPI) inflation ticked up to 2.75% in January 2026 under the new base year series, economists are cautioning that the real battle lies not in current price levels but in managing inflation expectations to protect long-term employment gains. With unemployment edging to 5% in January from 4.8% in December 2025, the political economy narrative underscores a critical choice: prioritize anchoring expectations over reactive measures to current inflation spikes, ensuring that India's growth story translates into enduring job security for its youthful workforce.

The interplay between government spending, inflation, and employment in India reveals a complex political economy where fiscal stimulus meets monetary discipline. The Reserve Bank of India (RBI), under its inflation-targeting framework adopted in 2016, has maintained the repo rate at 5.25% since its last cut in December 2025, signaling an end to easing amid revised inflation forecasts. For fiscal year 2025-26 ending March 2026, the RBI now projects average inflation at 2.1%, up slightly from earlier estimates due to precious metal price surges, with the fourth quarter expected at 3.2%. Projections for 2026-27 anticipate a climb to 4.3%, driven by normalizing food prices and base effects, though core inflation remains subdued at around 3.9%. This moderation follows a period of ultra-low inflation averaging 1.7% from April to December 2025, aided by easing food and fuel costs. However, the budget's push for higher spending—total outlay rising to 53.47 trillion rupees from 49.65 trillion in the previous revised estimate—raises questions about potential demand-pull pressures. Government initiatives like the Purvodaya scheme for eastern industrial corridors and enhanced public infrastructure via entities such as InvITs and REITs aim to boost productivity and create jobs, but without careful calibration, they could inadvertently stoke inflation if expectations remain unanchored.

At the heart of this discourse is the distinction between current inflation and inflation expectations, a nuance often overlooked in political rhetoric but pivotal for long-run employment. Current inflation, as measured by headline CPI, stood at 2.75% in January 2026, returning to the RBI's 2-6% tolerance band for the first time since August 2025. This uptick was largely due to a 19.02% surge in personal care items influenced by gold and silver prices, while food inflation, now weighted at 36.8% in the revised CPI basket (down from 45.86%), rose to 2.13% from -2.71% the prior month.Yet, economists argue that focusing solely on these figures misses the bigger picture. Inflation expectations, as captured in RBI's household surveys, have historically exceeded actual inflation by 2-4 percentage points, with recent data showing three-month-ahead expectations at around 8-9% despite low realized rates. This gap persists because headline shocks, like food price volatility, feed into public perceptions, influencing wage negotiations and spending behaviors. Studies on India's Phillips curve—a relationship linking inflation and unemployment—indicate that unanchored expectations can lead to persistent inflation, necessitating tighter monetary policy that temporarily elevates unemployment.

From a long-run employment perspective, lowering inflation expectations emerges as more crucial than addressing transient current inflation spikes. Historical data reveals India's unemployment rate has trended downward, averaging 7.87% from 2018 to 2026 but dropping to a low of 4.7% in November 2025 before rising to 5% in January 2026. The Periodic Labour Force Survey shows rural unemployment at 4.2% and urban at 7.0%, with female joblessness notably higher at 9.8% in urban areas. Long-term trends are encouraging: the rate fell from 6% in 2017-18 to 3.2% in 2023-24, reflecting structural reforms like labor codes that boosted formalization and added over 10 lakh manufacturing jobs in FY24. However, research underscores a negative long-run link between inflation and growth in India, with thresholds around 5.5% where elevated inflation erodes output by 0.1-0.2 percentage points annually. High expectations amplify this: if households anticipate 7-8% inflation, they demand higher wages, pushing up costs and reducing firm hiring. This creates a vicious cycle, as seen in the 1970s global stagflation, where unanchored expectations led to wage-price spirals, ultimately harming employment.

In India's context, evidence from the RBI's inflation-targeting era shows that better-anchored expectations enhance policy flexibility. For instance, during the COVID-19 shock, anchored outlooks allowed aggressive stimulus without spiraling prices, supporting a rebound in employment from pandemic highs of 20.8% in 2020. Conversely, ignoring expectations risks "jobless growth," where GDP expands at 7% but unemployment lingers due to investor caution amid perceived instability. The budget's fiscal consolidation—debt-to-GDP targeted at 55.6% for 2026-27, down from 56.1%—complements this by avoiding overheating, but political pressures for populist spending, like rural guarantees, could undermine it. Analysts note that supply-side bottlenecks, exacerbated by global trade frictions, make expectation management vital; a 1% rise in inflation expectations could shave 0.5% off long-run growth, translating to 2-3 million fewer jobs annually in a labor force of over 560 million.

Politically, this pits short-term gains against long-term stability. The government's focus on "Viksit Bharat" envisions 7-8% growth creating 8-10 million jobs yearly, but opposition critiques highlight youth unemployment at 14.3% in Q4 2025. RBI Governor Sanjay Malhotra has emphasized that excluding volatile items like gold (adding 60-70 basis points to inflation) reveals "benign" underlying pressures, yet proactive liquidity measures are needed to preempt fluctuations. International comparisons bolster the case: economies like the US in the 1980s tamed inflation by credibly anchoring expectations, unlocking decades of job growth. In India, where inflation persistence is high— a 1% deviation from expected inflation adjusts expectations by only 0.1% quarterly—policy must prioritize communication and forward guidance over reactive rate hikes.

As India navigates this juncture, the imperative is clear: while current inflation at 2.75% demands vigilance, the true lever for containing it lies in lowering expectations through consistent policy. This not only prevents cost-push spirals but fosters an environment where government spending on capex yields multiplicative employment effects. With projections of 4% inflation in 2027 and unemployment trending toward 5.4%, anchoring expectations could add 1-2% to long-run growth, creating millions of jobs. In the political economy of a rising power, this strategy ensures that today's fiscal ambitions secure tomorrow's workforce prosperity, turning economic resilience into inclusive advancement. 

Anchoring Expectations: Prioritizing Inflation Forecasts Over Current Pressures to Safeguard US Long-Term Employment.....

In the evolving landscape of the US economy, where consumer spending drives nearly 70 percent of growth, the interplay between expected spending patterns and domestic inflation has taken center stage. As of February 2026, recent data reveals a cooling in headline inflation, with the Consumer Price Index rising just 2.4 percent year-over-year in January, down from 2.7 percent in December 2025.  This moderation, coupled with a slight dip in the unemployment rate to 4.3 percent, might suggest a stable short-term outlook. However, economists and policymakers are increasingly focusing on a subtler yet more potent force: inflation expectations. These forward-looking beliefs, shaped by households, businesses, and investors, hold the key to sustaining long-run employment gains, potentially outweighing the immediate concerns of current price levels in containing inflationary spirals.

The rationale stems from the self-reinforcing nature of inflation expectations. When consumers anticipate higher prices, they adjust behaviors accordingly—accelerating purchases or demanding wage hikes—which can embed inflation into the economy, leading to persistent pressures that erode purchasing power and force aggressive monetary tightening. For instance, the University of Michigan's February 2026 survey shows year-ahead inflation expectations easing to 3.5 percent from 4 percent in January, while long-run expectations ticked up slightly to 3.4 percent. This divergence highlights a risk: if long-term expectations drift upward, even amid current inflation at 2.4 percent, it could trigger a wage-price spiral, where workers seek compensation for anticipated cost increases, prompting businesses to raise prices further. Historical episodes, like the 1970s stagflation, underscore how unanchored expectations amplified inflation to double digits, ultimately requiring sharp Federal Reserve rate hikes that pushed unemployment above 10 percent and stifled growth for years.

From a political economy perspective, this dynamic intersects with fiscal policies influencing expected spending. Projections from the Congressional Budget Office indicate real consumer spending growth holding steady at 1.8 percent in 2026, bolstered by factors like wealth gains from a buoyant stock market and potential tax relief, but tempered by tariff-induced price hikes and slower population growth.  Yet, if inflation expectations remain elevated—say, above the Fed's 2 percent target—they could amplify these pressures, leading to reduced real spending and investment. Economists argue that anchored expectations allow the Fed greater flexibility to support employment during downturns without sparking runaway inflation.  For example, if expectations fall too low, nominal interest rates follow suit, limiting the Fed's ability to cut rates and stimulate job creation, potentially trapping the economy in a cycle of subpar growth. Conversely, taming expectations now could prevent the need for harsh measures later, preserving the 164.52 million employed Americans recorded in January 2026.

Data further illustrates the long-run employment stakes. Studies show that for every 0.1 percentage point rise in inflation expectations, achieving a 3 percent inflation target might require sacrificing up to 6 million jobs, pushing unemployment as high as 7.2 percent.  This is because elevated expectations steepen the Phillips curve, making small unemployment increases correspond to larger inflation drops, thus demanding more economic pain to restore stability.  In contrast, well-anchored expectations—ideally at 2 percent—enable softer landings, where the Fed can ease policy without igniting price surges, fostering sustained job growth. Amid political debates over Fed independence and fiscal stimulus, prioritizing expectation management through clear communication and credible policy could avert such costs, especially as consumer spending intentions for 2026 show resilience, with inflation-adjusted growth forecasted at 2.8 percent, supported by easier financial conditions and higher tax refunds.

Ultimately, while current inflation at 2.4 percent demands vigilance, the true linchpin for US long-run employment lies in curbing inflation expectations to prevent self-perpetuating cycles that undermine economic stability. By focusing on this forward-looking metric, policymakers can nurture a virtuous environment where steady job gains—potentially maintaining unemployment below 4.5 percent through 2036, per CBO estimates—coexist with price stability, ensuring broader prosperity without the scars of deeper recessions.

Seeds of Discontent: The Politics of Crop Pricing in India and the World.....

In the winter of 2020, the outskirts of Delhi transformed into a sprawling tent city as hundreds of thousands of farmers from Punjab, Haryana, and Uttar Pradesh descended upon the capital, their tractors forming barricades against the biting cold and police lines. These were not just cultivators of the soil but guardians of a way of life, protesting three new farm laws passed by Prime Minister Narendra Modi's government that September, which aimed to deregulate agricultural markets by allowing private buyers to negotiate directly with farmers outside the traditional mandi system. The laws, critics argued, would erode the safety net of minimum support prices, exposing smallholders to corporate exploitation and volatile market forces. The protests swelled to an estimated 250 million participants at their peak, marking one of the largest demonstrations in human history, and endured for over a year amid clashes, internet shutdowns, and over 700 farmer deaths from exposure and accidents. This movement, born from decades of agrarian distress including farmer suicides linked to debt and low incomes, forced the government to repeal the laws in November 2021, but it left lingering questions about how India prices its crops compared to developed nations and what system truly serves its farmers under unique socioeconomic pressures.

India's crop pricing revolves around the Minimum Support Price mechanism, a government-set floor price for 23 essential commodities like rice, wheat, pulses, and oilseeds, designed to shield farmers from market crashes and ensure food security. Established in the 1960s amid the Green Revolution, this system relies on the Commission for Agricultural Costs and Prices, which calculates MSP based on factors including production costs like seeds, fertilizers, labor, and family input, plus a 50 percent margin over the A2 plus FL formula, though experts like the Swaminathan Commission advocated for a more generous C2 plus 50 percent to cover comprehensive costs including land rent. The government procures crops at MSP through agencies like the Food Corporation of India, but this is unevenly implemented, benefiting mainly rice and wheat growers in states like Punjab and Haryana where procurement reaches 80 to 97 percent of production, while pulses and oilseeds see minimal uptake, often below 10 percent. In 2021-22, for instance, rice procurement was 44.5 percent of total production nationwide, but states like West Bengal saw only 14.3 percent. This leaves many farmers selling at market prices that can dip below MSP, contributing to average monthly household incomes of around 19,696 Indian rupees in 2024-25, or about 2,400 US dollars annually, far below the poverty threshold for many.  Political pressures amplify these issues, as seen in the 2020 protests where farmers feared the laws would dismantle MSP entirely, favoring conglomerates like Reliance and Adani, leading to boycotts of their telecom services and a surge in farmer unity across castes and regions.

In contrast, developed countries like the United States employ market-driven pricing bolstered by extensive subsidies and insurance, creating a stark divide in farmer prosperity. Under the US Farm Bill, renewed every five years with a 428 billion dollar budget for 2018-2023, growers receive counter-cyclical payments guaranteeing prices regardless of market dips, alongside crop insurance covering up to 85 percent of losses from weather or low yields. This has propelled average US farm incomes to over 100,000 dollars annually, with cereal yields at 7.6 tons per hectare compared to India's 3.7 tons, thanks to large-scale mechanization on farms averaging 178 hectares versus India's 1.08 hectares.  For example, in 2019, the US disbursed 16 billion dollars in direct payments under the Market Facilitation Program to offset trade war impacts, helping exporters like soybean farmers maintain global competitiveness against rivals in Brazil and Argentina. The European Union's Common Agricultural Policy allocates 58 billion euros yearly in direct payments and market support, representing 18.3 percent of farm receipts as producer support, far exceeding India's negative 14.5 percent producer support equivalent, which effectively taxes farmers through policies keeping domestic prices below international levels. In Canada and Australia, pricing is largely market-oriented with safety nets like export subsidies and risk management programs, yielding higher per capita farm incomes around 50,000 to 70,000 dollars, supported by vast lands and advanced tech that boost efficiency.

These global practices highlight India's unique challenges: over 50 percent of its workforce depends on agriculture contributing just 16 percent to GDP, with smallholdings, rain-fed farming, and infrastructure gaps leading to 30 to 60 percent lower yields than achievable benchmarks in Brazil or China.  In developed nations, subsidies per farmer dwarf India's; the US provides about 7 percent of agricultural value in support, while EU farmers receive 12.85 percent, enabling diversification into high-value crops and exports totaling 149 billion dollars for the US in 2019-23 averages.  India's system, while protective for staples, stifles innovation, as seen in eastern states like Bihar where incomes lag 50 percent below national averages due to poor procurement and market access.  Precedents like the 2020 laws' repeal show political will can shift, but protests underscored the need for balance; farmers in Punjab, earning 161 percent above national averages from MSP-backed wheat and rice, feared losses, while diversification in Meghalaya yields 187 percent higher incomes through high-value crops.

Under India's country-centric conditions—fragmented lands, monsoon dependency, and 260 million in rural poverty—a hybrid model emerges as optimal to benefit farmers, blending MSP guarantees with market freedoms to foster productivity and incomes. This approach retains price floors for food security staples like rice and wheat, where procurement stabilizes 37 percent and 17 percent of output respectively, while encouraging private investment in value chains for perishables like tomatoes or pulses, where market prices often exceed MSP but volatility persists.  Examples from protests' aftermath include the government's formation of an MSP committee, though slow progress fuels ongoing demands, and diversification successes in states like Karnataka where non-farm income boosts environmental efficiency by 4 percent per 1 percent rise, allowing reinvestment.  Data from 2018-19 shows livestock and non-farm activities already contribute 13 percent and 8 percent to farm incomes, suggesting hybrids could raise overall earnings by 29 percent through reforms like better insurance and tech access, mirroring US gains from 10 percent producer support.  Ultimately, this hybrid safeguards against distress while promoting growth, turning seeds of discontent into harvests of equity.

 

The Forge of Bharat: Weaving Make in India into the Tapestry of Made in India.....

In the shadow of the Himalayas, where ancient forges once hammered iron into tools of empire, a modern saga unfolds across India's vast industrial heartlands. From the humming assembly lines of Noida to the sun-baked foundries of Coimbatore, the nation stands at a crossroads of ambition. For decades, India has dreamed of reclaiming its place as a global artisan, not merely a consumer of the world's wares. Yet, in this pursuit, two visions have emerged, often conflated but profoundly distinct: Make in India and Made in India. These are not mere slogans but divergent economic philosophies, each promising a path to prosperity. As we trace their stories, it becomes clear that while Make in India ignites the spark of production, Made in India forges the enduring flame of self-reliant growth. And in their harmonious fusion lies the blueprint for India's long-term economic welfare.

Picture the year 2014, when Prime Minister Narendra Modi unfurled the banner of Make in India from the ramparts of the Red Fort. It was a clarion call to the world: come, invest, assemble, and manufacture here. The initiative was a masterstroke of pragmatism, designed to lure foreign direct investment into a manufacturing sector that had languished at around 16 percent of GDP. Factories sprouted like monsoon blooms—Apple's suppliers in Tamil Nadu piecing together iPhones from components shipped across the seas, Foxconn's plants churning out electronics for global brands, and Suzuki's Maruti factories expanding to meet the insatiable demand for affordable cars. FDI inflows surged, climbing from $45 billion in 2014-15 to peaks exceeding $80 billion in subsequent years. Production-linked incentive schemes poured billions into sectors like mobile phones, where India vaulted to become the world's second-largest manufacturer, exporting devices worth over ₹1.2 lakh crore by 2024. Jobs materialized in the millions, skills were honed on the factory floor, and infrastructure—highways, ports, and power grids—began to knit the nation tighter. This was Make in India: a welcoming hearth where foreign capital met Indian labor, creating a temporary boom in output and employment. Yet, beneath the surface, a subtle alchemy was at play—or rather, its absence. Much of this "making" was assembly, not creation. High-value components, from semiconductors to precision machinery, flowed in from China and Taiwan, leaving India with thin margins and persistent trade deficits in intermediates. The value added domestically hovered low, often below 20 percent in electronics, echoing the critique that Make in India, for all its vigor, sometimes resembled a grand screwdriver operation: efficient at putting pieces together, but reliant on outsiders for the soul of the product.

Contrast this with the quieter, more introspective ethos of Made in India, a vision that predates the 2014 campaign but gained renewed fervor through initiatives like Atmanirbhar Bharat. Here, the emphasis shifts from inviting the world's workshops to building our own. Made in India is the story of indigenous ingenuity, where products are not just stamped "assembled in India" but born from Indian soil, minds, and machines. It demands the full spectrum of domestic factors—land tilled for raw materials, labor skilled in design and innovation, capital nurtured by local banks, entrepreneurship blooming in MSMEs, and technology forged in homegrown R&D labs. Think of Amul, that humble cooperative from Anand, Gujarat, which transformed milk into a global dairy empire, capturing value from farm to fridge without foreign crutches. Or the pharmaceutical giants like Sun Pharma and Dr. Reddy's, which evolved from reverse-engineering generics to pioneering biosimilars, exporting to over 100 countries and slashing India's import bills. In defense, the shift is palpable: from licensing foreign jets to DRDO's Tejas fighter, a fighter born of Indian aerospace expertise, now exported to allies. These are not imports dressed in local garb but creations that embody Bharat's intellectual capital, generating deeper economic ripples—higher wages for engineers, spillovers to suppliers, and a virtuous cycle of innovation that elevates productivity across the economy.

Why, then, are they not the same, and why does Made in India emerge as the superior model for India's welfare? The divergence lies in the depth of value capture and resilience. Make in India excels at scale and speed, injecting liquidity and know-how into a capital-scarce economy, much like a spark that lights a fire. But its welfare gains are often shallow: low-skill jobs in assembly lines, where profits repatriate abroad, and vulnerability to global supply shocks—as seen in the 2020 pandemic disruptions or the 2022 chip shortages. India's manufacturing GDP share, despite the push, stagnated around 15-17 percent, far from the 25 percent target, underscoring that mere production without ownership yields limited multipliers. Made in India, by contrast, is the sustained blaze, fostering technological sovereignty, reducing import dependence, and channeling gains into domestic welfare. It creates high-value employment—think software-embedded hardware from Bengaluru startups or green hydrogen plants powered by indigenous electrolyzers—boosting per capita incomes, narrowing inequality, and building a buffer against geopolitical tempests. In economic terms, it amplifies the multiplier effect: for every rupee invested in a truly Made product, more circulates locally, spurring consumption, savings, and further innovation. Studies from bodies like the Economic Survey affirm this; nations that prioritize indigenous manufacturing, from post-war Japan to contemporary Vietnam, see sustained GDP growth through productivity surges, not just volume. For India, with its youthful demographic dividend, Made in India promises not just jobs, but careers—elevating workers from cogs to creators, and the economy from assembler to architect.

Yet, the truest path to long-term growth lies not in choosing one over the other, but in a hybrid model that marries their strengths in a deliberate evolution. Imagine it as the ancient Indian art of kintsugi, where broken pottery is mended with gold: Make in India provides the sturdy base of foreign partnerships and scale, while Made in India infuses the golden veins of local mastery. This symbiosis begins with strategic openness—inviting MNCs to establish plants under strict local content mandates, as the Production-Linked Incentive schemes have done in mobiles and solar panels, mandating 30-50 percent domestic sourcing to seed supplier ecosystems. Over time, investments in R&D tax credits, skill academies, and public-private innovation hubs accelerate the transition: foreign tech transfers evolve into joint ventures, then wholly Indian designs. The result is compounded growth, where initial FDI builds capacity, and indigenous capabilities ensure compounding returns—higher exports, stronger balance of payments, and a manufacturing sector that could swell to 25 percent of GDP by 2030, as envisioned in recent policy roadmaps.

Precedents abound, illuminating this hybrid's potency. China's journey is the archetype: Deng Xiaoping's 1978 reforms flung open doors to Western investors, creating a "Make in China" factory floor that absorbed global supply chains. But by 2015, Xi Jinping's Made in China 2025 pivoted ruthlessly—subsidizing domestic chipmakers like SMIC, enforcing tech localization, and birthing Huawei as a global titan. The outcome? China's manufacturing share hit 28 percent of GDP, lifting 800 million from poverty, though at the cost of over-reliance on state dirigisme. Closer to home, South Korea's chaebols—Samsung and Hyundai—began in the 1960s as licensees of Japanese and American tech, assembling under foreign blueprints. Government-directed R&D and protectionism then catalyzed the leap: by the 1990s, they were innovating semiconductors and EVs, transforming a war-torn agrarian economy into a high-tech powerhouse with per capita income rivaling Europe's. Even India's own defense sector offers a microcosm: early Make in India deals with Dassault for Rafale jets included offset clauses for local assembly. Today, this has spawned Made in India successes like the HAL Tejas Mk-1A, with 60 percent indigenous content, and exports to Egypt and Argentina, fostering a $21,000 crore defense export industry.

In semiconductors, the hybrid is already blooming: Tata's joint venture with Taiwan's PSMC for a fab in Gujarat blends foreign expertise with Indian capital, while the India Semiconductor Mission seeds design talent at IITs for future "Made" chips. In renewables, Adani's solar modules started with imported cells (Make) but now incorporate locally refined polysilicon (Made), positioning India as a net exporter. These precedents reveal a timeless truth: long-term growth demands patience and policy foresight. The hybrid model mitigates Make in India's pitfalls—import leakage and skill gaps—while amplifying Made in India's strengths, yielding a resilient economy where welfare accrues not in fleeting booms but in enduring abundance: better health from affordable indigenous pharma, cleaner air from homegrown EVs, and empowered youth through innovation-driven jobs.

As the sun sets over the Arabian Sea, casting golden hues on Mumbai's gleaming skyline, India's economic odyssey enters its most promising chapter. The forge of Bharat, once cooled by colonial neglect, now glows with the heat of hybrid ambition. Make in India laid the foundation, Made in India will crown the edifice, but their union ensures that the welfare of 1.4 billion souls—jobs that dignify, incomes that uplift, and a nation that innovates—becomes not a distant mirage, but a living reality. In this narrative, India does not merely make; it masters. And in that mastery lies the promise of a Viksit Bharat, self-assured and sovereign, for generations to come. 

The Inflation Crossroads: RBI's Mandate and India's Economic Destiny.....

In the grand halls of India's Parliament, where echoes of democratic debates shaped the nation's fate, a pivotal session unfolded in early 2026. Lawmakers from across the political spectrum gathered to scrutinize the Reserve Bank of India's latest monetary policy review, a ritual that blended economic theory with the raw pulse of public sentiment. The air was thick with tension, as whispers of global uncertainties—lingering effects of geopolitical tensions and supply chain disruptions—mingled with domestic triumphs, like the robust 8.2 percent GDP growth in the second quarter of fiscal year 2025-26. Yet, at the heart of the discourse lay a contentious proposition: should the RBI, in consultation with the government, shift its inflation targeting framework toward higher thresholds to stimulate demand, or steadfastly pursue low inflation to foster sustainable growth? This narrative, drawn from the corridors of power, explores how parliamentary pressures clashed with economic prudence, revealing the delicate balance between short-term allure and long-term prosperity.

The session began with Finance Minister Aarav Singh rising to address the house, his voice steady but laced with urgency. He painted a picture of India's economy not as one mired in demand scarcity or a slowdown accompanied by deflationary pressures, but as a vibrant engine humming at near-full capacity. "Honorable members," he intoned, "our nation has achieved a projected real GDP growth of 7.4 percent for fiscal year 2025-26, as per the first advance estimates, building on the 6.5 percent expansion in the prior year. This surge, fueled by a 7.3 percent rise in gross value added, underscores that we are far from the stagnation some fear." Yet, beneath this optimism lurked challenges: unemployment, though declining to 4.7 percent in November 2025 from higher levels earlier in the decade, still weighed on millions, particularly in rural and informal sectors. Supply constraints persisted, with private investment lagging behind public capital expenditure, which had risen by over 10 percent in the previous fiscal year according to the Economic Survey 2025-26. Singh argued that the RBI's temptation to lean on higher inflation—perhaps adjusting the 4 percent target upward within its flexible band of 2 to 6 percent—stemmed from a desire to erode real interest rates. By allowing inflation to climb, nominal rates could remain steady while real borrowing costs fell, ostensibly spurring investment. Precedents abounded; in the 1970s, when oil shocks quadrupled prices and propelled India's inflation to peaks exceeding 20 percent between 1973 and 1974, the government had resorted to expansive policies that temporarily boosted demand but ultimately stifled growth through eroded savings and distorted resource allocation.

Opposition leader Priya Desai countered fiercely, her arguments weaving historical lessons with contemporary data to dismantle the case for elevated inflation targets. She reminded the assembly of the 2011-2013 era, when inflation averaged over 10 percent annually, driven by a weakening rupee and surging import costs for petroleum and commodities. "That period," she declared, "saw wholesale price index inflation hit 15 percent in the fourth quarter of 2009-10, leading to a sharp decline in real interest rates that depressed household savings by nearly 5 percentage points as a share of GDP and ballooned the current account deficit to 4.8 percent in 2012-13." Such high inflation expectations, she explained, had begotten a vicious cycle: they fueled demand in the short term but curtailed supply by deterring private investment, which contracted by 2 percent in real terms during those years. Employment suffered too, with urban unemployment rates climbing above 8 percent, as businesses hesitated amid uncertainty. Desai highlighted how high prices restricted demand over time, citing the long-run fallout where economic growth slumped to below 5 percent in 2013, far from the double-digit aspirations of the era. Drawing from global parallels, she invoked the 1970s stagflation in advanced economies, where inflation rates above 10 percent in the United States reduced long-term growth potential by eroding productivity and investor confidence. In India today, she noted, inflation had softened dramatically to 0.71 percent in November 2025 and a modest 1.33 percent in December, enabling the RBI to maintain the repo rate at 5.25 percent in its February 2026 meeting while revising upward its GDP forecast for the year to 7.4 percent.

As the debate intensified, RBI Governor Vikram Rao, invited as an expert witness, took the floor to elucidate the central bank's stance. He acknowledged parliamentary concerns but emphasized that the institution's efforts were not aimed at inflating expectations to juice demand artificially. Instead, the focus remained on anchoring low inflation expectations, crucial for boosting investment and supply-side reforms. "To increase real economic growth without stoking inflation," Rao stated, "lower price expectations must take center stage." He pointed to data from the IMF's 2025 Article IV Consultation, which showed India's economy expanding by 7.8 percent in the first quarter of fiscal 2025-26, driven by rising capital expenditure and services exports that grew 12 percent year-over-year. Yet, with private investment still trailing at around 28 percent of GDP—below the 32 percent peak in 2011—high inflation would only exacerbate the lag by raising input costs and uncertainty. Rao invoked the success of the inflation-targeting framework adopted in 2016, which had reduced average headline inflation from 6.8 percent in the 2012-16 period to 4.9 percent thereafter, with volatility dropping from a standard deviation of 2.3 percent to 1.5 percent. This stability, he argued, had anchored expectations, allowing demand to rise organically as low inflation preserved purchasing power. The main peril, he warned, lay in high inflation expectations, which could spike demand temporarily but slash supply by reducing investment incentives and employment opportunities. Indeed, precedents like the 2009-10 spike, when inflation reached 15 percent, demonstrated how such dynamics begat sustained high prices, ultimately curbing long-run demand as real wages eroded and growth decelerated to 6 percent annually in the following years.

The narrative reached its zenith as lawmakers grappled with the RBI's projections: a revised inflation forecast of 2.1 percent for fiscal 2025-26, with quarterly estimates at 3.2 percent for the fourth quarter, 4 percent for the first quarter of 2026-27, and 4.2 percent for the second. These figures, Rao asserted, reflected balanced risks and a commitment to the existing 4 percent target, set to be reviewed by March 2026. Proponents of higher targets, like coalition partner Rajesh Kumar, invoked the need to combat lingering supply shortages, where industrial output grew only 5.6 percent in 2025 amid raw material constraints. But Desai rebutted, noting that low inflation had already facilitated a drop in the unemployment rate to 4.7 percent, proving that stable prices encouraged hiring and investment without the distortions of price surges.

In the end, the parliamentary session concluded with a consensus resolution endorsing the RBI's prudent path, recognizing that the choice between low and high prices was no mere technicality but a cornerstone of India's aspirations. By opting for low inflation, the nation could unlock sustained growth, where investment flourished, employment expanded, and demand grew resiliently without the shackles of escalating costs. Historical scars from eras of double-digit inflation—such as the 28.6 percent peak in 1974 that triggered decades of instability—served as stark reminders that high prices ultimately restricted demand, eroded competitiveness, and diminished long-run prosperity. As the gavel fell, India's economic narrative affirmed a timeless truth: true progress lay not in chasing inflationary mirages, but in building foundations of stability that endured.

Understanding the 2026 Indian Inflation Outlook: Distinguishing Base Effects from True Demand.....

Introduction

The trajectory of inflation in India approaching 2026 is uniquely poised to be dictated by statistical mechanics rather than solely by fundamental economic forces. With the Indian government shifting the Consumer Price Index (CPI) base year to 2024 and significantly reducing the weightage of volatile food and fuel components—which previously constituted nearly half of the index—the headline inflation figures have appeared anomalously low through late 2025. As India enters mid-2026, a potential surge in reported inflation is anticipated, not driven by overheated demand or supply shortages, but primarily by a low base effect stemming from the historically low inflation recorded after June 2025. Investors and policymakers must therefore carefully dissect whether future headline inflation reflects structural demand-supply imbalances or merely a statistical reversal, ensuring that monetary policy and investment decisions are not based on misleading data.

The Base Period Distortions and 2026 Projections

The Consumer Price Index in India, which was based on 2012, recorded exceptionally low levels through 2025, reaching a nadir of 1.33% in December 2025, with food inflation often in the deflationary zone. This created a "base" for comparison that is fundamentally not normal. When calculating year-on-year inflation starting from June 2026, the comparisons will be drawn against these extremely low figures from 2025. As a result, even moderate increases in prices will yield high year-on-year percentage growth rates. Projections indicate that despite a, for instance, 1.7% average headline inflation in the April-December 2025 period, inflation could face sharp upward pressure purely due to these base effects. Experts expect this statistical effect to dominate through the middle of 2026, potentially showing an uptick in headline numbers even if actual consumer pressure remains contained.

Reduced Food and Fuel Weightage and Demand Signals

The new 2024-based CPI series, implemented in February 2026, addresses previous criticisms by lowering the weight of food and beverages from approximately 45.86% to 36.75%. While this change makes the index less volatile by reducing the impact of seasonal food price swings, it does not remove the underlying base effect issue. The low inflation experienced in late 2025 was driven heavily by a surplus monsoon, allowing food prices to decline, but this, paired with reduced weights, means the headline index may not fully capture the cost-of-living experiences of lower-income households. A major risk is that this, coupled with a low-base effect in 2026, will give a wrong signal of high demand. If the Reserve Bank of India (RBI) interprets high headline inflation in mid-2026 as a sign of high demand, they might keep interest rates too high, which could choke a genuinely recovering economy (expected to grow at 7.4% in 2025-26). The data implies that the upcoming high inflation is primarily a "2025 hangover" rather than a 2026 demand spike.

Investor Strategy: Dissecting the Data

Investors must critically analyze the inflationary drivers during 2026. A simple reliance on headline CPI data could lead to mistaken investments, particularly in interest-rate-sensitive sectors. While headline inflation is expected to rise to 4% or higher from June 2026, it is crucial to monitor "core" inflation (excluding food and fuel) and sequential momentum rather than just year-on-year changes. The 2025 experience—where high food inflation caused headline inflation to seem higher than it felt for many, or vice versa when it dropped—shows that headline numbers are easily distorted. Investors must consider if inflation is driven by supply-side disruptions (e.g., monsoon issues) or strong, consumption-driven demand. With projections showing core inflation remaining manageable and the RBI potentially adopting a more data-dependent stance, investors should look for signs of "base effect" dissipation rather than panic over high headline numbers.

Conclusion

The Indian economy is experiencing a complex interplay between a restructured, more modern, but lower-weighted food basket and a base effect caused by exceptionally low inflation in 2025. The high inflation numbers projected for 2026 are largely statistical rather than structural, a consequence of the low base in 2025. While this may signal a rise in nominal inflation, it does not necessarily represent an overheating economy. Therefore, navigating the 2026 inflationary environment requires distinguishing between illusory high inflation, which is a statistical artefact of the 2025 base, and real inflation, which would reflect a surge in demand. Investors who correctly distinguish between these two will be better positioned, while policy errors based on misleading high inflation readings could potentially result in actual economic slowdowns due to unwarranted policy tightening.

The Investment Relay: Government-Led Capex and Private Sector Hesitation in India.....

Introduction

The Indian economy currently presents a fascinating dichotomy where macroeconomic growth indicators remain robust while the engine of private sector investment operates below capacity. Over the past five years, the baton for capital expenditure (CAPEX) has been firmly held by the government, which has been driving investment to build foundational infrastructure. This heavy lifting has been necessitated by a prolonged hesitation in private sector investment, driven by a combination of sluggish demand, capacity underutilization, and, crucially, high inflation and volatile price expectations. As India aims for a $5 trillion economy, the reliance on public spending rather than private enterprise poses significant questions about the sustainability of its growth model, especially as inflationary pressures compress corporate margins and create a "wait-and-watch" mentality among investors.

Why the Government Holds the Baton

The shift towards government-driven investment has been a strategic response to structural slowdowns in the private sector since roughly 2012–13. Following the pandemic, the central government intensified this role to revive economic growth, employing a "crowding-in" strategy, where public infrastructure investment is intended to create the necessary conditions to attract private capital. In the 2024–25 Union Budget, the government continued this trend with a massive capital expenditure allocation of INR 11.11 lakh crore, representing roughly 3.4% of GDP. This investment is heavily focused on infrastructure, including roads, railways, and renewable energy, aimed at boosting productivity and reducing logistics costs through initiatives like the PM GatiShakti National Master Plan. Furthermore, the government has used direct incentives to spur manufacturing, notably the Production Linked Incentive (PLI) schemes with an outlay of over INR 1.97 lakh crore, aimed at sectors like electronics, pharma, and automobiles. State governments have also stepped up in certain quarters, with 34.6% growth in their fresh investments in Q3 FY25, providing a crucial boost to the overall investment landscape.

Why the Private Sector is Delaying Investment

Despite high corporate profitability in 2024 and significant corporate tax cuts introduced earlier, the private sector has been reluctant to initiate large-scale greenfield projects. Data indicates that private corporate investment has remained stagnant at around 12% of GDP for over a decade. A primary reason for this, as evidenced by a 1.4% decline in private investment plans in the third quarter (Q3) of FY 2024-25, is the perception of weak demand and fears over rising costs. Many companies continue to operate with capacity utilization below 75-80%, reducing the immediate need for new plants and machinery. Additionally, firms have preferred to pay down debt or return capital to shareholders through buybacks rather than investing in new projects. The lingering impact of high debt levels, or corporate balance sheet issues, has made firms cautious about long-term debt-funded expansion, creating a scenario where, despite having cash, they prefer liquidity.

The Role of Inflation and Price Expectations

Inflation and price expectations have played a critical role in delaying private investment. High inflationary pressures, particularly in the aftermath of global supply chain disruptions and high energy costs, have significantly compressed corporate margins. When input prices rise faster than the selling prices of finished goods, profitability shrinks, and companies become wary of new investment, fearing they cannot pass the costs on to consumers in a weak demand environment. Moreover, high food inflation in India, which has been volatile, can restrain discretionary spending, further suppressing demand.

Price expectations are crucial; if manufacturers anticipate that high inflation will continue, they may hesitate to invest in projects with long gestation periods, as the cost of raw materials and labor might make the project unviable upon completion. Data shows that even when retail inflation was showing signs of easing in early 2025 (4.9% from April to December 2024), input cost fears remained, with 1.4% of private plans being pulled back in Q3 FY25 due to these concerns. The RBI’s inflation-targeting framework, which requires keeping inflation within a 2-6% band, means that when inflation surprises on the upside, it often leads to high interest rates, making borrowing more expensive for companies, thus acting as a deterrent to expansion.

Conclusion

The current investment scenario in India is defined by a "paradox of 2025," where strong macroeconomic performance, driven by public investment, has not yet translated into a robust private-sector revival. The government, through massive infrastructure spending and incentives like the PLI scheme, has taken the lead to bolster the economy's productive capacity, but this cannot be a permanent substitute for private investment. The delay by the private sector is not merely due to lack of funds, but to a cautious approach driven by idle capacity, weak demand, and the erosion of margins due to persistent inflationary pressures and uncertain price expectations. While the 2024-25 budget has attempted to create a better environment with the removal of the angel tax and focus on SME credit, the long-term sustainability of India’s 7%+ growth depends on the private sector regaining the confidence to start investing again. Until inflationary pressures are fully anchored and demand improves significantly, the baton for investment is likely to remain in the government's hands. 

Productivity, Market Structure, and the Dynamics of Pricing.....

Introduction

The relationship between productivity and pricing is a cornerstone of economic theory, yet its practical application is fundamentally mediated by the structure of the market. While the productivity theory suggests that gains in efficiency should lead to lower consumer prices, this outcome is not guaranteed. Instead, the final price is determined by the degree of market power held by firms, which dictates whether the benefits of increased productivity are passed on to the consumer or retained as surplus profit. By examining how monopolies and perfectly competitive firms set prices, one can understand the critical role that market entry and supply expansion play in driving price competition.

The Mechanism of Productivity and Market Power

The core of the productivity theory holds that when firms become more efficient—producing more output with fewer inputs—the marginal cost of production falls. In an ideal economic scenario, these cost savings translate into lower prices for the end user. However, market power functions as a filter for these savings. Market power is the ability of a firm to raise prices above marginal cost without losing all its customers. In markets with high barriers to entry, firms can leverage productivity gains to increase their profit margins rather than lowering prices, effectively decoupling productivity from price relief. Consequently, the benefits of innovation and efficiency are often captured by the producer rather than the consumer when competition is absent.

Pricing Disparity Between Monopoly and Perfect Competition

A monopoly and a firm in a perfectly competitive market operate under vastly different pricing incentives. In perfect competition, firms are "price takers" who must accept the market equilibrium price determined by the intersection of aggregate demand and supply. Because many firms sell identical products and entry is free, any individual firm that attempts to price above the market rate will lose its entire customer base. Here, productivity gains almost inevitably lead to lower prices because competitive pressure forces firms to pass savings along to maintain their market share. In contrast, a monopoly is a "price maker" with no close substitutes for its product. A monopolist maximizes profit by restricting output and setting prices where marginal revenue equals marginal cost, often resulting in higher prices and lower output than what would be seen in a competitive environment. For a monopolist, increased productivity may simply result in higher "deadweight loss" or increased producer surplus rather than a cheaper product for the public.

Market Entry and the Catalysis of Price Competition

The transition from a concentrated market to a more competitive one occurs through the entry of new firms. When barriers to entry are low and new participants enter the market, the total supply of the good increases. According to the law of supply and demand, an outward shift in the supply curve—driven by both more firms and their individual productivity improvements—places downward pressure on the equilibrium price. As more firms vie for the same pool of consumers, price competition becomes the primary tool for gaining market share. This competitive process ensures that the "precedents" of high pricing set by former incumbents are challenged. Over time, the influx of competitors transforms the market structure, reducing the market power of any single entity and forcing a closer alignment between production costs and consumer prices.

Conclusion

Ultimately, the theory that productivity leads to lower prices is highly dependent on the competitive landscape. While perfect competition serves as an engine that passes efficiency gains to the consumer, a monopoly can act as a dam, holding back those benefits to maximize private gain. The entry of new firms is the essential mechanism that breaks market power, stimulates supply, and ensures that the fruits of productivity are reflected in the marketplace. Without robust competition, the link between working smarter and paying less is easily severed by those with the power to set the price.

Long-Run Macroeconomic Growth with Deflationary Expectations and Supply-Side Enhancement.....

Economic growth is traditionally viewed through the lens of expanding demand or increased capital accumulation. However, a significant, often overlooked, driver of long-run growth is the interplay between lower prices, downwardly adjusted inflation expectations, and enhanced supply-side efficiency. This model explores how a sustained, lower price environment, supported by lower inflationary expectations, can lead to a rightward shift in the Long-Run Aggregate Supply (LRAS) curve, stimulating potential output. By reducing the nominal cost of inputs and fostering productivity gains, an economy can experience sustainable, non-inflationary growth, reversing the conventional wisdom that lower prices only signify recessionary pressures.

Model Construction

The model relies on the AD-AS framework, operating in the long run where all input costs and expectations are fully flexible. The core equation for Long-Run Aggregate Supply is (Y_{L}=f(K,L,T,P^{e}), where (Y_{L}) is potential GDP, (K) is capital, (L) is labor, (T) is technology, and (P^{e}) is expected price level. In this model, a lower price level (P) and lower inflationary expectations (P^{e}) influence the supply side. When producers expect lower future prices and costs, they invest in cost-saving technology and productive capacity, shifting the Aggregate Supply curve rightward.

Graphically, this involves a downward adjustment in input costs, such as nominal wages and raw material costs, shifting the Short-Run Aggregate Supply (SRAS) curve rightward. In the long run, this persistent shift, coupled with increased productivity from the lower-price environment, causes the vertical LRAS curve to move to the right, indicating a higher level of potential output (Y_{L}).

The mechanism works because, unlike a sudden negative demand shock that reduces output, a gradual reduction in price levels and inflationary expectations (a positive supply shock) allows for lower, more stable production costs. The lower (P^{e}) reduces the need for workers to bargain for high nominal wage increases, which lowers the cost of production and increases the long-run capacity of the economy.

Data Analysis

Data analysis of inflationary periods, such as the Volcker disinflation, indicates that while lower prices initially cause a contraction in output, the long-term impact of lower inflation expectations is stabilizing, enabling stronger growth. Empirical studies on supply shocks show that when price expectations decrease alongside a positive supply-side adjustment, the long-run Phillips curve shows a lower price level without a permanent drop in output.

In a scenario where technology increases productivity, costs fall, leading to lower prices, which allows for increased real income and greater investment in the long run. Furthermore, research suggests that when inflationary expectations are well-anchored at a lower level, the supply chain becomes more efficient, leading to higher, more sustainable output levels. The analysis of decreasing-cost industries, which often accompany lower prices due to technological improvements, confirms that lower prices can coincide with higher supply, shifting the long-run supply curve to the right.

The long-run model of economic growth with lower prices and lower inflation expectations demonstrates that downward pressure on prices can, in fact, drive economic growth. By reducing input costs and aligning inflationary expectations to a lower, more stable rate, an economy enhances its productive capacity, illustrated by a rightward shift in the LRAS curve. While the transition may involve short-run adjustments, the long-run equilibrium achieves higher potential GDP through increased efficiency and lower costs. Therefore, policy frameworks that foster productivity-led, lower price environments are conducive to sustainable, long-term expansion rather than merely causing deflationary stagnation.

RBI’s February 2026 Policy: A Delayed Response to Low Underlying Inflation and Sluggish Demand.....

The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) decision on February 6, 2026, to maintain a status quo on the repo rate at 5.25% and retain a "neutral" stance, despite a challenging deflationary environment, represents a critical, albeit arguably delayed, acknowledgement of the "low inflation" problem. While headline inflation has shown signs of a slight uptick due to volatile precious metal prices, the underlying economic reality—when excluding gold and silver—is one of exceptionally benign price pressures and weak consumer demand, pointing to a need for continued monetary easing. The decision reflects an excessive, albeit cautious, focus on headline numbers, failing to address the acute need to stimulate spending and rectify the imbalances in supply and demand in the economy.

Low Inflation and the "Ex-Gold/Silver" Reality

The core issue facing the Indian economy in early 2026 is that inflation has consistently operated well below the 4% target. While the RBI projected CPI inflation for FY26 at 2.1% (up from 2.0%), the underlying, or "core," inflation remains exceptionally low, suggesting that the economy is facing a deflationary, rather than inflationary, pressure. The "headline" numbers have been artificially elevated by a sharp surge in gold and silver prices (36% year-on-year in some segments), which are essentially safe-haven investments rather than consumer goods demand. When excluding these components, the underlying price pressures are extremely subdued, bordering on deflationary in some sectors, suggesting the RBI is overreacting to volatility in precious metals.

Delay in Addressing Spending and Demand

The refusal to cut rates is a failure to address the sluggishness in consumer demand. While GDP growth is projected at a robust 7.4% for FY26, this number is heavily supported by government-led capital expenditure rather than widespread private consumption. Urban consumption, in particular, remains weaker than rural consumption, which has only recently shown signs of recovery. The continued high cost of credit, which has not fully transmitted to the final consumer despite 125 bps of easing throughout 2025, is limiting spending. The RBI's "wait-and-watch" approach is a significant delay in acting, as the "real" interest rate remains elevated, hindering economic velocity.

Supply and Demand Mismatch

The current economic conditions are characterized by a supply-side that has recovered well—supported by favourable monsoons and high production—outpacing the demand-side, which is lagging. The economy has seen a "Goldilocks" scenario turn into a "weak-demand" scenario, where the supply of goods is ample (keeping food inflation low), but consumer purchasing power, especially in urban areas, is not keeping pace. The RBI's decision to pause, thus, fails to address this structural weakness. A cut in the repo rate would have lowered the cost of credit, boosting consumption and helping to bridge the gap between strong supply and weak consumer spending.

In conclusion, the RBI’s decision to keep the repo rate at 5.25% in February 2026 is a "wait-and-watch" approach that acts as a delay in addressing the core problem of low, non-commodity-driven inflation and the need to boost consumption. By focusing on headline CPI, which is distorted by gold prices, the MPC is overlooking the underlying deflationary pressures that require a more accommodative stance. With private demand still weak and supply conditions strong, the status quo acts as a drag on economic potential, delaying the necessary stimulus to make growth more inclusive and robust. The decision is a "delayed acceptance" of the low-growth-demand reality, prioritizing a rigid inflation target over a needed boost to spending.

The Paradox of Rate Cuts: Why Below-Target Inflation and High Real Rates Demand Policy Easing.....

When central bank inflation targets are set, they are generally intended to provide a stable, small positive buffer to encourage spending and prevent deflationary spirals, usually around 2% to 4% depending on the institution. A situation where inflation and expectations are running at 2%—significantly lower than a 4% target—creates a scenario of high real interest rates that can stifle economic activity. Despite the conventional view that rate cuts stimulate spending, the prevailing economic conditions, characterized by high nominal rates (e.g., 5.25%) relative to low inflation (2%), create a "real" interest rate that is higher than the long-run neutral rate. Consequently, this environment raises expectations for rate cuts, which are ironically necessary to prevent a, or, paradoxically, to reinforce, a, or delay in, spending, ultimately preventing inflation from falling further.

The Dynamics of High Real Rates and Low Inflation

In this scenario, inflation and its expectations have anchored at 2%, which is 2 percentage points below the 4% target. According to the Fisher Equation, the real interest rate is calculated as the nominal interest rate (5.25%) minus inflation (2%), resulting in a real rate of 3.25%. If the long-run neutral rate (the rate that neither speeds up nor slows down the economy) is 2%, a real rate of 3.25% is significantly contractionary. This means money is expensive, making borrowing costs for consumers and businesses high.

When inflation is this low (or falling), the real value of debt increases. Savers benefit, but borrowers are penalized, leading to a reduction in consumption and capital expenditure. The high real rate acts as a barrier to investment. As seen in recent economic data, when inflation drops below the central bank’s target range, the real policy rate becomes too restrictive, often acting as a drag on private investment and overall economic growth.

Why Rate Cut Expectations Rise

With inflation running well below the 4% target, the central bank’s monetary policy is deemed too tight. The primary mandate of most central banks is to keep inflation around their target; thus, inflation at 2% versus 4% indicates an over-tightening of policy. Market participants and analysts therefore increase their expectations for rate cuts to bring the real rate back down closer to the neutral rate (2%).

The high real rate (3.25%) represents a "drag" on the economy. To prevent inflation from falling further, or potentially entering a deflationary spiral where consumers delay spending in expectation of lower future prices, rate cuts are necessary to incentivize economic activity. Furthermore, when inflation falls below targets, central banks must act to prevent "low inflation traps" which can lead to weak demand and, ironically, even lower inflation in the future.

How Rate Cuts Reinforce Spending

Cutting the 5.25% nominal rate, for instance, to 4.5% would immediately lower the cost of borrowing. This eases the burden on households and businesses, encouraging increased, rather than delayed, spending. If the 3.25% real rate is currently causing a slowdown, a reduction in the nominal rate reduces this real burden, boosting consumption and investment.

The delay in spending occurs when real rates are high because the cost of capital is prohibitive. By lowering the nominal rate, the central bank reduces the real rate (nominal rate - inflation), thereby reducing the cost of borrowing, which should boost investment and consumption, making loans more affordable. Therefore, contrary to the fear that rate cuts might not immediately spark spending, they are necessary to remove the high-cost barriers that are causing the delay in the first place.

A situation where inflation (2%) is significantly below a 4% target means that a 5.25% nominal rate produces a high real interest rate, which is restrictive. This high real rate (3.25%) is far above the estimated 2% neutral rate, which causes a, or, paradoxically, to reinforce, a, or delay in, spending, ultimately preventing inflation from falling further. The resulting economic slowdown drives expectations for rate cuts. These cuts are designed to reduce the high real cost of borrowing, encouraging consumption and business investment, thereby preventing the economy from falling into a low-inflation, low-growth trap, or, or, paradoxically, to reinforce, a, or delay in, spending, ultimately preventing inflation from falling further. Thus, rate cuts in this scenario are essential to re-accelerate spending and bring inflation back up to the target.