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.
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