Inflation & Slow Growth Rate: India’s Double Trouble

India’s rate of inflation rose, or more precisely, the Consumer Price Index, which is the most reliable means of gauging retail inflation, rose to 6.21 per cent in October, compared to its low of 3.6 per cent in July. This is a major development in an economy like that of India, which has a GDP per capita of under USD 2,500.

In addition, India, which was one of the fastest-growing economies in the world, saw its GDP slump in the second quarter of FY25. Here, the GDP grew at the rate of 5.4 per cent, compared to 6.7 per cent in the quarter before that (Q1FY25).

Now, why do these factors matter?

The GDP growth rate and the rate of inflation are two important metrics that allow us to look into the progression of an economy in the short term while aiming for the long term. In addition, it also gives us a look into the feasibility of the steps that stakeholders of the economy can take.

How Did We Get Here?

While the inflation rate has since dipped, it continues to be above the RBI threshold, and this, needless to say, pushes the purchasing capacity of the consumers further, chaining the economy to a vicious feedback loop.

When it comes to the growth rate, broadly, the GDP can be deemed as the total result of four fundamental tenets of the economy.

It starts with the government; here, the growth rate and its calculation would involve government outlay in a given period. Then comes business, the total investment poured in by corporations. In an economy like that of India, where public sector undertakings play a pivotal role, investment from the sector also plays a role.

Then we come to the third pillar, the aforementioned consumption in the economy, and finally, we come to the next value of exports and imports made in a given period.

Now, when it comes to the current state of the economy, these factors collectively play a role in resulting in changes to the growth rate, along with the rate of inflation.

A rise in inflation, as suggested before, leaves a truncated domestic market. This is the case because a rise in the prices of commodities and an adjacent slump in the value of the currency shrink the space for consumption. This in turn brings down investment in business or businesses.

Now, how did these factors affect the Indian economy? Similar to the developments in the 2010s, the Great Recession affected not just stocks on Wall Street but also brought the global fiscal system to its knees.

A similar story was woven in this case as well, only there are more chapters here. It all started with the pandemic that brought the global economy to a near standstill; this ended up impacting not just various sectors, but economies as well. 

Globally Domestic 

China, after an initial spurt, has been crawling at a snail’s pace; meanwhile, the European Union and its constituents started running deficits, with the continent’s engines, Germany and France, stuttering as the world tried to get out of the wreck.

 The disrupted supply chain only grew more fragile as another era of conflicts packed with multiple war fronts opened up. It started with Ukraine and Russia, and this was followed by the crises in the Middle East. The kerfuffles in the Sahel region, along with volatilities in eastern Africa, definitely did not aid the course.

The factors put greater pressure on the supply chain, further slowing down the wheels of progress. 

Amid these myriad issues, India’s own wage problem, in which wages do not grow as per inflation, ballooned to affect ordinary citizens.

In addition, the recent, additional uncertainties induced by the old, new Trump administration have further strengthened US prospects (at least in the interim), evidenced by the surge in the value of the US dollar.

 In addition, this has also “bestowed” a significant depletion of reliability and the visible potential of emerging markets, evidenced by the decline of the Indian equity markets over the past few weeks and even months.