India’s inflation has fallen sharply in 2025, with CPI-based inflation at 2.07% in August 2025 and WPI-based inflation at 0.52%. While this benefits consumers, it creates challenges for government finances, affecting revenue, fiscal deficit, and debt management.

About Inflation

• Inflation: It refers to the sustained rise in the general price level of goods and services in the economy. 
  • A moderate level of inflation is normal, but very high or very low inflation distorts economic decisions.

How is Inflation Measured?

In India, inflation is primarily measured by two main indices WPI (Wholesale Price Index) and CPI (Consumer Price Index), which measure wholesale and retail-level price changes, respectively.

About Consumer Price Index (CPI) – Retail Inflation

• CPI Measures the change in the retail prices of goods and services with reference to a base year.
• Compiled by: National Statistics Office (NSO), Ministry of Statistics and Programme Implementation (MoSPI).
• Base Year: 2012
• Types of CPI: In India, along with the general CPI (CPI–Combined), segment-specific indices are also published to cater to different population groups:
  • CPI (IW): Consumer Price Index for Industrial Workers
  • CPI (AL): Consumer Price Index for Agricultural Labourers
  • CPI (RL): Consumer Price Index for Rural Labourers

Wholesale Price Index (WPI)

• WPI: It measures the average change in wholesale prices before the retail level.
• Coverage: It covers only goods, excluding services.
• Compiled by: Office of Economic Advisor, Ministry of Commerce and Industry (on a monthly basis).
• Base year: 2011-12.
• Composition of Basket: Comprises 697 items categorized into three major groups:
  • Primary Articles (Weight: 22.618 out of 100): Consists of 4 sub-groups: Food Articles; Non-Food Articles; Minerals; and Crude petroleum and natural gas.
  • Fuel and Power (Lowest weight: 13.152 out of 100): Consists of 3 sub-groups: Coal; Mineral Oils; Electricity. 
  • Manufactured Products (Highest weight: 64.230 out of 100): Consists of 22 sub-group

Factors leading to Low Inflation

• Supply-Side Improvements: Strong agricultural production and improved supply chains can help ensure better availability of essential goods, keeping food inflation low.

• Global Commodity Trends: Declining global prices of crude oil, edible oils, and other commodities can reduce imported inflationary pressures on the domestic economy.
• Monetary Policy Actions: The Reserve Bank of India’s measures such as repo rate hikes, tighter liquidity, and macroprudential steps can curb demand-pull inflation.
• Base Effect in Price Index:  A high base in the previous year makes current year inflation rates appear lower, even if prices are stable or rising slowly. 
  • The nominal GDP for 2024–25 was revised upwards by 2 percent to Rs 331 lakh crore.
  • This revision means that the government needs only around 8 percent growth in 2025–26 to reach the budgeted figure of Rs 357 lakh crore.
  • However, with nominal growth already slowing to 8.8 percent in April–June and expected to weaken further, even this reduced target may be difficult to achieve.

Inflation and GDP Growth

• GDP Growth: Gross Domestic Product measures total monetary value of all finished goods and services produced within a country’s borders over a specific period, typically a year or a quarter
  • Growth in GDP reflects how fast the economy is expanding in terms of income and output.

• Interlinkage: Inflation influences the nominal size of GDP, while real GDP reflects only output growth adjusted for price changes. 
  • Nominal GDP as fiscal anchor: Budget calculations (tax revenue, fiscal deficit, debt-to-GDP ratio) are tied to nominal GDP size and growth.
  • Budget Assumptions: When the Finance Ministry prepares the Union Budget, it assumes a certain growth rate for nominal GDP in the upcoming year.
  • Example: Union Budget 2025–26 assumed Rs 357 lakh crore nominal GDP (10.1% growth).
  • If nominal GDP is expected to grow at 10.1% , it implies that overall economic activity in money terms is going up by that much.
  • The government then projects tax revenues in line with this assumption.
  • With inflation being low, nominal GDP growth has been weaker than anticipated so far this year
• Meeting this nominal GDP number is important for two key indicators:  Fiscal deficit & Central government debt, both of which are measured as a percentage of the nominal GDP. 
  • As long as the nominal GDP number is achieved, the fiscal deficit target of 4.4 per cent and the debt-to-GDP ratio estimate of 56.1 per cent will be satisfied (Assuming the fiscal deficit does not exceed the Budget estimate)
• Revenue impact: Tax collections, including GST, direct taxes, and indirect taxes, are dependent on the value of transactions rather than merely the physical volume of output.
  • Between April and July 2025, gross tax revenue increased by only 1 percent year-on-year, while net tax revenue fell by 7.5 percent compared to the same period in the previous year.

Is Low Inflation Bad?

Low inflation is generally considered good for consumers as it protects purchasing power. However, its impact depends on the underlying reasons.

• Positive Side:
  • Consumer Benefit: Households face lower prices for essential goods and services.
  • Monetary Stability: Predictable and stable prices reduce uncertainty in financial planning.
  • Global Competitiveness: Exporters may benefit if production costs remain subdued.
• Negative Side (when too low):
  • Nominal GDP Growth Impact: Low inflation reduces nominal GDP growth, undermining tax revenue projections.
  • Fiscal Stress: Lower nominal growth affects fiscal deficit and debt-to-GDP targets.
  • Corporate Investment Weakness: If low inflation is due to weak demand, firms may hesitate to invest despite high profits.
  • Risk of Deflation: Persistently low inflation may tip into deflation, discouraging consumption and growth.

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