Inflation is “Under Control” — But Life is Getting More Expensive. Why?

General Studies Paper 3 — Indian Economy
Source: Reserve Bank of India / Periodic Labour Force Survey, 2026

1. The Core Confusion

The Reserve Bank of India says inflation is within its target band of 2% to 6%. But ordinary people feel life is getting more expensive every year. Both are correct — and that is the problem.

Falling inflation does not mean falling prices. It only means prices are rising more slowly than before. The damage from past price rises has already accumulated — and incomes have not caught up.

2. The Real Picture — Prices vs Incomes Over 12 Years

Price Level vs Income Growth (2014–2026)

Cumulative Price Rise Since March 2014

• ₹100 → ₹175 today
• +75% rise in cost of living

What Your Income Needed to Grow By — Just to Stay Even

• At least +75%
• To maintain the same standard of living

Simple way to understand: A basket of goods that cost ₹100 in 2014 now costs ₹175. If your salary did not grow by at least 75% in 12 years, you are actually poorer today — even though the inflation “rate” looks fine on paper.

Who Kept Up With Prices and Who Did Not?

(Periodic Labour Force Survey data, 2017–2024)

Category	Observation
Salaried and Self-Employed Workers	Income growth lagged behind the price rise. In real terms, they became poorer over time and lost purchasing power.
Casual Labourers (Daily Wage Workers)	Daily wages grew faster than the price index, but they still earned the least in absolute terms (about ₹13,590 per month compared to ₹22,699 for salaried workers).

3. Why the Reserve Bank of India Alone Cannot Fix This

• RBI’s main tool is interest rates. It can raise the Repo Rate to slow demand, but that also slows growth and reduces job creation. It cannot raise wages.
• Current inflation is supply-driven — caused by geopolitical oil price shocks (West Asia conflict, Strait of Hormuz blockade). Monetary policy is largely ineffective against supply shortages.
• A structural solution is needed: reduce oil import dependence, improve agricultural supply chains, and focus on policies that create real wage growth rather than merely suppressing demand.

4. Value Box — Key Frameworks and Bodies

Flexible Inflation Targeting (Introduced in 2016)

Introduced through an amendment to Section 45ZA of the RBI Act, 1934.

• Target: 4% inflation
• Tolerance Band: ±2% (2% to 6%)
• Retained for another five years (April 2026 to March 2031)
• The anchor is the Headline Consumer Price Index (CPI)

Monetary Policy Committee (MPC)

• 6-member statutory body
• 3 members from the Reserve Bank of India
• 3 external experts appointed by the Government
• Headed by the RBI Governor
• Decides the policy Repo Rate to achieve the inflation target

Periodic Labour Force Survey (PLFS)

• Launched in 2017 by the Ministry of Statistics and Programme Implementation
• Tracks employment, unemployment, and income data across India
• Replaced the older five-yearly surveys conducted by the National Sample Survey Office (NSSO)

Prelims Practice Question

Consider the following statements regarding India’s inflation targeting framework and the Monetary Policy Committee:

1. India’s Flexible Inflation Targeting framework was introduced through an amendment to the RBI Act, 1934, with a target of 4% and a tolerance band of 2% to 6%.
2. The Monetary Policy Committee has 6 members — 3 from the Reserve Bank of India and 3 external experts — and is headed by the Union Finance Minister.
3. The Periodic Labour Force Survey, which provides employment and income data, was launched in 2017 by the Ministry of Statistics and Programme Implementation, replacing the older quinquennial surveys.

(a) 1 and 2 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3

Correct Answer: (c) 1 and 3 only