Very low inflation makes groceries feel affordable, but it can quietly hurt government finances, company profits, jobs and overall growth if it lasts too long.

What is happening 

India has recently seen soft price rise. Headline consumer inflation has cooled, wholesale prices are mild, and some food items have even turned cheaper. Real output (the physical quantity of goods and services) is holding up, but the price part of growth is weak. That means nominal GDP (growth measured in rupees) is slower than expected. When nominal GDP slows, tax revenues grow more slowly and deficit targets get harder.

Why this matters right now

• Union Budget math usually assumes a certain nominal GDP growth (real growth + inflation).
  
• If actual inflation stays very low, the same real growth delivers fewer rupees, so:
  
  • Tax collections grow more slowly.
    
  • Fiscal deficit (as % of GDP) becomes harder to meet.
    
  • Companies find it tough to raise prices, margins get thin, and hiring/capex can slow.
    

Key terms

• Inflation: Average increase in prices across the economy.
  
• Real growth: Growth in output after removing price effects. Think “more goods/services.”
  
• Nominal growth: Growth measured in current rupees; combines real growth + inflation.
  
• Nominal GDP: The rupee value of all goods and services produced in a year.
  
• Real interest rate: Loan rate minus inflation. If inflation falls but loan rates don’t, real rates rise.
  
• Fiscal deficit (as % of GDP): Government’s annual borrowing need compared to the economy’s size.
  
• Tax buoyancy: How strongly tax revenue grows when the economy grows.
  

Why very low inflation can be a problem

A) It pulls down nominal GDP

Simple idea: Nominal GDP = Quantity × Price.

• When prices barely move, the total rupee size of the economy grows slowly even if we are producing more.
  
• A smaller rupee pie means slower income growth for households, firms and the government.

B) Tax collections rise more slowly

• Most taxes (GST, corporate tax, income tax) are linked to rupee turnover and profits.
  
• If selling prices are flat, tax buoyancy weakens unless volumes explode or compliance improves sharply.

C) Budget arithmetic gets tight

• Deficit targets are easier when nominal GDP grows fast.
  
• If nominal growth undershoots assumptions, the deficit ratio looks worse unless spending is trimmed or revenues surprise on the upside.

D) Real borrowing costs go up

• With low inflation, real interest rates rise unless policy rates are cut.
  
• Loans feel heavier for homebuyers, MSMEs and farmers, which can delay investment and hiring.

E) Pricing power and profits shrink

• Companies struggle to pass on input cost spikes.
  
• Thin margins reduce cash for expansion and salary growth, slowing demand further.

F) Farmers and small producers feel the pinch

• Fixed costs (power, wages, logistics) don’t fall as easily as output prices.
  
• When farm-gate or factory-gate prices stay low, incomes and future investment plans suffer.

G) Debt dynamics worsen

• Moderate inflation normally erodes the real value of old debt.
  
• With very low inflation, the real burden of debt stays heavier for governments and leveraged firms.
  

Bottom line: Low inflation is pleasant for shoppers, but if it stays too low for too long, it can cool jobs, incomes and public investment.

But isn’t low inflation good for people?

Yes—up to a point.

• Protects purchasing power of fixed incomes and wages.
  
• Reduces uncertainty for poor households who spend more on food and basics.
  
• Anchors expectations; helps plan budgets.
  

The catch: If low inflation persists without strong volume growth, it shrinks rupee incomes, slows tax growth, and raises real interest costs—hurting the same households through weaker jobs and public services.

What India should do 

Monetary policy (RBI)

• Stay near the 4% goal but avoid over-tightening when inflation hugs the lower band (2–3%).
  
• If low inflation persists and growth is steady, consider measured rate cuts to stop real rates from drifting too high.
  
• Keep liquidity conditions even so credit flows to MSMEs, housing and capex.
  

Fiscal policy (Union & States)

• Protect public capex (roads, rail, power, water, digital). This supports demand and jobs even if nominal tax growth slows.
  
• Broaden the tax base: tighten compliance, invoice matching and targeted audits to lift GST efficiency without raising rates in a soft-price year.
  
• Prioritise quality of spending: maintain social protection and productivity-boosting outlays; trim low-impact revenue expenditure where possible.
  

Supply-side moves

• Food management: timely buffer releases, imports/exports calibrated to prevent sudden spikes and avoid crashes that harm farmer incomes.
  
• Cut input frictions: reliable power, lower logistics costs, faster ports—so firms gain from low inflation through lower costs, not lower margins.
  
• Deepen bond markets so firms can refinance at better rates when policy becomes supportive.
  

Exam hook 

Key takeaways

• Good for consumers, but persistent very low inflation can thin profits, jobs and tax revenues.
  
• Nominal GDP matters for Budget math; low prices tighten the deficit path.
  
• Real interest rates can rise when inflation falls faster than loan rates.
  
• Balanced policy: protect capex, improve tax efficiency, calibrate rates, and ease supply costs.
  
• Watch core inflation, nominal GDP, GST, and credit conditions over the next two quarters.
  

UPSC Mains question

“Low and stable inflation is desirable, but very low inflation can complicate fiscal consolidation and growth.” Examine with reasons. Suggest a short-term policy mix for India that protects capex and manages real interest rates. (250 words)

UPSC Prelims question 

1. Consider the following statements about a situation where real GDP growth is steady but inflation falls sharply while policy interest rates are unchanged:

1. Nominal GDP growth is likely to slow.
   
2. Real interest rates are likely to rise.
   
3. Tax revenues automatically accelerate due to stronger volumes.
   
4. The fiscal deficit ratio becomes easier to meet.
   

Which of the statements given above are correct?
(a) 1 and 2 only
(b) 1 and 3 only
(c) 2 and 4 only
(d) 1, 2 and 4 only

Answer: (a)
Explanation (in one line): Low inflation slows nominal growth and lifts real borrowing costs; tax flows do not automatically speed up, and deficit ratios usually get harder, not easier.

One-line wrap

Low inflation is sweet for the thali—but if it stays too low for too long, it can shrink the rupee engine that feeds jobs, revenues and growth.