Low inflation and high growth, Indian economy at 'Goldilocks'...who is getting the real benefit?

India is currently experiencing a unique economic phase, with near-zero inflation and a robust economy growing at over 8%. The Reserve Bank of India (RBI) has cut the policy repo rate four times this year, reducing interest rates by a combined 1 percentage point. 

Experts are calling this a Goldilocks era, meaning rapid growth, low inflation, and ample room for economic support. Let's explore this and understand which segments of the country will truly benefit from this situation.

According to a Times of India report, at first glance, it seems entirely good news that the consumer price inflation (CPI) has fallen to around 0.25%, its lowest level ever. 

Wholesale inflation has turned negative. Meanwhile, GDP growth is projected to be around 8.2% in the latest quarter, driven by both manufacturing and service sectors. However, this economic relief is not affecting every Indian equally, nor will it in the future.

For urban workers and borrowers, lower interest rates and lower prices can provide some relief from EMIs and help them manage their monthly expenses more easily. 

For retirees, these same interest rate cuts can cause concern given their already dwindling interest income. For farmers who sell their crops like onions, potatoes, and pulses at low prices, lower inflation means a direct loss.

What is the Goldilocks period?

Ranen Banerjee, partner and head of economic advisory at PwC India, told TOI that a period of low inflation and rapid growth is called a Goldilocks period. This means that interest rates remain soft. Inflation appears to be low, but farmers will bear the brunt of this.

Why is inflation so low?

The biggest reason for the decline in inflation is the sharp decline in food prices. According to government data, food inflation has fallen significantly, with vegetable prices falling by 30% or more in some months. Pulses and some grains have also become significantly cheaper in the wholesale market.

Who is benefiting?

Since the RBI recently cut the repo rate, lower policy rates are clearly beneficial for individuals and companies with floating-rate loans. When interest rates were high, banks passed the burden on to customers, leading to sharp increases in EMIs. 

Now, with the full 1 percent cut in the repo rate, customers with loans linked to external benchmarks are expected to see some relief. Over time, when banks review interest rates again, home loan, car loan, and some business loan installments may be reduced.

However, the problem is that banks are not as quick to reduce interest rates as they are to increase them. Consequently, customers may have to wait for their loan review date or pressure the bank to pass on the full benefit. The Indian government is also one of the country's largest borrowers. 

Lower interest rates ease the government's debt repayment burden and allow for more spending on infrastructure and welfare schemes, or for faster deficit reduction. 

The RBI's open market purchases of government bonds and foreign exchange-related measures help keep bond yields in check, allowing the central and state governments to more easily meet their borrowing needs.

Companies are benefiting

Additionally, the environment is almost ideal for companies. Demand is growing, interest rates are falling, and inflation is low and predictable. 

International rating agencies and global investors have taken note, and many have revised India's growth forecasts upward. Cheap capital and strong demand together encourage expansion plans, merger and acquisition activity, and new hiring.

Who is being harmed

The deepest impact of low inflation is being felt not in air-conditioned offices or bank branches, but in the markets. The decline in food prices, which has brought down the CPI and WPI, is also suppressing farmers' incomes. 

Onions are selling at ₹2-6 per kg in many wholesale markets, well below cost. Potato prices in some North Indian markets have fallen by ₹600-1,000 per quintal since last year. Pulses and cotton are also sometimes trading below the minimum support price.

This is a relief for consumers, but a crisis for farmers. Falling prices leave small farmers with difficult choices: selling at a loss, storing produce at a high cost, or destroying it. If food deflation persists, rural demand will weaken, leading to cuts in non-essential spending, education, and health. 

On the other hand, low interest rates provide relief to borrowers, industry, and MSMEs, supporting investment and employment. This is the Goldilocks balance, where growth is visible, but agricultural incomes remain under pressure.