less inflation more growth
India is currently going through a special economic phase, where inflation is almost zero and the economy is growing at a fast pace of more than 8%. The Reserve Bank of India (RBI) has cut the policy repo rate four times this year, due to which the overall interest rate has decreased by 1 percentage point. Experts are calling this the Goldilocks era. That means fast growth, low inflation and full scope to support the economy. Let us know about it and understand which section of the country will be the real beneficiary of this situation.
According to the Times of India report, at first glance it seems to be completely good news that the consumer inflation rate (CPI) has fallen to around 0.25%, which is the lowest level ever. Wholesale inflation has become negative. At the same time, GDP growth in the latest quarter is estimated to be around 8.2%, in which both manufacturing and service sectors have contributed. But the effect of this economic comfort is not the same on every Indian and nor will it be in the future.
For urban workers and loan borrowers, lower interest rates and lower prices can provide some relief in EMIs and help in managing the monthly expenses easily. At the same time, for retired people, this cut in interest rates can be a cause of concern for their already decreasing interest income. For farmers selling crops like onion, potato or pulses at low prices, low inflation means direct loss.
What is Goldilocks period?
Ranen Banerjee, partner and head of economic advisory, PwC India, told TOI that the period of low inflation and fast growth is called the Goldilocks period. This means that interest rates remain soft. Inflation appears to be low but farmers will suffer more losses due to it.
Why is inflation so low?
The biggest reason for the decline in inflation is the sharp decline in the prices of food items. According to government data, food inflation has come down significantly and vegetable prices have fallen by 30% or more in a few months. Pulses and some grains have also become quite cheap in the wholesale market.
Also read- Will the rupee boom due to India-US trade deal? Currency will improve!
who is benefiting
Since RBI has recently cut the repo rate, the low policy rates are clearly beneficial for those people and companies who have taken floating interest rate loans. When interest rates were high, banks passed the burden on the customers, due to which the EMI increased rapidly. Now after the full 1 percent reduction in repo rate, customers are expected to get relief on loans linked to external benchmark. Over time, when banks review interest rates again, the installments of home loans, car loans and some business loans may reduce.
However, the problem is that banks do not show as much speed in reducing interest rates as they do in increasing them. In such a situation, customers may have to wait for their loan review date or may have to put pressure on the bank to give full benefits. The Government of India is also one of the biggest borrowers in the country. Low interest rates reduce the government’s debt repayment burden and create scope for spending more on infrastructure and public welfare schemes or reducing the deficit faster. Open market purchases of government bonds by the RBI and foreign exchange-related measures help keep bond yields under control. This provides a way for the Center and the states to easily meet their borrowing needs.
Companies are benefiting
Along with this, this 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, both together encourage expansion plans, merger and acquisition activities and new recruitments.
who is getting harmed
The deepest impact of low inflation is visible not in AC offices or bank branches, but in the markets. The fall in food prices that is bringing down the CPI and WPI is also suppressing the income of farmers. Onion is being sold at Rs 2-6 per kg in many wholesale markets, which is much less than the cost. Potato prices in some North Indian mandis have fallen by Rs 600-1,000 per quintal since last year. Pulses and cotton are also trading below the minimum support price at times.
This is a relief for consumers, but a crisis for farmers. When prices fall, small farmers are left with tough choices like selling at a loss, storing expensively or destroying their produce. 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 we see growth but agricultural incomes remain under pressure.
Also read- Startup India Mission is amazing, due to the efforts of the government the figure of 2 lakhs has been crossed