Context
Although low inflation is generally seen as positive for consumers, it can create macroeconomic challenges for the government—especially by affecting tax revenues, budget planning, and fiscal stability.
Recent Economic Indicators
- CPI inflation fell to 2.07% in August 2025, well below the RBI’s 4% target.
- WPI inflation remained subdued at 0.52% in August 2025.
- Real GDP growth rose to 7.8% in Q1 (April–June 2025)—a five-quarter high.
- However, nominal GDP growth slowed to 8.8%, a three-quarter low.
- The Union Budget 2025–26 assumed 10.1% nominal GDP growth, projecting GDP at ₹357 lakh crore.
- Yet, gross tax revenue rose by only 1% (Apr–Jul 2025) year-on-year, while net tax revenue fell by 7.5%.
Why Low Inflation Is a Problem
Low inflation leads to lower nominal GDP growth since nominal GDP = real GDP + inflation. This becomes problematic because:
- Budget Targets Become Hard to Achieve
Government revenue projections are based on nominal GDP, not real GDP. The Budget expected ~11% growth in net tax revenue, but slower price growth means lower-than-expected tax collections.
- Fiscal Deficit Ratio Appears Worse
Fiscal deficit and government debt are calculated as a percentage of nominal GDP. If nominal GDP is lower than expected:
- The fiscal deficit ratio rises, even if spending stays constant.
- The FRBM targets become difficult to meet.
- Tax Collection Suffers
- Direct taxes grow slowly due to subdued income growth.
- Indirect taxes (GST, excise duty) fall with weak price growth and consumption.
- Revenue shortfalls force the government to either borrow more or cut spending.
Corporate Sector Dynamics
- RBI data shows private firms’ sales rose just 5.5%, while profits jumped 17.6% in Q1 2025–26.
- Despite strong profits and high cash reserves, private investment (capex) remains weak.
- This lack of investment raises concerns about future economic growth momentum.
Broader Economic Implications
| Concern | Impact |
| Low nominal growth | Lower tax revenue |
| Fiscal pressure | Higher deficit-to-GDP ratio |
| Weak capex | Slower job creation |
| Limited inflation | Possible deflationary risk |
Key Economic Concepts (Quick Revision)
- CPI – Measures retail inflation impacting consumers.
- WPI – Measures wholesale price movements.
- Nominal GDP – GDP measured at current prices, includes inflation.
- Real GDP – Adjusted for inflation.
- Fiscal Deficit – Expenditure > Revenue gap for the government.