Mains Practice Questions

Introduction

India’s GDP growth has averaged around 6-7% over the past years, while inflation (rate of increase in prices) has typically hovered around 4-5%. While these steady indicators are often viewed as signs of a healthy economy, it is crucial to observe the broader economic context to determine whether they truly reflect long-term economic stability and well-being.

Body

Economic Benefits of Steady GDP Growth and Low Inflation:

• Investment and Economic Stability: Steady GDP growth and low inflation (prices are rising slowly), foster a stable economic environment that boosts investor confidence, encourages long-term investments, and enhances the competitiveness of Indian exports.
  • This stability attracts FDI and FII, as per UNCTAD, India ranked 8th globally in terms of FDI inflows in 2022 and received FDI inflows of USD 49.3 billion.
• Increased Disposable Income and Demand: Low inflation leads to higher real wages and greater disposable income, as prices rise at a slower pace, allowing consumers to purchase more goods and services with the same amount of money.
  • It also helps maintain stable interest rates, which benefits credit-dependent sectors like industry and corporates, enabling more efficient expansion.
• Reforms and Revenue Growth: Steady GDP growth empowers the government to implement key reforms such as the GST, which generated over ₹20 lakh crore in FY 2023–24, an 11.7% increase from the previous year.
  • This revenue boost enabled higher social spending, including a 6% rise in the allocation to the Ministry of Women and Child Development in FY 2023–24.

Limitations of Steady GDP Growth and Low Inflation:

• Real Interest Rates and Investment: Low inflation, while promoting price stability, can lead to higher real interest rates, making borrowing costlier for businesses.
  • This may suppress private investment, particularly in capital-intensive and credit-reliant sectors like MSMEs, housing, and infrastructure.
• Jobless and Unequal Growth: India’s unemployment rate rose to 9.2% in June 2024 from 7% in May (CMIE). Despite strong GDP growth, labour absorption remains weak, especially among youth and women.
  • Growth is largely capital-intensive, with sectors like IT and finance dominating, while labour-intensive industries lag.
    • The World Inequality Report (2022) notes a widening gap between the top 10% and bottom 50%, reflecting rising income inequality.
• Fiscal Deficit: While GDP growth contributes to revenue generation, it may not always result in sufficient tax revenue if nominal GDP growth slows down.
  • The government may then face challenges in meeting fiscal deficit targets, forcing expenditure cuts that can affect public welfare programs.
• Agrarian Distress: Persistently low food inflation reduces farmers’ incomes. According to NABARD’s Financial Inclusion Survey (2022), over half of rural households rely on agriculture, yet many face falling returns, growing indebtedness, and stagnating wages, leading to increased rural unrest.

Conclusion

Steady GDP growth and low inflation highlight India's stability but mask issues like inequality and unemployment. Structural reforms in taxes, labour markets, and financial inclusion, along with a focus on skills, entrepreneurship, and rural support, can drive sustainable, inclusive growth. Prioritizing MSME loans and labor-intensive industries will help ensure long-term stability.