Growth Inflation And The Gaps In Between What Latest Rbi Annual Report Says About Where India Stands

TITLE: Growth, inflation & the gaps in between: What latest RBI annual report says about where India stands CHANNEL: ThePrint DATE: 2026-06-02 ---TRANSCRIPT--- [cough] [clears throat]

Mutual fund investments are subject to market risks. Read all scheme related documents carefully. Hello and welcome to the print. This is Bidisha and you’re watching economics. In macroeconomics, we have a simple framework for evaluating how well an economy is doing. Three questions are usually asked. Is it growing and is that growth broad-based? Is inflation under control and are the public finances sustainable? Get all three right simultaneously and you have what we call a stable macroeconomic environment. It sounds simple, but it is extraordinarily difficult to achieve, especially in a turbulent global year. The RBI’s annual report for 2025-26 just answered all three questions for India. And the answers are worth examining carefully. So, today we are not chasing headlines. We are not talking about one bad quarter, a currency wobble, or whatever came out of Washington this week. We are going to do what economists do. We are going to read the full picture with the data in front of us and let the numbers speak. Five chapters, one economy. Let us begin with chapter one. The growth number and why it matters that you look beyond the headline. Let’s start with the number everyone reaches for first, India’s real GDP. The total value of everything the country produced and adjusted for inflation grew at 7.6% in 2025-26. That is up from 7.1% the year before. Now, 7.6% is a strong number by any standard. But, here is the context that makes it remarkable. The IMF revised its 2026 global growth forecast down to just 3.1% well below the long-term average of 3.7%. Geopolitical tensions were running high from Ukraine to West Asia, global supply chains were under pressure, and in that environment, India did not just hold its ground, it accelerated. It remained the fastest-growing major economy in the world. But, and this is where I want you to pay close attention, the headline number is not the real story. The real story is what is inside it. Look at this chart on your screen. Four engines of growth all firing at once. Private final consumption expenditure grew at 7.7%. This is you and me, ordinary households spending money. Buying groceries, paying school fees, purchasing a two-wheeler, going to a restaurant. When this number is healthy, it tells you that the people have income, they feel reasonably confident, and they are spending it. That is the very foundation of any demand-driven economy. Gross capital formation grew at 6.5%. Now, this is investment, businesses building factories, the government laying roads, both sides of the economy making long-term bets on the future. Investment matters because it creates productive capacity today that generates income tomorrow. Services gross value added surged to 8.7%. Now, a quick note on gross value added. It basically measures what a sector actually contributes to the economy after subtracting the cost of inputs. So, when services GVA is 8.7%, it means IT, finance, logistics, hospitality, the entire services complex is generating enormous net value. India’s services engine is not slowing down. And then, there is the manufacturing GVA at 11.5%. Now, this is the best performance in recent years. If you have been following the long debate about whether India can build a serious manufacturing base, whether we can be more than a services economy, this number is worth sitting with for a moment. In development economics, we call this broad-based growth. It means no single engine is doing all the work. Consumption, investment, services, and manufacturing are all expanding together. That is the profile of an economy that is genuinely firing on multiple cylinders, not the profile of an economy being propped up by government spending. Chapter two, the inflation surprise nobody saw coming. Now, let’s talk about prices because this is where the report delivers its most striking finding. Headline CPI inflation, the consumer price index, which tracks what everyday goods and services cost, fell to 2.1% in 2025-26. The year before, it was 4.6. The RBI’s official inflation target is 4% with a tolerance band of 2 to 6%. At 2.1% we are brushing against the lower bound of that band. To an economist, this is genuinely surprising. Inflation at this level while growth is accelerating, that combination does not come along often. Normally, fast growth generates demand pressure which pushes prices up. The fact that both moved in favorable directions simultaneously does require explanation. Look at this chart on your screen and look at the trend line. For years, inflation was sticky, hovering near or above 4%, resisting the RBI’s efforts to bring it down sustainably. And then it fell sharply. Four factors drove that decline. First, food price deflation. Food actually got cheaper. And since food has a heavy weight in India’s inflation basket, when food prices fall, overall CPI falls with them. Second, a base effect. Prices had been elevated the previous year, so this year’s comparison flatters the current reading. Third, softened global commodity prices. Oil, metals, and other inputs all came down globally, reducing cost pressures across the economy. And fourth, the one that matters the most, an exceptionally favorable monsoon. The southwest monsoon arrived 8 days early in 2025, the earliest since 2009. Reservoir levels hit a record 91.4% of full capacity by October. Food grain and horticulture production broke records across both the kharif and rabi seasons. Abundant food supply pushed food prices down and that pulled inflation down with it. Now, here is where the analysis gets genuinely interesting. And I say this as someone who finds agricultural economics endlessly fascinating because this is the paradox at the heart of this report. Despite record harvests, despite all that abundance, agricultural gross value added actually slowed down. From 4.2% growth the year before to just 2.4%. How do you have record production and declining value added at the same time? The answer takes us to a concept called the terms of trade for farmers, the relationship between the prices farmers receive for what they sell and the prices they pay for what they buy. Weather disruptions during the kharif season were severe enough in parts of the country to damage crops and suppress farm gate prices. More supply in aggregate means lower prices. And when prices fall faster than volumes rise, farmers earn less, even as national production statistics may look impressive. This is more of a procurement and market access problem and less of a climate problem. The infrastructure for connecting farmers to markets that pay fair prices, the cold chains, the mandis, the procurement mechanisms, is not working well enough. And that gap deserves far more serious policy attention than it currently receives. Meanwhile, the Monetary Policy Committee responded to the fall in inflation by cutting the repo rate by a total of 100 basis points over the year. One full percentage point. Now, the repo rate is the rate at which the RBI lends to commercial banks overnight. So, when it falls, borrowing becomes cheaper across the entire economy, for banks, for businesses, and ultimately consumers. Now, this chart on your screen shows what exactly happened to liquidity in the system after those cuts. The average daily net absorption under the liquidity adjustment facility, essentially a measure of how much surplus cash is sloshing around in the banking system, jumped from just 1,605 crore to 1.86 lakh crore. This is an extraordinary increase in system liquidity and critically, it did not just sit in the financial system. Bank credit to commercial sector grew by 15.7%. The money reached the real economy, that is the transmission mechanism working as it should. Chapter 3, the quiet fiscal discipline that changed the story. Let us now turn to the external sector and then to what I consider the most important part of this report. The external sector did face real stress in 2025-26. The rupee depreciated 9.9% against the dollar. The merchandise trade deficit widened to 333.2 billion dollars. Foreign portfolio investors pulled out 16.5 billion dollars. Forex reserves fell by 30.8 billion dollars. In isolation, any one of those numbers would generate alarming headlines. But macroeconomics is never about one number in isolation. It is about the full picture. The current account deficit, which measures the net flow of goods, services, and the income between India and the rest of the world, held at just 1% of GDP. Now, that is remarkably contained for an economy growing this fast with this much import demand. And despite the drawdown, India’s foreign exchange reserves stood at 691.1 billion dollars at end of March 2026. Let me put that in terms that mean something. This is roughly 11 months of import cover, meaning India could pay for all its imports for nearly a year with zero new foreign exchange inflows. It also covers 90.3% of India’s total external debt. Among emerging markets, these are among the best external vulnerability metrics anywhere. So, yes, the rupee fell. Yes, the reserves dipped and capital flowed out. But India’s external position remained fundamentally sound. Now, the fiscal story. This is where the report’s core argument lives. The central government’s gross fiscal deficit came in at 4.4% of GDP right on its consolidation target. Capital expenditure was sustained, revenue expenditure was controlled. In the language of public finance, this is exactly what we call fiscal consolidation without austerity. You are bringing the deficit down without cutting the investments that drive future growth. Now, that is a difficult balance to strike and India struck it. The chart on your screen now is the one I would like you to study carefully because it speaks to one of the oldest debates in macroeconomics. Does government spending crowd out private investment or does it crowd it in? Now, the crowding out argument goes on like this. When the government borrows heavily to spend, it competes with the private sector for available funds. It pushes up interest rates and squeezes out private investment. Now, this is a real concern and in many historical cases, it has played out exactly this way. But this chart tells a different story for India right now. Sustained public capital expenditure in roads, railways, ports, digital infrastructure has been pulling private investment in, not pushing it out. Now, the reason is straightforward. When the government builds a highway, it makes a new industrial zone viable. When it upgrades a port, it makes exports cheaper. Public infrastructure reduces the cost and risk of private investment. That is nothing but the crowding in effect. And it is precisely what good development economics recommends. Direct tax revenues are projected at 6.9% of GDP in 2026-27, the highest in over a decade. Now, that matters because it reflects a broader and deeper tax base, which in turn reflects a formalizing economy. Non-food credit grew at 15.9%. Credit to micro and small enterprises grew at an extraordinary 33.1%. These are the businesses that employ the most people, the small manufacturers, the local service providers, the first-generation entrepreneurs. When credit flows to them at this rate, it suggests that the financial system is directing capital towards where the employment multipliers are the highest. And the gross NPA ratio, non-performing assets, the bad loans that nearly brought India’s banking system to its knees a decade ago, has fallen to a multi-decadal low. 10 years ago, the banking system was paralyzed. Lenders were afraid to lend, borrowers could not get credit, the investment cycle stalled. Today, that same banking system is the engine of India’s investment cycle. Now, that transformation did not happen overnight. It happened through years of painful resolution, recapitalization, and regulatory reform. And it is now paying dividends. Chapter four. What the RBI sees ahead and what still needs solving. The RBI forecasts GDP growth of 6.9% for 2026-27, still strong, still the fastest-growing major economy in the world if the forecast holds. But the RBI is appropriately cautious about the risks and they tilt downward. The conflict in West Asia could spike oil prices overnight and India, as a major oil importer, is exposed to that risk in a way that feeds directly into inflation and the current account. An El Nino event could disrupt the monsoon, reverse the food price deflation we saw in 2025-26, and push CPI back up. And trade policy volatility, the on-again, off-again tariff environment from the United States and others, creates a fog of uncertainty that is genuinely difficult to plan around. The MPC’s April 2026 decision was to hold the repo rate at 5.25% and adopt a neutral stance, vigilant but not reactive, neither easing further nor tightening. In monetary policy, we call this data dependence. You keep your options open, you watch the incoming numbers, and you move only when the evidence is clear. In a world where the primary sources of macroeconomic instability are geopolitical shocks rather than policy errors, that is exactly the right posture for a central bank. You cannot hedge against a conflict in West Asia by moving the repo rate 25 basis points. What you can do, in fact, is maintain credibility, preserve your policy space, and be ready to act decisively when the situation demands it. Now, one more thing this report notes that I find genuinely encouraging as an economist, India’s agricultural vulnerability to monsoon shocks has structurally diminished. Better irrigation coverage, improved farm level technology, more resilient supply chains, the economy that once shuddered every time the monsoon delayed by 2 weeks has grown more robust to that risk. Now, that is structural progress. Slow, invisible, un glamorous, but real and compounding. Chapter five, the gaps, because an honest assessment requires them. A balanced reading of this report would require acknowledging what it does not resolve. The agricultural GVA paradox is real and it is not going away on its own. Record production and declining farmer value added in the same year is a structural signal, not really a coincidence. The gap between what farmers grow and what they earn points directly to the failures in procurement systems, market linkages, and price support mechanisms. Now, this is a policy problem, not a weather problem, and it demands policy solutions. The dominance of services at roughly 69% of real GVA growth raises a legitimate and important question about the nature of India’s growth. Services-led growth is real growth, but it tends to be skill intensive. It does not absorb the hundreds of millions of workers entering the labor force each year who need manufacturing jobs. Jobs that pay a living wage and do not require a college degree. The 11.5% manufacturing GVA growth this year is encouraging, but manufacturing’s share of overall output remains far below what India needs if it is serious about the kind of job creation that transforms the lives of its poorest citizens. Now, these are not pessimistic observations. They are the honest complement to the positive story this report tells. An economy this complex deserves both. So, where does all of this leave us? India is entering a period of heightened global uncertainty. The geopolitical environment is difficult. The global growth outlook is subdued. The risks are real, and they are not symmetrically distributed. They tilt downward. And yet, the macroeconomic foundations going into this period of uncertainty are stronger than at any comparable moment in the last 30 years. The banking system is stable. The fiscal framework is disciplined. The inflation management architecture has been tested, and it held. The external buffers are adequate. The investment cycle is turning. The crowding in effect is working. The challenge now is not to manage decline. It is to sustain acceleration and to ensure that its benefits reach the farmers waiting for better prices, the workers waiting for manufacturing jobs, and the small business owners waiting for the credit and markets they deserve. Now, that is a harder problem than the pessimists expected India to have. But, it is, for the very first time in a long time, a good problem to have. Thank you for watching. [music]