India’s economic outlook is facing growing pressure despite strong headline numbers as weak tax buoyancy and limited fiscal space are creating policy constraints, according to a report by a research firm. The analysis suggests that the popular Goldilocks narrative is losing balance as underlying growth momentum remains fragile.
The report noted that official indicators point to a high growth low inflation environment but policy actions do not fully align with that picture. It stated, “Headline growth masks fragile momentum, leaving the government trapped in a policy dilemma”. Policymakers are now dealing with difficult trade-offs as recent fiscal and monetary steps appear counterintuitive in an economy projected to grow at 8% with near zero inflation.
One example highlighted in the report is the increase in basic excise duty on cigarettes which came only months after GST rationalisation. This move is expected to raise additional annual tax revenue of around Rs 400 billion. The report explained that a Goldilocks economy reflects moderate sustainable growth with low inflation and low unemployment while a gridlock economy refers to a situation where fragmented ownership reduces overall economic gains.
On the monetary front the Reserve Bank of India surprised markets by announcing fresh open market operations involving government securities worth Rs 2 trillion along with USD 10 billion of USD INR buy sell operations. This followed earlier guidance that had already signalled large OMO and swap purchases. Despite these steps markets have tightened with the 10-year government bond yield rising to 6.6% to 6.65% the rupee weakening beyond 90 against the US dollar and system liquidity slipping into deficit.
The report warned that cumulative CRR cuts of 150 basis points repo rate cuts of 125 basis points liquidity infusion of nearly Rs 8 trillion and GST reductions resemble emergency support measures. Yet these actions may be crowding out private investment as fiscal space shrinks and borrowing pressures rise potentially limiting policy flexibility in the coming period.
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