How Will Low Inflation Impact Purchasing Power and Fiscal Finances in India?
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Synopsis
HSBC Research predicts that low inflation will significantly enhance household purchasing power and reduce corporate costs in India. This report also highlights potential benefits for fiscal finances, including the government's ability to leverage global oil price changes. Discover how these dynamics could shape India's economic landscape.
Key Takeaways
- Low inflation expected to enhance household purchasing power.
- Projected inflation rate of 2.5 percent for the next six months.
- Food inflation likely to remain low due to ample supplies.
- Fiscal finances may benefit from higher RBI dividends.
- Informal sector consumption is showing positive growth trends.
New Delhi, May 26 (NationPress) Reduced inflation for the remainder of the year is expected to enhance the real purchasing power of households and decrease input costs for businesses in India, according to a report from HSBC Research released on Monday. Additionally, a less apparent but equally significant advantage may arise through improved fiscal finances.
The upcoming months are anticipated to benefit from a reduced inflation rate of around 2.5 percent.
With ample food reserves and favourable monsoon conditions predicted, food inflation is likely to stay low. Furthermore, core inflation is expected to remain stable, driven by diminished commodity prices, subdued growth, a stronger rupee (against the US dollar), and imported disinflation from China, the report indicated while updating its extensive database of 100 indicators relevant to the nation.
These indicators reflect various sectors, providing a comprehensive and sequential overview of growth.
There exist certain pressures on the FY26 fiscal deficit target due to lower-than-expected nominal GDP growth, direct tax performance, and increased defence expenditure.
Nevertheless, there are compensating factors, particularly a higher-than-anticipated RBI dividend (Rs 2.7 trillion). Most crucially, the government has the option to capitalize on the decline in global oil prices by increasing oil excise tax,” the HSBC report elaborated.
Considering inflation is already low, “we project that if the government utilizes half of the oil 'windfall' instead of reducing fuel prices, it would not only achieve the fiscal deficit target but also generate additional funds for supporting growth,” it added.
The March quarter (1Q25) performed slightly better than previous periods, with 66 percent of the indicators showing positive growth (compared to 64 percent and 61 percent in the preceding two quarters).
Consumption in the informal sector led this positive trend, bolstered by an increase in state capital expenditure (in March), a strong winter harvest, higher real rural wages, and improved rural trading conditions.
In contrast, urban consumption metrics, such as the production and imports of consumer durables, were less robust.
“We have received data for a third of the activity indicators for April, and 64 percent are exhibiting positive growth. Consumption in the informal sector appears to have further increased during the month (as indicated by domestic non-cess GST),” the report stated.
Point of View
I find that the insights from HSBC Research highlight critical economic trends that could significantly influence both household finances and corporate costs in India. It is essential to consider how these factors interplay with fiscal policies, especially in a time of fluctuating global markets.
NationPress
14/06/2025
Frequently Asked Questions
What is the forecasted inflation rate for India in the coming months?
The forecasted inflation rate for India is expected to be around 2.5 percent for the next six months, according to HSBC Research.
How could low inflation benefit households?
Low inflation is expected to enhance the real purchasing power of households, making their money go further.
What are the potential impacts on fiscal finances?
The government may benefit from improved fiscal finances through higher-than-expected RBI dividends and by adjusting oil excise taxes in response to global oil price changes.
Is there a projected impact on urban consumption?
Yes, urban consumption indicators, particularly for consumer durables, have shown softer performance compared to the informal sector.
What role does the informal sector play in this economic scenario?
The informal sector has displayed positive growth, largely supported by state capital expenditure and improved rural economic conditions.
