Why the economy needs 4% inflation

  • November 20, 2025
  • Economy

Hindustan Times

Why the economy needs 4% inflation

1. Introduction and Context

The article argues that moderate inflation (~4%) is healthy for India’s economy, especially compared to very low inflation (2% or below).
It explains that extremely low inflation slows demand, squeezes farm and corporate incomes, discourages investment, and increases the risk of deflation — all of which can weaken growth.
The piece responds to public debate after recent CPI readings fell below the RBI’s comfort zone.

2. Key Arguments Presented

a) Very low inflation damages incomes and demand

  • Producers earn less → lower farm income and weak rural demand.
  • Firms delay investment when prices don’t rise.
  • Wages stagnate when inflation is ultra-low.

b) Nominal growth is essential

  • Moderate inflation helps reduce real debt burden.
  • Supports corporate revenues, investment, and credit flows.

c) Danger of deflationary expectations

  • Consumers postpone purchases.
  • Firms delay capex.
  • Overall aggregate demand shrinks.

d) A 4% inflation target ensures balance

  • Enough inflation to support income growth.
  • Not high enough to destabilize the poor.
  • Gives RBI flexibility for monetary policy.

e) Manage supply shocks separately

  • Food inflation must be handled through agri-policy & logistics — not aggressive rate hikes.

3. Author’s Stance and Tone

Stance:
Favors moderate, stable inflation around 4% as ideal for India’s growth–stability balance.

Tone:
Pragmatic, policy-oriented, cautioning against excessive monetary tightening when inflation dips too low.

4. Implicit Assumptions & Possible Biases

Assumptions

  • Moderate inflation strengthens investment and demand.
  • Supply-side interventions can control food inflation.
  • Monetary policy should remain flexible, not rigid.

Biases

  • Pro-growth bias: Downplays inflation’s impact on poor households.
  • Skepticism toward strict inflation control: Prefers growth-supportive stance.
  • Focuses more on producers and corporates than savers and pensioners.

5. Pros and Cons of the Argument

Pros

  • Realistic about harms of ultra-low inflation.
  • Good explanation of debt, investment, and demand linkages.
  • Encourages targeted supply-side fixes.
  • Supports flexible inflation targeting — aligned with global norms.

Cons

  • Underestimates inflation’s impact on low-income households.
  • Assumes 4% is universally optimal without strong empirical backing.
  • Risks encouraging complacency toward persistent inflation.
  • Doesn’t quantify trade-offs for India’s unique economy.

6. Policy Implications (Actionable)

Monetary Policy

  • Maintain flexible targeting around 4%.
  • Avoid knee-jerk rate hikes for food-driven inflation.

Supply-Side Reform

  • Strengthen agri-logistics, storage, and cold chains.
  • Reduce food volatility via buffer stocks and better market integration.

Social Protection

  • Temporary PDS top-ups during food inflation spikes.
  • Index critical welfare schemes to inflation.

Financial Stability

  • Promote inflation-linked bonds to protect savers.
  • Ensure debt sustainability without relying on high inflation.

Communication

  • RBI–Government must clearly explain inflation strategy to anchor expectations.

7. Real-World Impact

Positive (if recommendations followed)

  • Stronger investment cycle
  • Reduced risk of deflation
  • Healthier corporate balance sheets
  • More room for counter-cyclical policy

Risks

  • Poor management may entrench higher inflation expectations
  • Food inflation spikes may hit poor households hard
  • Monetary policy credibility may weaken if flexibility is misread as tolerance for inflation

8. UPSC GS Alignment

GS Paper 3

  • Monetary policy, inflation targeting, growth, supply chains.

GS Paper 2

  • Coordination between RBI & government, welfare during inflation.

GS Paper 4

  • Balancing growth with equity
  • Ethical responsibility to protect vulnerable groups

Essay

  • Growth vs inflation
  • Macroeconomic stability
  • Role of central banks

9. Balanced Conclusion & Future Perspective

The article persuasively argues that ultra-low inflation is harmful and a stable 4% inflation rate strikes the right balance for India’s growth and macroeconomic health.
While this approach supports investment and demand, it must be backed by:

  • aggressive supply-side reforms,
  • strong inflation management,
  • protection for vulnerable households, and
  • credible RBI communication.

The real challenge is achieving moderate inflation with stability, not oscillating between price spikes and excessive tightening. A balanced, flexible framework is key to sustaining India’s long-term growth momentum.