Inflation vs growth: Here’s how India can strike the right balance

Inflation is a major concern for both countries and central banks. It leads to higher prices for goods and services, reducing people's purchasing power and impacting daily life. Inflation occurs when there is a significant gap between demand and supply or when excessive liquidity chases too few goods. This fuels inflationary expectations, further disrupting the demand-supply balance.

The government tries to control inflation by ensuring removal of hindrance to supply or by ensuring adequate availability of goods and services at fair price avoiding or preventing any hoarding of goods thereby creating artificial shortage or if there is shortage of availability due to lesser production or any natural disasters affecting the enough products availability which can be prevented by importing from other countries to supplement the domestic availability.

Certain items like oil, natural gas, or essential raw materials where we are dependent on imports as we do not have the supply, there arises inflation from imports if there are generally commodity prices are high in international markets due to global demand factors.

It is therefore imperative that both Central Bank and the government must work together to tackle the problem of inflation as Regulator from the monetary policy perspective can control the liquidity as well by regulating the interest rates higher or lower can curb the inflation trajectory. But at the same time equally the government must take steps to ensure to remove supply bottlenecks and with ensuring adequate supply and availability from domestic source as well if required from imports.

At the same time there is negative correlation between inflation vs economic growth, and it is always a case that high inflation tends to hinder economic growth as higher inflation leads to dampen the consumer and business confidence which leads to lesser investment and slower economic expansion. Both the government and regulator must have a balanced approach that while inflation has to be tackled by tight monetary policy and higher benchmark interest rates as well by tight liquidity management, excessive policy tightening should not result in hampering economic growth.

Here with the proactive policy initiatives and definite measures taken by the government parallelly in supply chain management as well by ensuring boost to economic growth by government led capex both at central and state level which will lead to crowding of private sector investment which in total has a multiplier impact on growth.

The adequate consumption both at urban demand and rural demand must be ensured to ensure better capacity utilisation. If inflation is not managed effectively which will dampen the consumer demand and that will affect manufacturing sector growth which in turn leads to lesser economic growth. This inflation growth dynamics has been an important parameter for ensuring continuity of sound and adequate economic growth.

While Regulator has got the primary responsibility of managing prices volatility by tackling inflation but they have also to have the focus on growth factors and while deciding various factors in each monetary policy, depending upon the circumstances and evolving situation and the likely movement of inflation trajectory anticipated as well keeping equal focus on economic growth, respective policy decisions are taken and various tools available at Regulator level are exercised to fight inflation.

It is to the credit of all regulators and respective government in general all over the world but Indian RBI and our central government in particular that with the proper policy initiatives both at Regulator and government level, higher inflation arising out of too much liquidity and loose monetary policy followed aftermath of Covid-19 which later led to high inflation which led to tighten monetary policy and equal policy steps taken at government level has had an impact on controlling inflation with lesser impact on growth.

As brought out in Chapter 4 of Economic Survey 2025-26, while global inflation peaked in 2022 due to supply chain disruptions and geopolitical tensions, it has declined since then aided by Policy measures. In India too, we have witnessed the positive impact of timely measures taken by RBI and government and retail inflation eased in FY 2025. Core inflation reached its lowest point in a decade.

However due to climate change and adverse weather conditions and events have a negative impact on availability of food grains, vegetables and these supply chain disruptions and adverse weather conditions are the reasons for continuous impact on food inflation.

The RBI has to factor these climate change factors while deciding in monetary policy and these food and vegetables related elevated inflation has led to the headline inflation continue to be high and as the expected inflation trajectory is on high inflation, the expected repo rate cut could not be effected earlier except recent 25 basis point cut in repo rate as RBI was focused on inflation vs growth dynamics and wanted to bring the headline inflation to the mandated target level of 4 per cent.

However, in the last policy as India's growth has gone down recently substantially and there was a space for cut in repo rate which RBI took advantage by 25 basis cut to equally focus on growth aspects.

Onion and tomato prices are affected by the decline in production, partly due to extreme weather conditions and monsoon induced supply chain disruptions. India also faced supply and demand gap in pulses despite being a major producer.

The government has focused in the recent budget as well earlier to ensure adequate supply of onion and tomato as well increase the production of pulses and also take measures for climate resilient crops, to reduce crop damages and post-harvest losses. It is expected that with better supply measures along with global commodities prices are expected to decline, India's retail price inflation will align Progressively with the target.

In conclusion, regulator RBI has to take into account the impact of climate in their monetary policy whereas government should develop climate resilient crop varieties, enhancing yield and reducing crop damage.

In the short term, government must ensure adequate supply of food items especially onion, tomato and expanding the growing regions for pulses. India cannot afford to dampen the economic growth by these supply factors and with collaborative approach of RBI and government the desired economic growth with lower retail inflation can ensure consistency in growth.

(The author is former Chairman & Managing Director of Indian Overseas Bank)