India’s Goldilocks Economy

The Indian economy has been labelled as being in a “Goldilocks situation” by the Ministry of Finance and several analysts, but deeper structural indicators challenge the sustainability of this assessment.

Understanding the 'Goldilocks' Economy Concept

• Definition:A Goldilocks economy refers to a state where economic growth is neither too hot (leading to inflation) nor too cold (leading to recession), characterized by moderate GDP growth, controlled inflation, and favourable monetary conditions.
• Government’s Claim:India was described as being in such a macroeconomic phase due to GDP growth of 7.6% in FY24, declining inflation, and peaking interest rates.

Inflation Dynamics: Headline vs Food Inflation

• Disparity in CPI and CFPI:Despite CPI declining to 2.82% in May 2025, the Consumer Food Price Index (CFPI) remained consistently higher, reaching 10.87% in Oct 2024 and 5.66% in Aug 2024.
• Implication:For low-income households, which spend nearly 50% of their consumption on food, elevated food inflation significantly erodes real income and purchasing power.
• Core Inflation Focus:Economists argue for a policy focus on core inflation (excluding food and fuel) as a more stable and reliable metric for monetary policy decisions.

Real Wage Growth and Household Distress

• Wage-Income Disparity:Despite nominal wage increases, real wage growth has been minimal or negative in recent years. E.g., 2023 saw a nominal hike of 9.2% but real growth of only 2.5%.
• Impact:This "silent squeeze" forces households to reduce discretionary spending, incur debt, or compromise on essentials.

Income Inequality and the K-shaped Recovery

• Gini Coefficient Trends:India’s Gini coefficient declined from 0.489 (AY13) to 0.402 (AY23), but this data reflects only taxable income from the formal sector.
• K-shaped Recovery Post-COVID:Certain sectors (tech, high finance) have thrived while others (informal sector, low-skilled workers) remain stagnant, increasing intra-societal disparities.
• ILO Observations:India’s labour market continues to show stagnant real wages and inadequate job quality, which constrain consumption demand.

Fiscal Challenges and Debt Sustainability

• Deficit Trajectory:Fiscal deficit is projected to reduce from 6.4% (2022–23) to 4.4% (2025–26), and primary deficit from 3% to 0.8%.
• Public Debt Concerns:India’s general government debt-to-GDP stands at ~81%, exceeding the FRBM target of 60%.
• Macroeconomic Risks:High deficits and public debt crowd out private investment, strain fiscal space for social spending, and risk long-term sustainability.

Way Forward:

• Focus on Inclusive Growth:
  • Prioritise real wage growth and quality employment generation across sectors.
  • Expand social safety nets and public investment in education and health.
• Inflation Management with Precision:
  • Enhance supply-side management of essential commodities.
  • Adopt a dual strategy focusing both on headline and core inflation.
• Fiscal Prudence with Targeted Spending:
  • Rationalise subsidies while increasing capital expenditure on productive sectors.
  • Reorient tax policies to ensure progressivity and reduce burden on the poor.
• Labour Market Reforms:
  • Enhance formalisation of the workforce.
  • Strengthen skilling and wage standards, particularly in the informal sector.
• Data Transparency and Broader Metrics:
  • Incorporate household-level metrics into economic assessment.
  • Develop real-time indicators on employment, savings, and consumption.