India’s Inflation and Nominal GDP Growth in 2025
Recent data from 2025 shows India experiencing low inflation levels alongside subdued nominal GDP growth. Consumer Price Index (CPI) inflation was recorded at 2.07 per cent in August. Wholesale Price Index (WPI) inflation was even lower at 0.52 per cent year-on-year. While this is positive for consumers, it presents challenges for government finances and fiscal targets.
Current Inflation Scenario
Inflation rates in 2025 have remained unusually low. CPI inflation averaged 2.4 per cent in the first five months of the fiscal year, down from 4.6 per cent the previous year. WPI inflation averaged just 0.1 per cent, a sharp decline from 2.3 per cent in 2024-25. This decline is partly due to recent reductions in Goods and Services Tax (GST) rates, which are expected to further ease prices.
Nominal GDP Growth and Its Importance
Nominal GDP represents the total value of goods and services at current prices. It is crucial for government budget planning, especially for estimating tax revenues and fiscal deficit targets. The Union Budget 2025-26 projected nominal GDP growth of 10.1 per cent, targeting Rs 357 lakh crore. However, actual nominal GDP growth has been weaker, recorded at 8.8 per cent in April-June 2025, below expectations.
Impact on Government Finances
Lower nominal GDP growth affects tax revenue collections. From April to July 2025, gross tax revenue rose by only 1 per cent year-on-year, while net tax revenue declined by 7.5 per cent. This shortfall strains the government’s fiscal deficit and debt-to-GDP ratio targets, both dependent on nominal GDP figures.
Reasons Behind Low Inflation
Low inflation can result from oversupply or weak demand. Recent data suggests robust corporate profits despite moderate sales growth, indicating supply-side factors and lower input costs. For example, private manufacturers saw sales increase by about 5.3 per cent, but profits surged by nearly 28 per cent. However, capital expenditure (capex) remains weak, signalling cautious investment despite strong profit margins.
Budget Assumptions Versus Reality
Historically, India’s nominal GDP growth often misses budget assumptions. Over the last 13 years, actual growth was below projections nine times. Yet, in recent years, nominal growth exceeded expectations three out of four times. The revised base GDP for 2024-25 is now Rs 331 lakh crore, easing the growth target for 2025-26 to 8 per cent nominal growth. Still, economists forecast nominal GDP growth below the budgeted 10.1 per cent.
Future Outlook and Challenges
The government faces the challenge of balancing low inflation benefits for consumers with the need to meet fiscal targets. Continued low inflation driven by GST cuts and global commodity price trends may suppress nominal GDP growth further. This could impact tax revenues and fiscal consolidation efforts. The key will be stimulating investment and consumption without igniting inflationary pressures.
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