Ramesh Singh Summary: Inflation & Business Cycle- 2 | Indian Economy for UPSC CSE PDF Download

If depression visits an economy, the common response is to replicate the policy measures of 1929. The best strategy to avoid depression is to prevent its occurrence. Therefore, modern economies closely monitor key economic indicators to implement timely prevention measures and avoid depression.

Key Points:

• Replication of 1929 Measures: Using historical policy measures as a guide.
• Prevention Focus: Vigilant monitoring of economic indicators to implement timely measures.

Recovery

When an economy attempts to exit a low production phase, whether it be a depression, recession, or slowdown, governments implement various fiscal and monetary measures to boost demand and production. This leads to an economic recovery, characterized by the following traits:

1. Upturn in Aggregate Demand: Accompanied by increased production.
2. Expanded Production: Attracts new investments.
3. Rising Inflation: Makes borrowing cheaper for investors.
4. New Employment Opportunities: Decline in unemployment rates.

Increased incomes from these factors create new demand, starting a cycle of demand and production that aids economic recovery. Common government measures include tax breaks, interest cuts, and salary increases for employees. Innovations by entrepreneurs, incentivized by the government, also play a crucial role in recovery.

Key Points:

• Boost Demand and Production: Through fiscal and monetary measures.
• Tax Breaks and Interest Cuts: Common government actions.
• Entrepreneurial Innovation: Critical for recovery, incentivized by the government.

Boom

A boom is a strong upward fluctuation in economic activities, often resulting from recovery measures taken by governments and the private sector. The major traits of a boom include:

1. Accelerated Demand Increase: Prolonged and significant.
2. Peak Demand: Exceeds sustainable production levels.
3. Demand-Supply Lag: Economic heating up.
4. Inflation Rise: Due to demand-supply disequilibrium.
5. Structural Problems: Shortage of investable capital, lower savings, falling living standards, and a seller's market.

While recovery is positive, leading to a boom, it often results in rising prices. The experience of developed economies in the 1990s, especially the US, and India in the early 2000s illustrates this pattern. The symptoms of overheating, following a boom, include:

1. Downturn in Aggregate Demand: Decline in overall demand.
2. Falling Production Levels: Reduced output.
3. Stagnant Employment Growth: Lack of new employment opportunities.
4. Voluntary Labor Cuts: Increasing unemployment rates.
5. Risk of Depression: If not addressed by the government.
6. Low Inflation Rates: Discouraging new investments.

Key Points:

• Strong Upward Fluctuation: In economic activities.
• Demand Exceeds Production: Leading to inflation.
• Overheating Symptoms: Decline in demand and production, rising unemployment.

Recession

A recession is similar to a depression but milder, potentially leading to depression if not managed properly. The recent global financial crises triggered severe recessionary trends. The major traits of a recession include:

1. General Fall in Demand: Economic activities downturn.
2. Low or Falling Inflation: Further signs of decline.
3. Rising Unemployment: Declining employment rate.
4. Price Cuts by Industries: To sustain business.

In 1996-97, India experienced a recession due to a general downturn in domestic and foreign demands, initiated by the Southeast Asian Currency Crisis. Recovery was achieved only by the end of the decade. Government measures to combat recession typically include:

1. Cutting Taxes: Direct and indirect, to increase consumer disposable income and make goods cheaper.
2. Reducing Burden of Direct Taxes: Income tax, dividend tax, and interest tax to stimulate demand.

Key Points:

• Milder Form of Depression: Fatal if not handled properly.
• Tax Reductions: To increase disposable income and stimulate demand.
• Historical Examples: India's recovery in the late 1990s.

1. Inflation Trends: Inflation has moderated to 3.34% in March 2025, down from 6.62% in 2020, with food inflation at 2.69%, reflecting deflation in items like eggs and vegetables.
2. GDP Growth: FY25 GDP growth is estimated at 6.4%, a stable growth phase compared to the -6.6% contraction in 2020, with India ranked as the 5th largest economy globally.
3. Monetary Policy: The RBI cut the repo rate to 6.25% in 2025 to support growth amidst low inflation, a shift from the aggressive rate cuts during the 2020 crisis.
4. Government Policies: Recent initiatives include Production Linked Incentive (PLI) schemes, increased infrastructure spending, and agricultural reforms post-2020, unlike earlier policies like demonetization.
5. Global and Sectoral Impacts: The Russia-Ukraine war since 2022 has affected commodity prices, while sectors like manufacturing benefit from PLI schemes, and agriculture faces food deflation.

These developments highlight India's shift towards a balanced growth trajectory, supported by proactive fiscal and monetary policies. 

Key Points:

• Low Inflation: 3.34% in March 2025, supporting economic stability.
• Stable GDP Growth: 6.4% in FY25, reflecting recovery and growth.
• Policy Reforms: PLI schemes and infrastructure focus drive sectoral growth.

Recent Developments

As of  2025, India’s economy reflects a balanced growth trajectory amidst global and domestic challenges. The following developments in inflation and business cycles are critical for understanding the current economic landscape, particularly for UPSC preparation.

1. Inflation Trends: CPI inflation stabilized at ~4.5% in April–May 2025 (RBI target: 4% ± 2%), up from 3.34% in March, driven by food inflation (~5%) due to erratic monsoons (2024 La Niña). Core inflation (~4%) guides RBI policy, reflecting stable non-food/fuel prices. E-commerce (15% of retail) influences price discovery, complicating inflation measurement.
2. GDP Growth: FY25 GDP growth projected at 6.5–7% (Economic Survey 2024–25), led by services (54% of GVA) and manufacturing (PLI-driven). This marks a stable expansion phase, though informal sector joblessness raises growth recession concerns. India remains the 5th largest economy, aiming for 3rd by 2030.
3. Monetary Policy: RBI maintains a repo rate of 6.25% with a neutral stance (since mid-2024), balancing growth and inflation. The e-Rupee pilot (expanded 2024–25) enhances money supply control. Variable Rate Reverse Repo (VRRR) auctions manage liquidity, replacing COVID-era tools like LTRO.
4. Fiscal Policy: Budget 2025 allocates ₹12 lakh crore for capex, focusing on infrastructure and green energy (₹1 lakh crore for solar). Tax slabs revised to make ₹12.75 lakh tax-free (new regime), boosting consumption. Fiscal deficit targeted at <4.5% by FY26, supporting inflation control. The 16th Finance Commission’s report (due 2025) will shape fiscal federalism.
5. Global Influences: US Fed rate cuts to ~4.5% (2024–25) ease capital flow pressures, while China’s ~4% growth and deflation impact India’s exports. Russia-Ukraine war stabilization keeps oil at $70–80/barrel, moderating fuel inflation. FTAs (India-UAE, India-Australia) lower import costs, influencing prices.
6. Sectoral Dynamics: Services dominate (54% GVA), with IT and fintech thriving. Manufacturing grows via PLI schemes, but agriculture faces deflation risks (e.g., vegetables). Green transition costs (renewables) contribute to short-term cost-push inflation, aligned with net-zero 2070 goals.
7. Structural Challenges: Climate shocks (erratic monsoons) and jobless growth in informal sectors pose risks. RBI’s real-time data use (mobility indices, online prices) and anchored inflation expectations (~4–5%, household surveys) enhance policy precision.