India’s ‘Goldilocks’ Economy: Hidden Fault Lines

Why in the News?

1. The Finance Ministry recently described the Indian economy as being in a “Goldilocks situation”, marked by moderate growth, low inflation, and favourable monetary conditions.
2. This follows a strong 6% GDP growth in Q2 FY2024, peaking interest rates, and stable corporate earnings, prompting analysts to call it a “mini-Goldilocks moment.”
3. India exited FY2024 as a $3.6 trillion economy with sustained growth above 7.6%, creating optimism for 2025.
4. However, experts caution that this upbeat outlook may mask deeper structural imbalances in the economy.

Inflation and Stagnant Wage Growth

1. Headline CPI masks underlying stress
   4. CPI (General) fell from 8% in May 2024 to 2.82% in May 2025, indicating apparent price stability.
   5. However, this improvement hides the persistent gap between food inflation (CFPI) and general inflation.
2. Persistent food inflation volatility
   10. CFPI consistently remained higher than CPI throughout 2024, peaking at 87% in Oct 2024 vs 6.21% CPI.
   11. Even during low CPI periods, e.g., Aug 2024 (CPI 3.65%), CFPI was 66%.
   12. Food inflation disproportionately impacts lower-income groups as food accounts for approximately 50% of their consumption basket.
3. Drivers of food inflation
   1. Unseasonal rains disrupting harvests.
   2. Supply chain bottlenecks.
   3. Global commodity price fluctuations.
4. Impact on household budgets
   1. High food prices erode real incomes, forcing compromises in diet quality, essential spending cuts, or increased borrowing.
   2. Volatility in food prices undermines household budgeting and savings stability.
5. Need to focus on core inflation
   1. Economists like Dr. Pronab Sen suggest targeting core inflation (excluding food and fuel) for a more accurate picture of persistent cost pressures in housing, education, transport, and personal care.
6. Wage growth lagging behind inflation
   9. 2023: 9.2% nominal salary hike → only 5% real wage growth.
   10. 2020: Real wages fell (-0.4%) despite 4% nominal increase.
   11. 2025 projection: 8% nominal hike → 4% real wage growth, meaning half the gains eroded by inflation.
7. The “silent squeeze” effect
   1. Stagnant real wage growth reduces household savings and discretionary spending.
   2. Increases debt reliance, especially in IT product & services, manufacturing, engineering, and consumer industries where hikes are lower.
8. The “Goldilocks” narrative is undermined by volatile food prices, persistent cost pressures, and weak real wage growth, revealing a more fragile household economic situation.

Income Inequality

1. Stagnant real wages as a structural challenge
   1. ILO and labour economists highlight that without sustained real wage growth, consumption demand, a key growth driver, remains weak.
   2. This constrains the possibility of a broad-based economic recovery.
2. Gini coefficient trends and limitations
   1. Gini coefficient of taxable income:
      1. AY13: 0.489 (high inequality)
      2. AY16: 0.435 (dip)

• AY23 (forecast): 0.402 (further decline)

1. Apparent improvement may be misleading as it only captures the formal sector and higher-income taxpayers, ignoring the vast informal economy and wealth distribution patterns.

3. K-shaped recovery post-pandemic
   1. Certain affluent groups and specific industries have thrived.
   2. Large sections, especially at the lower income levels, have seen stagnant real wages.
   3. Billionaire count has surged even as earnings stagnate for many.
4. Consequences of persistent inequality
   1. Weakens social cohesion and fosters economic discontent.
   2. Restricts access to quality education and healthcare for lower-income groups.
   3. Can undermine long-term inclusive growth despite high GDP figures.
5. Reality check for “Goldilocks” narrative
   1. Robust GDP growth does not equate to shared prosperity.
   2. When a significant portion of the population feels excluded from economic gains, the idea of a universally beneficial “Goldilocks” economy becomes questionable.

Fiscal Pressures

1. Fiscal consolidation trajectory
   6. Fiscal deficit projected to decline from 4% in 2022-23 to 4.4% in 2025-26 (BE).
   7. Revenue deficit expected to reduce from 4% to 1.5% in the same period.
   8. Primary deficit forecast to fall from 3% to 0.8%.
2. Concerns despite improvement
   1. Deficit levels remain substantial even after projected reductions.
   2. Persistent high deficits require large government borrowing.
3. Macroeconomic risks of high deficits
   1. Crowding out effect: Increased demand for funds by the government may push up interest rates.
   2. Higher interest rates could deter private investment, slowing business expansion and job creation.
4. Public debt burden
   1. General government debt-to-GDP ratio at ~81% in 2022-23, well above the FRBM target of 60%.
   2. High debt means a large share of revenues will go towards interest payments.
5. Impact on citizens
   1. Reduced fiscal space for social sector spending (education, healthcare, infrastructure).
   2. Risk of higher future taxes to manage debt obligations.
6. Overall implication
   1. While fiscal consolidation is underway, high debt and deficit levels could restrict growth potential, crowd out private sector activity, and limit inclusive development.

Complicating the “Goldilocks” Narrative

1. Multiple structural pressures
   1. Volatile food inflation continues to erode purchasing power.
   2. Income disparities persist despite GDP growth.
   3. Real wages remain stagnant for the majority.
   4. Limited fiscal space constrains public investment and welfare spending.
2. Disconnect between macro indicators and lived reality
   1. The so-called macroeconomic “sweet spot” is not experienced equally across society.
   2. Economic gains are disproportionately concentrated among affluent sections.
   3. Aggregate metrics like GDP growth and headline inflation fail to reflect daily struggles of common households.
3. Risks of the “Goldilocks” perception
   1. Comforting narrative may obscure underlying fragilities.
   2. Risks masking the urgent need for policy focus on inclusivity and equitable growth.
4. True measure of economic strength
   1. Goes beyond temporary stability in GDP and inflation.
   2. Requires:
      1. Sustained growth in real incomes.
      2. Reduction in inequality.

• Strengthening of fiscal resilience.

1. Tangible improvement in quality of life for all citizens.

5. Way forward
   1. Address structural imbalances rather than celebrating short-term balance.
   2. Prioritise policies fostering inclusive and sustainable prosperity over headline macro numbers.

Implications for the economy

1. Household purchasing power and consumption demand
   1. High and volatile food inflation reduces real incomes for lower-income households and tightens household budgets immediately.
   2. Lower real wages and precautionary savings reduce discretionary spending, weakening domestic consumption and slowing demand-driven growth.
2. Monetary-policy trade-offs and policy effectiveness
   1. Volatile food prices complicate the RBI’s decision-making: headline CPI may fall while households still feel squeezed, creating a dilemma between containing inflation and supporting growth.
   2. Relying narrowly on core inflation could underplay the immediate welfare loss suffered by poor households and misalign policy signals.
3. Investment, job creation and the quality of growth
   1. Large deficits and elevated public debt can push up interest rates and crowd out private investment, constraining job-creating capacity.
   2. Stable corporate earnings at the top do not automatically translate into broader employment gains if investment remains capital-intensive or concentrated in particular sectors.
4. Social cohesion, poverty and long-term human capital
   1. A multi-speed recovery risks widening access gaps in education, health and skills, which erodes long-run productivity and increases social tensions.
   2. Persistent wage stagnation for large worker segments can increase vulnerability and reliance on debt or informal support networks.
5. Fiscal sustainability and limited public goods provision
   1. Servicing high public debt leaves less fiscal space for essential public investment in health, education and rural infrastructure.
   2. Limited countercyclical capacity makes it harder to support households during shocks, increasing long-term macroeconomic fragility.

Challenges and Way Forward

Conclusion

The “Goldilocks” label captures a narrow, headline view — moderate headline inflation and strong GDP growth — but it obscures deeper stresses: volatile food prices, eroding real wages, a multi-speed recovery and constrained fiscal space. For growth to be genuinely “just right” for ordinary Indians, policymakers must combine near-term relief (targeted transfers, price-stabilizing actions) with medium-term structural reforms (formalisation, tax reform, rural logistics and public investment). Only a strategy that raises real incomes, stabilises essential prices and rebuilds fiscal headroom will convert favourable macro numbers into broadly felt, durable prosperity.