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India's Goldilocks Economy Shows Strain as Fiscal Space Shrinks: Report

A report by Systematic Research indicates India's celebrated "Goldilocks" economic phase is under strain, revealing a fragile underlying momentum despite strong headline growth figures. This has resulted in a policy gridlock, with recent fiscal and monetary actions appearing unusual for a period of high growth and low inflation. Measures like excise duty hikes and large open market operations have not eased financial conditions, as interest rates have risen and the rupee has weakened. The report warns that shrinking fiscal space and aggressive liquidity support could crowd out private investment and constrain future policy flexibility.

Key Points: India's Goldilocks Economy Faces Gridlock, Report Warns

  • Weak tax buoyancy strains fiscal space
  • Policy moves appear counterintuitive in high-growth phase
  • Market indicators show tightening financial conditions
  • Aggressive fiscal support may crowd out private investment
3 min read

Indian economy trapped between Goldilocks and Gridlock, shrinking fiscal space: Report

A new report warns India's "Goldilocks" economic narrative is strained by weak tax buoyancy and shrinking fiscal space, creating a policy dilemma.

"Headline growth masks fragile momentum, leaving the government trapped in a policy dilemma - Systematic Research Report"

New Delhi, January 5

India's much-discussed "Goldilocks" economic narrative is increasingly showing signs of strain, with weak tax buoyancy and shrinking fiscal space creating a policy gridlock, according to a report by Systematic Research.

The report highlighted that while headline growth numbers suggest a strong economy, the underlying momentum remains fragile. This has left policymakers facing difficult choices, with recent fiscal and monetary actions appearing counterintuitive in what is officially projected as a high-growth, low-inflation environment.

It stated, "Headline growth masks fragile momentum, leaving the government trapped in a policy dilemma".

The report shared that one such move is the increase in the basic excise duty on cigarettes, announced only months after the government undertook GST rationalisation. The hike is estimated to generate additional annual tax revenue of around Rs 400 billion.

A Goldilocks economy is a balanced economic state with moderate, sustainable growth, low inflation, and low unemployment, avoiding both recession ("too cold") and overheating ("too hot"). The "gridlock economy" means that too many people own tiny pieces of something valuable, causing everyone to lose out.

On the monetary side, the Reserve Bank of India surprised financial markets by announcing additional large open market operations (OMO) involving government securities worth Rs 2 trillion, along with USD 10 billion of USD/INR buy-sell operations. This came just weeks after a monetary policy statement that had already signalled substantial OMO and swap purchases.

The report noted that these actions are unusual because they are being implemented during what is described as a "Goldilocks" phase, marked by 8 per cent real GDP growth and near-zero inflation.

Despite this favourable backdrop, policymakers have rolled out measures that resemble emergency-style support.

These include cumulative CRR cuts of 150 basis points, repo rate cuts of 125 basis points, liquidity infusion of close to Rs 8 trillion, and fiscal stimulus through GST reductions.

However, market indicators suggest that these measures have not eased financial conditions as intended. Interest rates have moved higher, with the 10-year government security yield rising to the 6.6-6.65 per cent range.

At the same time, the Indian rupee has weakened beyond 90 against the US dollar, and system liquidity has slipped into deficit.

According to the report, these trends point to growing concerns that aggressive fiscal expansion and liquidity support could be crowding out private sector capital expenditure.

With fiscal space narrowing and borrowing pressures rising, the recent liquidity push by the government and the central bank may further constrain policy flexibility in the period ahead.

- ANI

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Reader Comments

S
Sarah B
As someone working in finance in Mumbai, the OMO announcements and rupee volatility have been the talk of the trading floor. The RBI's actions do seem contradictory to the "Goldilocks" narrative. It's like they see a storm we don't. 🧐
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Rohit P
The part about crowding out private investment is key. If the government is borrowing so much, where will the capital for new factories and jobs come from? We need private sector confidence to actually take off.
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Priya S
Headline numbers vs real momentum... story of our economy. My small business is still struggling with high input costs and tight credit. The "low inflation" doesn't match the prices at the sabzi mandi. Hope the policymakers look beyond the spreadsheets.
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Aman W
Respectfully, while the report raises valid points, it's easy to critique from the outside. Managing an economy as vast and complex as India's is a monumental task. The global headwinds are strong. We should acknowledge the efforts being made to maintain stability.
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Nisha Z
The "gridlock" analogy is perfect. Too many small stakeholders, too much bureaucracy, and not enough bold, cohesive action. We need a clear long-term vision, not just reactive measures. The youth need jobs, not just reports! 💪

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