Why declining inflation augurs well for India’s economic growth

Since last month, a kilo of tomatoes can be bought for anywhere between Rs 10-Rs 20 in the weekly vegetable market in Delhi. The exact quantity of tomatoes cost Rs 60 (sometimes more) during the Diwali season last year.

The sharp decline in the retail price of tomatoes, a kitchen staple, is seen in data from the consumer affairs ministry’s price monitoring cell too. According to this data, on Wednesday (March 12) a kilo of tomatoes retailed for just about Rs 12 in Madhya Pradesh, Rs 15 in Bihar, Rs 20 in Delhi and Rs 19 in Andhra Pradesh. Last year, on March 12, the same quantity of tomatoes was being sold for Rs 23 in Bihar, Rs 28 in Delhi and Rs 30 in Madhya Pradesh. On Diwali last year (October 29), the average all-India price for a kilo of tomatoes was Rs 61.

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So the retail price of tomatoes has not only eased compared to Diwali but has been falling since February as supplies have surged. Similarly, retail prices of onions and potatoes have also shown a downward trend across the country since February.

Softening inflation rate

This decline in vegetable prices is one of the key reasons for the softening inflation rate as the latest official data shows that the year-on-year inflation rate, based on the All India Consumer Price Index (CPI) for February 2025 over February 2024 is 3.61%. This is a decline of 65 basis points (0.65%) in headline inflation of February versus January 2025 and the lowest year-on-year inflation after July 2024.

While lower inflation is good news, if it is sustained over the next few months, it could also positively impact overall private final consumption expenditure (PFCE), which is critical in accelerating India’s economic growth. Close to two-thirds of Indian GDP is accounted for by PFCE and this expenditure has not been growing fast enough over the last few quarters, especially in rural pockets. This has generated concerns over India’s economic growth.

In any case, a sustained lower inflation print could spur the Reserve Bank of India (RBI) to cut policy rates (they were lowered for the first time since the COVID-19 pandemic last month) again during the monetary policy committee meeting in early April. This could translate to lower EMIs which, in turn, may boost consumption in the form of increased buying of consumer durables, two-wheelers, cars and many fast-moving consumer goods (FMCG) products.

Vegetables, pulses in deflation

The ‘food and beverages’ category has the biggest weightage in the CPI basket at nearly 46%. So cheaper veggies usually have a disproportionately large impact on the overall inflation number.

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Rajani Sinha, Chief Economist at CARE Ratings, said that inflation in the ‘food and beverages’ category moderated to 3.8% in February, the lowest since May 2023. “Vegetable inflation, which had been a significant contributor to the overall inflation, slipped into deflation (at -1.1%), reversing the trend of high inflation seen in the past months. Additionally, deflation in pulses (at -0.4% Vs 2.6% last month) also supported the lower food inflation reading. On the other hand, double-digit inflation in edible oils (16.4%) and fruits (14.8%) somewhat capped the moderation in overall food inflation.”

Sinha cautioned that edible oil prices continue to be a crucial factor to monitor, particularly given the contraction in the sowing of oil seeds and the rise in global edible oil prices. But benign food inflation spells cheer. CARE Ratings has projected CPI at around the 4% level going ahead, supported by comfortable core inflation and moderating food inflation.

RBI inflation forecast

According to the minutes of the latest monetary policy committee meeting, the members have noted that going ahead, food inflation pressures, absent any supply side shock, should see a significant softening due to good kharif production, winter-easing in vegetable prices and favourable rabi crop prospects.

RBI has projected CPI inflation for 2024-25 at 4.8%, with Q4 (January-March 20205) at 4.4%. The MPC has further said that “assuming a normal monsoon next year, CPI inflation for 2025-26 is projected at 4.2% with Q1 at 4.5%, Q2 at 4%, Q3 at 3.8% and Q4 at 4.2%.”

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Consumption boost

In its outlook released earlier this month, Crisil has said that private consumption is expected to improve on expectations of healthy agricultural production and cooling food inflation. Softer food inflation should create space in household budgets for discretionary spending.

“The tax benefits announced in Union Budget 2025-2026 and increased allocations towards key asset- and employment-generating schemes are expected to support consumption. Thirdly, easing monetary policy by the Reserve Bank of India (RBI) is expected to support discretionary consumption. We expect the RBI’s Monetary Policy Committee (MPC) to cut the repo rate by 50-75 bps in fiscal 2026.”