In spite of different measures planned and executed by the central bank of the country – the Reserve Bank of India – and fiscal policy which is planned and implemented by the union government of India continues to grapple with recurrent inflationary pressures in 2025. What initially seemed like a short-term impact of world’s supply chain disturbances and the repercussions of the pandemic has reinforced into a more rooted economic reality, affecting household budgets and macroeconomic stability. This is an attempt to analyze the crucial contributing to this persistent inflationary environment.
Current Global Supply Chain Challenges and Geopolitical Uncertainty:
Although the intense phases of the pandemic-created supply chain constraints have eased, their ripple effects continue to be felt. International conflicts, specially the ongoing strife in Eastern Europe and distressed global relations, have further aggravated these issues. These occurrences have resulted in:
- Soaring fuel prices: The strife has notably affected the international fuel markets, propelling prices of crude oil and natural gas booming. In view of the fact that our country, India, meets its energy consumption needs through importing considerable amounts of crude oils from surplus producing countries of the world, these exorbitant prices apparently result in hiked transportation costs, costs of production and eventually, escalated prices for a diverse selection of goods and services. For example, the price of petrol in some large urban centres has still hovering around Rs. 110 per litre for a significant part of the year.
- Erratic Commodity Flows: The conflict and resulting trade restrictions have severely hampered the flow of essential goods such as inorganic fertilizers, cooking oils and some certain metals. India’s significant consumption of these commodities has made it susceptible to volatile price swings and increasing costs. The price of sunflower oil has definitely seen a big jump and has not come back down to where it was before the conflict among the countries.
- Elevated transportation costs: Even though container freight rates have diminished from their peak just one year after the pandemic, they persist to be higher than pre-pandemic levels because of supply chain disruptions and port congestion in certain regions. This makes imported stuff cost more, which makes everything else more expensive too.
Significant local demand and consumption:
Reliable economic growth driving power of India, even with a generally positive outlook, has also led to inflationary pressures. Surged in personal disposable incomes and consumer believe have boosted demand for goods and services of various sectors. This is manifest in:
- Retail sector expansion: The official facts and figures observe a considerable escalation in retail sales across various sectors in October – December 2024, from consumer durable goods to garment industry. The current high demand environment empowers producers with the pricing power to shift increased input costs to consumers while maintaining comparable sales figures.
- Growth of the services industry: The tertiary sector which shares considerable portion in GDP of India has witnessed strong growth, paved the way in hike of prices for services such as hospitality, recreation and self-care. For example, the aviation industry is seeing a rise in demand this is what’s keeping airfares stubbornly high.
- Public expenditure: When the government keeps spending a lot of money, it is like everybody suddenly has more in hand cash. This can be good for creating basic infrastructure for the country like constructing roads, electricity generation and business firms. However, if everybody starts wanting to buy more goods and services than what is actually available, prices might hike which led to inflation. Therefore, while government spending helps the economy to boost, the state needs being cautious not to spend exceedingly that stuffs become exorbitant.
Core economic vulnerabilities facing India:
- Fragilities of farming: More dependency of farmers on monsoon, scattered landholdings by marginal and small farmers and poorly functioning agricultural distribution lead to price unpredictability in essential food items. Weather with significant fluctuations in the previous year has affected harvests for pulses and vegetables; the price of these essential goods has risen sharply.
- Inefficiencies hindering the movement of resources: Lack of proper infrastructure, comprising interconnected system of roads, railways and airways and warehouses, leads more surges in production costs. It also creates delay in the conveyance of commodities, adding to the final price paid by consumers. The transportation of commodities take time to travel from factories/production units to consumption centres remains a concern.
- Fragile supply lines in essential sectors: Some of the crucial sectors of the country confront the supply-side constraints, like production volume is constrained or not availability of skilled labourers in sufficient amount, which can lead to more surge in prices as demand surpasses supply. For example, the automotive sector has faced fragmentary production challenges because of lack of semiconductor chips.
Deterioration of the currency’s international value:
The currency of India has weakened against the American dollar over the past year. Import of raw materials and necessary items are becoming expensive in terms of Indian rupees which eventually lead to surge in inflation. Interest rate increases in major developed countries are creating headwinds for currencies in emerging markets, comprising the Indian rupee.
The possibility of a wage-price spiral:
As inflation continues in the economy, there are growing concerns about a potential wage-price spiral. The increasing cost of living is stimulating demands for higher wages, especially in formal sectors. If businesses shift these increased wages on consumers in the form of higher prices, it could create an escalating cycle of inflation. The upward trend in wages is reflected in recent public sector undertaking agreements.
Influence of Indirect Taxes and Regulatory Frameworks:
The Goods and Services Tax (GST) was designed to bring greater efficiency to the indirect tax structure, even with some elements staying the same and regular updates, costs can still go up. Regulatory policies within specific sectors can shape how much of a product is available and at what price it’s offered.
Finding a resolution:
To effectively combat India’s ongoing inflation, a comprehensive strategy is essential, addressing the forces that drive demand as well as the factors that limit supply. The monetary policy measures, planned and executed by Reserve Bank India, play an important role in adjusting demand. Still, state’s intervention through fiscal policy is equally important.
- Stabilizing essential food prices by improving irrigation, storage, and supply chain efficiency.
- To lower transportation costs and improve the movement of goods, we need to speed up the construction of highways, railways, and ports.
- Boosting local production and cutting import dependence in crucial industries.
- Practice sound fiscal policy to keep demand in check.
- Streamlining key sectors for higher output
Continuous inflation significantly threatens India’s 2025 economic growth and well-being of the country’s citizen. A coordinated strategy fusing monetary and fiscal policies along with structural reforms is in need for long-term stability. The success of current measures in checking this inflation will be evident in the coming months.
Frequently Asked Questions (FAQs)
Q1. What are the main causes of inflation in India in 2025?
Global geopolitical conflicts, supply chain disruptions, rising fuel prices, and strong domestic demand are key contributors.
Q2. How is the Reserve Bank of India responding to inflation?
The RBI is managing inflation by adjusting interest rates and controlling money supply to balance economic demand.
Q3. How does inflation affect the average Indian household?
It reduces purchasing power, making essential goods and services more expensive.
Q4. What long-term solutions can reduce inflation in India?
Improving infrastructure, enhancing domestic production, and managing public expenditure are crucial steps.
Tags: Inflation in India 2025, RBI inflation policy, Indian economy, fuel price impact, global supply chain, fiscal policy India, rupee depreciation
– Dr. Moharram Ansari, Assistant Professor
Department of Economics, Madhav University