- Inflation fell sharply: From 3.2% in April to 2.8% in May 2025 — within RBI’s target.
- Unemployment rose simultaneously: From 5.1% in April to 5.8% in May, based on PLFS data.
- Key critique: Celebrating falling inflation while ignoring rising unemployment is economically myopic.
Relevance: GS 3(Indian Economy)
Growth and Employment Link
- GDP growth slowed: From 9.2% in 2023–24 to 6.5% in 2024–25.
- Broad-based deceleration: Most sectors saw slower growth except agriculture and public administration.
- Rising unemployment aligns with this growth slowdown, showing a structural concern.
Agriculture’s Role in Lowering Inflation
- Agricultural sector outpaced non-agricultural sectors in growth.
- This narrowed the supply-demand gap in food, sharply reducing food inflation:
- From ~11% in Oct 2024 to <1% in May 2025.
- Hence, real factors (supply-side) explain inflation reduction more than monetary tightening.
Limits of Monetary Policy
- Services sector slowdown can’t be attributed to interest rate hikes — it’s less credit-dependent.
- Monetary policy likely followed inflation trends rather than driving them.
Econometric Evidence
- Study shows no conclusive role of interest rates in curbing inflation in India.
- Agricultural price movements, linked to sectoral growth differences, are the dominant factor.
- Inflation targeting via demand suppression is ineffective when inflation is supply-side driven.
Expectations & Central Bank Credibility
- RBI’s claim of influencing inflation expectations is weak:
- Household inflation expectations remained high (above 4%) from Mar 2024 to May 2025.
- Hence, inflation decline cannot be due to expectation management.
Conclusion: Rethinking Macroeconomic Assessment
- Focusing solely on inflation ignores jobless growth and the economic distress it causes.
- A holistic macroeconomic evaluation must considered .
