New Delhi [India], January 5 (ANI): India’s “Goldilocks” economic narrative is showing increasing signs of strain, as weak tax buoyancy and shrinking fiscal space are creating a policy gridlock, according to a report by Systematic Research.
While headline growth numbers suggest a strong economy, underlying momentum remains fragile, leaving policymakers with difficult choices. Recent fiscal and monetary measures have appeared counterintuitive in an environment officially projected as high-growth and low-inflation. The report noted, “Headline growth masks fragile momentum, leaving the government trapped in a policy dilemma.”
One example cited is the increase in the basic excise duty on cigarettes, announced shortly after GST rationalisation, expected to generate around Rs 400 billion in additional annual tax revenue. A “Goldilocks” economy refers to a balanced state with moderate, sustainable growth, low inflation, and low unemployment, avoiding both recession and overheating, while a “gridlock economy” implies excessive fragmentation of resources, limiting economic efficiency.
On the monetary side, the Reserve Bank of India (RBI) surprised markets with additional large open market operations (OMOs) worth Rs 2 trillion and USD 10 billion in USD/INR buy-sell operations, just weeks after signalling substantial OMO and swap purchases.
These measures are unusual given the reported 8 per cent real GDP growth and near-zero inflation, traditionally considered a “Goldilocks” phase. Yet, policymakers have implemented what the report describes as emergency-style support, including cumulative CRR cuts of 150 basis points, repo rate cuts of 125 basis points, liquidity infusion close to Rs 8 trillion, and fiscal stimulus through GST reductions.
Despite these steps, market indicators suggest limited easing of financial conditions. The 10-year government security yield has risen to 6.6–6.65 per cent, the Indian rupee weakened past 90 against the US dollar, and system liquidity slipped into deficit.
The report concluded that these trends highlight concerns that aggressive fiscal expansion and liquidity support may be crowding out private sector capital expenditure. With narrowing fiscal space and rising borrowing pressures, recent monetary and fiscal interventions may further constrain policy flexibility in the months ahead.
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