India’s Goldilocks Moment: How Long Can It Last?

Applying it to the economic scenario right now seems apt, given that all elements have combined to make the situation just right, at least for the time being. For a Goldilocks moment in an economy, low inflation is a significant indicator, and this reached a six-year low of 2.8 per cent in May.

Low Inflation & Rate Cut Provide Comfort

It has been supported by a decline in food inflation, an area that proved worrisome last year. The relief on the price front has emerged at the same time as the central bank’s unexpected decision to cut interest rates by as much as 50 basis points in the June meeting of the monetary policy committee. 

Another positive factor contributing to the sunny outlook currently has been the sustained rise in GDP growth. The Reserve Bank of India (RBI) has projected 6.5 per cent growth for 2025-26, the same level as last year.

While this may not be “just right” for an emerging economy that needs a faster pace of growth, it is commendable in the face of rising geopolitical tensions. Even as growth is slowing around the world in response to these pressures, India has emerged as the fastest-growing major economy for the second year in a row.

Latest data shows an upswing in key indicators like buoyant inflows of Goods and Services Tax (GST), while rural consumption has also picked up.  

Unemployment Rate Low & Steady

It is on the third pillar of a Goldilocks moment - low unemployment - that one has to take a more cautious approach. The unemployment rate for May is estimated at 5.6 per cent, according to the Periodic Labour Force Survey.

While this has risen slightly compared to the previous month, it is in line with annual trends over the past decade. In other words, unemployment has not risen sharply in recent months and has been contained at past levels.

To that extent, it conforms to the definition of moderation in key segments of the economy. It may not be an ideal situation, but it indicates stability on the employment front. 

The question is, how long will this Goldilocks moment last for the domestic economy?

There Are Red Flags Though...

The Finance Ministry itself has raised some red flags in relation to geopolitical tensions as well as energy prices. The country has been able to navigate the ripple effects of global conflicts with relative impunity till now.

The Iran-Israel war has, however, raised the spectre of high oil prices, which could be daunting for a country that imports 85 per cent of its crude needs. 

The situation regarding merchant shipping moving through the Suez Canal route via the Red Sea also remains fraught with tensions. The Yemen-based Houthis, who have been making attacks on cargo vessels, have succeeded in ensuring that many major shipping lines have moving cargoes via the Cape of Good Hope.

This has raised costs tremendously for all countries using this route. As much as 15 per cent of global trade is estimated to use the Suez Canal route, including importers and exporters from India.

The Goldilocks situation of harmony on the economic front is thus a tenuous one, as much will depend on the geopolitical scenario in the coming days. In case the ceasefire between Iran and Israel breaks down or hostilities expand in other parts of West Asia, it may be difficult to maintain the economy at just the “right” level.