Since 2014, India has undergone a transformative economic shift that has addressed market distortions stemming from the previous era’s reactive and misguided policies.

The adoption of a formal flexible inflation targeting (FIT) mechanism in 2016 has been a cornerstone of this reform, streamlining monetary policy, enhancing accountability, and bolstering the credibility of India’s monetary management. This policy shifts corrected distortions caused by earlier ad-hoc interventions, which fueled uncertainty and inconsistent economic outcomes.

Inflation expectations shape how consumers, businesses, and investors anticipate future price rises. It significantly influences economic behaviour, driving a significant portion of price-related decisions in India. Stable inflation expectations drive stronger consumption spending in both rural and urban India, fostering economic choices and sustained growth.

By anchoring these expectations through the FIT framework, the policies spearheaded by the Prime Minister Narendra Modi-led Government have curbed volatile consumption patterns and pre-emptive price hikes, fostered price stability, and reduced market uncertainty. For example, this anchoring has mitigated the risk of a wage-price spiral, a distortion where rising wages and prices reinforce each other, destabilising the economy.

The strategic overhaul has addressed inherited challenges, such as unpredictable inflation and erratic policy responses, which previously undermined inclusive growth. By fostering stable prices and reducing uncertainty, these reforms have driven quantifiable gains in economic resilience, setting India on a path of sustained stability and inclusive development.

Eased Market Distortions

India adopted a FIT regime via an amendment to the Reserve Bank of India Act in May 2016, setting a 4% inflation target with a ±2% tolerance band.

During the decade ending in 2013, India experienced bouts of retail inflation ranging from 8-12%. There have been phases of sustained double-digit inflation in 2009-11 and again during 2012-13. The urban-rural MPCE gap stood at a stark 84% in 2011-12, reflecting an unequal economy where price spikes crushed the poor. Past regimes struggled with inconsistent monetary policies, juggling growth and inflation without a clear anchor.,

After 2014, the focus has been on balancing aggregate demand and supply. Policies such as Direct Benefit Transfers (DBT) and digital infrastructure (India Stack) have reduced leakages and stabilised prices.

The avoidance of populist cash handouts, unlike the proposed schemes of previous regimes, has been a feather in the cap of the current national leadership, which has curbed the fueling of retail inflation.

This minimised sudden price spikes, stabilising markets for food, fuel, and other essentials. The framework performed better than many developed economies during the 2022 global inflation spike.

Investment in Productive Assets Surges

Prior to 2014, high inflation eroded real returns on savings, discouraged bank deposits, and skewed credit allocation toward speculative assets like real estate, inflating asset bubbles. This misallocation hampered the growth of productive sectors like infrastructure & manufacturing.

FIT reduced uncertainty, encouraging investment in productive assets. The interest rate channel strengthened under FIT, enabling the RBI to adjust rates predictably, which supported investment planning.

Manufacturing credit growth also improved, with MSME lending under priority sector norms rising by 30% from 2016-20, supported by schemes like MUDRA (Economic Survey 2020-21).

Gross fixed capital formation in infrastructure rebounded to 6.8% annual growth from 2016-20, reflecting increased investment. Real estate price growth moderated, with the NHB RESIDEX Index showing a 5-7% annual increase in major cities from 2016-20, signalling reduced speculative bubbles. Economic Survey 2019-20 and 2020-21 highlight increased infrastructure investment post-2016, driven by government initiatives such as the National Infrastructure Pipeline.

Pick Up in Rural Consumption

Elevated food inflation disproportionately burdens rural households, eroding their real incomes and compelling them to prioritize essentials, thereby curbing discretionary spending and stunting rural market growth and economic diversification.

By maintaining inflation within the 2-6% target range, FIT helped stabilise food prices, preserving the purchasing power of rural consumers. Additional measures, such as the release of rice stocks and the introduction of GST in 2017, lowered food transportation costs, further supporting the stability brought about by FIT.

Based on data collected from almost 3 lakh rural households and 1 lakh urban households from the Household Consumption Expenditure Survey, the monthly per capita expenditures (MPCE) indicate that the urban-rural Monthly Per Capita Expenditure (MPCE) gap narrowed from 84% in 2011-12 to 71% in 2022-23, with rural MPCE rising to Rs 4,122 and urban MPCE to Rs 6,996, showcasing sustained rural consumption growth and more inclusive economic progress.

The shift from volatility to stability in India’s inflation dynamics post-2014 reflects a transformative approach to economic policy under the PM Modi-led government, contrasting sharply with the traditional and less effective strategies.

In a complete departure from heavy reliance on broad subsidies, such as food and fertiliser programs, which contributed to market distortions and demand-pull inflation without addressing supply-side bottlenecks, the recent decadal forward-looking and systemic policies have prioritised targeted interventions, structural reforms, and emphasis on supply-side efficiency. These have laid a foundation for sustained economic stability, marking a significant evolution in India’s inflation-targeting framework.