New Delhi [India], January 5 : India's much-discussed "Goldilocks" economic narrative is increasingly showing signs of strain, with weak tax buoyancy and shrinking fiscal space creating a policy gridlock, according to a report by Systematic Research.
The report highlighted that while headline growth numbers suggest a strong economy, the underlying momentum remains fragile. This has left policymakers facing difficult choices, with recent fiscal and monetary actions appearing counterintuitive in what is officially projected as a high-growth, low-inflation environment.
It stated, "Headline growth masks fragile momentum, leaving the government trapped in a policy dilemma".
The report shared that one such move is the increase in the basic excise duty on cigarettes, announced only months after the government undertook GST rationalisation. The hike is estimated to generate additional annual tax revenue of around Rs 400 billion.
A Goldilocks economy is a balanced economic state with moderate, sustainable growth, low inflation, and low unemployment, avoiding both recession ("too cold") and overheating ("too hot"). The "gridlock economy" means that too many people own tiny pieces of something valuable, causing everyone to lose out.
On the monetary side, the Reserve Bank of India surprised financial markets by announcing additional large open market operations (OMO) involving government securities worth Rs 2 trillion, along with USD 10 billion of USD/INR buy-sell operations. This came just weeks after a monetary policy statement that had already signalled substantial OMO and swap purchases.
The report noted that these actions are unusual because they are being implemented during what is described as a "Goldilocks" phase, marked by 8 per cent real GDP growth and near-zero inflation.
Despite this favourable backdrop, policymakers have rolled out measures that resemble emergency-style support.
These include cumulative CRR cuts of 150 basis points, repo rate cuts of 125 basis points, liquidity infusion of close to Rs 8 trillion, and fiscal stimulus through GST reductions.
However, market indicators suggest that these measures have not eased financial conditions as intended. Interest rates have moved higher, with the 10-year government security yield rising to the 6.6-6.65 per cent range.
At the same time, the Indian rupee has weakened beyond 90 against the US dollar, and system liquidity has slipped into deficit.
According to the report, these trends point to growing concerns that aggressive fiscal expansion and liquidity support could be crowding out private sector capital expenditure.
With fiscal space narrowing and borrowing pressures rising, the recent liquidity push by the government and the central bank may further constrain policy flexibility in the period ahead.