Wages slump and low inflation hint at a slowdown despite high GDP growth

The Indian economy is in a piquant phase where unusually low inflation numbers — both in headline (Consumer Price Index, or CPI) and wholesale (Wholesale Price Index, or WPI) — point to a demand slowdown, even as FMCG and auto sales hit new highs after the September 2022 GST cuts and are expected to sustain this momentum.

At the same time, corporate profits in Q2 FY26 have returned to double-digit growth despite revenue growth remaining in single digits.

Inflation figures

This incongruity makes it hard to decipher whether the Indian economy is booming or its growth has stalled and is slipping. Consider the inflation numbers first.

• CPI fell to a 13-year low of 0.25 per cent in October, driven by falling food prices; it averaged 1.5 per cent in the past five months of June-October 2025, below the RBI’s lower band of tolerance (4 per cent with +/- 2 percentage points of tolerance). This is more like a deflationary phase.

• WPI fell to -1.2 per cent in October and averaged -0.3 per cent during the past five months (wildly fluctuating during the period, as the graph below shows). The Ministry of Commerce & Industry said the October fall in WPI was “primarily due to a decrease in prices of food articles, crude petroleum & natural gas, electricity, mineral oils and manufacture of basic metals etc.”

• Core inflation (CPI Industry) was 4.6 per cent in October and averaged 4.5 per cent during the past five months; this points to stable and healthy industrial growth. WPI inflation in manufacturing products was 1.5 per cent in October, averaging 2 per cent during the past five months.

• Services (miscellaneous in CPI) inflation was 5.7 per cent in October and averaged 5.3 per cent during the past five months. This too seems stable and healthy.

The following graph maps these numbers between June and October 2025.

Both the Finance Ministry and the RBI have highlighted, in their monthly reports, lower inflation since June and anticipated further dip after the GST rate cuts in September as a welcome development, indicating relief as well boost to consumption. But below 2 per cent inflation should worry both.

Debate over rate cuts

Meanwhile, worried by the low inflation numbers, economists and industry experts are talking about an imminent repo cut (by 25 basis points) by the RBI in the December cycle of the MPC meeting, to push more cash into the banking system to spur borrowing and investment.

The RBI had, in its October MPC, decided to keep the repo unchanged (at 5.5 per cent) and “continue with the neutral stance”.

On the contrary, SBI Research points to missing the chance to cut the repo rate in October. In its November 16 newsletter, it said the RBI’s estimate of inflation “is always on a higher side and now forecasted 2.6% for FY26, which seems to be 70/80 bps higher”. It went on to add: “…the RBI’s October decision to maintain status quo on policy rates now appears to have substantially narrowed its tactical flexibility. The Feb’26 policy (MPC), which many viewed as the next plausible window for a rate cut, is unlikely to offer the same freedom of action.”

Consider other economic indicators.

Growth conundrum

Growth in the Index of Industrial Production (IIP) is robust at 4 per cent in September (up to which data is available), averaging 3.2 per cent in five months between May and September. Both the core inflation (industry) – over 4 per cent and in line with the FY23-FY25 trend – and services inflation – 5-6 per cent – are also stable and normal.

Also read | GST cuts hailed as growth booster, but RBI risks ignoring warning signs

Post-GST cut, consumption spending has gone up, particularly in FMCG. Auto companies have registered a significant boost and are ramping up production, expecting the momentum to continue in the near future, pointing to healthy growth, even if not across the sectors.

The GDP numbers are robust. Real GDP growth in Q1 of FY26 (April-July) at 7.8 per cent surprised everyone – surpassing the RBI’s projection of 6.5 per cent and forcing it to revise its full FY26 growth from 6.5 per cent to 6.8 per cent. But its growth projections progressively go down (from 7.8 per cent in Q1) – 7 per cent in Q2 (to be declared later this month), 6.4 per cent in Q3 and 6.2 per cent in Q4. All these are in ‘real’ terms (inflation-adjusted).

The graph below maps nominal growth in quarterly GDP and consumption (PFCE) between Q1 of FY25 and Q1 of FY26.

What would explain such bewildering indications?

Making sense of indicators

The inflation numbers presented earlier indicate that the industry and services sectors are fine, and the trouble is with the agriculture sector.

For example, in October, food inflation fell by a massive -5.02 per cent. Since it (food and beverages) has a high weightage of 54.2 per cent in the CPI and 24.4 per cent in the WPI, a fall in food prices disproportionately impacts these indices.

The GST cuts happened only from September 22 and can’t explain the fall in CPI inflation (down to 2.1 and 1.6 per cent in June and July, respectively) or the WPI inflation (-0.2 and -0.6 per cent in June and July, respectively).

Agriculture presents a contrasting picture. Output has been robust in recent years, though this kharif and rabi seasons may fare worse because of unseasonal rains and flooding in states like Punjab and Gujarat. At the same time, the sector is burdened with an increasingly large workforce: job losses in manufacturing pushed workers into agriculture even before the pandemic, and the pandemic’s reverse migration further raised its employment share from 44.1% in 2017–18 to 46.1% in 2023–24 (PLFS data).

Rural wages under strain

Economist Pronab Sen says none of these factors is sufficient to explain the low inflation; there must be another one. In his assessment, rural wages may be falling, particularly in non-farm segments, thereby keeping agriculture wages low, and the two together keeping food demand very low.

Also read | 1 month of GST 2.0: Consumption zooms; will economy grow?

The RBI provides average daily wages in rural India across 25 occupations (both farm and non-farm), but its data is available until April 2025, while the drastic fall in inflation begins from June 2025.

Nonetheless, this data shows that, average growth (nominal) in rural wages during May 2024-April 2025 is 0.52 per cent, below 0.83 per cent during the corresponding previous year (May 2023-April 2024).

The Annual Survey of Unincorporated Sector Enterprises (ASUSE) maps informal and quasi-formal enterprises, providing another source of looking at wages. These surveys cover rural and urban areas. These establishments have hired workers, both formal and informal (with and without security cover). The job shares of urban and rural unincorporated enterprises are almost evenly matched (48:52).

Wage slump hits consumption

The last three ASUSE surveys of 2021-22, 2022-23 and 2023-24 show the number of informally hired workers has progressively gone up from 88 per cent in the first to 92 per cent in the second and 94 per cent in the third, pointing to rising precarity of workers (the total workers keeps rising).

These numbers don’t include unpaid workers. But the PLFS reports have shown the number of unpaid workers has gone up from 13.6 per cent (of the total workforce) in 2017-18 to 19.4 per cent in 2023-24. If the trend continues, India has far more unpaid workers (mostly women) now than in the past, reducing consumption demand.

All three reports (RBI, ASUSE and PLFS) point to a fall in rural wages – slowing down food consumption.

The SBI Research, mentioned earlier, provides wage growth across the country right up to the present time (the precise month is not given) – reproduced below. It shows that both nominal and real growth in wages have fallen sharply in FY26.

There’s no beating around the bush: Wages are on a downward spiral across the country and across the sector, dragging down food consumption.

Growth is stalling

This fall in consumption demand for food may be the real reason the prime minister suddenly announced the GST rate cuts on August 15 (which eventually came into effect in September 2022).

Also read | Higher wages and social security keys to unlocking informal sector

But despite the post-GST cut optimism in the RBI’s October bulletin and the Finance Ministry’s October monthly economic report (MER) about the Indian growth story, the RBI’s projections still show a downward slide in quarterly GDP growth in FY26 (as mentioned earlier).

Clearly, both the RBI and the Finance Ministry know that growth is stalling, but are unwilling to concede.