Inflation Falls But Not Unemployment

Notes for Students

Topic: Inflation vs. Unemployment in India – Limits of Monetary Policy and Structural Dynamics

Source News: The Hindu Editorial – “Inflation falls but not unemployment”
Published: June 24, 2025

Context of the Editorial: The editorial critiques the excessive celebration of inflation control without acknowledging rising unemployment and slowing GDP growth.

Relevant UPSC Paper: General Studies Paper III – Economic Development
(Subtopics: Indian Economy, Growth, Inflation, Employment, Monetary Policy, Inclusive Development)

Dimensions of the Article:

• Agricultural Growth vs. Non-Agricultural Sector
• Inflation Trend in 2025
• Rising Unemployment Despite Lower Inflation
• Link Between GDP Slowdown and Unemployment

Context of editorial

This editorial challenges the dominant narrative celebrating falling inflation in India, arguing that such celebration is misleading when unemployment and growth decline at the same time. The authors strongly assert that economic performance must be judged not just by inflation control, but also by employment generation and sustained growth — and current trends show weaknesses on these fronts.

Key Point 1: Inflation Down, But Unemployment Up

• Inflation rate (May 2025): 2.8% — dropped from 3.2% in April, and is well within RBI’s 4% target.
• Unemployment rate (May 2025): 5.8% — up from 5.1% in April, according to Periodic Labour Force Survey (PLFS).

Interpretation: While a fall in inflation benefits the employed (who retain purchasing power), it does nothing for the unemployed, who remain without income. The editorial argues that commentators often ignore the unemployed, focusing only on inflation because they themselves are typically employed and less impacted by joblessness.

Key Point 2: Flawed Assumption in Some Economic Theories

• Some Western economic theories (especially in the U.S.) assume that everyone who wants to work can find work — implying unemployment is voluntary.
• The authors call this absurd in India, where visible underemployment and surplus labour (e.g., daily wage workers waiting for jobs in small towns) disprove this assumption.

Interpretation: Structural unemployment and informality in India mean that jobs are simply not available to many — not that people choose not to work. Thus, policy must address unemployment as a serious real-world issue, not assume it will auto-correct.

Key Point 3: Declining GDP Growth Mirrors Unemployment Rise

• GDP Growth:
  • 2023–24: 9.2%
  • 2024–25: 6.5%
• This growth decline coincides with a rise in unemployment, showing the link between economic slowdown and job loss.
• According to provisional GDP estimates (NSO), slowdown is seen across almost all sectors, except:
  • Public administration (growth held steady)
  • Agriculture (grew much faster than usual)

Interpretation: The fall in inflation is likely linked to the rise in agricultural production, not any policy by RBI. This creates a false credit to monetary policy, when structural supply shifts (like better food supply) are the real reason.

Key Point 4: Food Price Dynamics Explain Falling Inflation

• Food price inflation peaked at ~11% in Oct 2024.
• Fell to less than 1% by May 2025.

This is due to:

• Agricultural sector growing faster than non-agricultural sectors.
• More food produced, so gap between food supply and demand reduced.
• Less pressure on food prices = overall Consumer Price Index (CPI) falls.

Interpretation: This natural sectoral shift (agriculture performing well) explains why inflation dropped. It has nothing to do with RBI’s monetary policy, which mainly works through interest rate control.

Key Point 5: RBI’s Monetary Policy Has Limited Role

• RBI raised repo rate to 6.5% in June 2022, but hasn’t increased it since.
• Yet inflation fell sharply only after Oct 2024, especially food prices.

Two arguments made:

1. It is unrealistic to say the 2022 repo rate hike caused inflation to fall two years later.
2. Most of the services sector (major part of GDP) is not dependent on formal credit, so repo rate hikes don’t impact them significantly.

Conclusion: RBI’s interest rate changes cannot explain the widespread economic slowdown or the fall in inflation. These are structurally driven, not policy-induced.

Key Point 6: Econometric Evidence Contradicts RBI’s Role

In their paper (“Inflation in India: Dynamics, Distributional Impact and Policy Implication,” June 2025), the authors provide empirical evidence:

• No strong link found between repo rate and inflation control in India.
• Strong link found between:
  • Relative growth rates of agriculture vs. non-agriculture
  • Agricultural prices → directly affect CPI and wage growth

Interpretation: The inflation we see is driven by supply-side imbalances, especially in food. So, monetary tightening (like repo hikes) that cuts demand is the wrong tool for such inflation.

Key Point 7: Inflation Targeting and Expectations Don’t Match Reality

RBI uses a model of inflation targeting — the idea that controlling inflation expectations helps control actual inflation.

But real data shows:

• Household inflation expectations (March 2024–May 2025) remained almost unchanged.
• Expectations stayed much higher than RBI’s 4% target — even while actual inflation fell.

Conclusion: If inflation expectations didn’t change, yet inflation fell, then inflation targeting failed to explain the outcome. It means the RBI didn’t control inflation — it followed it.

Final Observation: RBI’s Policy Is Passive, Not Active

• RBI Governor recently said repo rate may be lowered further if inflation continues to fall.
• But if RBI did not cause the inflation drop, then adjusting the repo rate now merely reacts to inflation, not influences it.

Interpretation: Monetary policy appears to be following inflation trends, rather than shaping them. This undermines the credibility of RBI’s role in inflation management.

Overall Takeaway for Students:

1. Macroeconomic performance must be judged holistically — not just inflation, but also employment and growth must be considered.
2. The celebration of inflation control in India today is misplaced, as it is happening alongside rising unemployment and slowing GDP.
3. Monetary policy (repo rate hikes) has a limited role in inflation control, especially when inflation is driven by food prices and supply issues.
4. Agricultural sector dynamics and relative sectoral growth patterns have a greater influence on inflation in India than RBI interest rate policy.
5. The claim that inflation expectations are managed by the RBI is not supported by data.
6. India needs policy tools beyond interest rates — especially structural reforms that boost employment, supply chains, and productivity — to manage inflation effectively and equitably.