Newspaper Summary 180826

 

Small firms could get big relief on bank guarantees

Performance bank guarantee may go as govt plans to leverage existing schemes

By Manas Pimpalkhare

NEW DELHI: The Centre aims to ease cash concerns for smaller enterprises by scrapping stiff performance bank guarantees required for government contracts, according to two officials aware of the discussions. Instead, the government plans to marshal existing schemes to support the performance requirement, which could potentially free up working capital totalling trillions of rupees for enterprises that form the backbone of Indian industry.

The Union ministry for micro, small, and medium enterprises (MSME) is currently discussing this proposal with the department for promotion of industry and internal trade (DPIIT). Many government contracts presently mandate that MSMEs furnish a performance bank guarantee to compensate the government for potential defaults, which often burdens small businesses living on thin margins.

Under the current General Financial Rules of 2017, MSMEs securing a government contract valued at over ₹10 lakh must furnish a performance bank guarantee worth 3-10% of the project value. The proposed shift involves linking these requirements with the Centre’s existing credit guarantee schemes. Under these schemes, the government promises to cover lenders’ losses in case of default, allowing businesses to access collateral-free bank loans.

Industry Impact and Significance Industry stakeholders have noted that this relief would be particularly welcome for the MSME sector, where the vast majority of enterprises are micro units with a turnover of less than ₹10 crore. Vinod Kumar, president of the India SME Forum, stated that removing these guarantees has been a long-standing plea, as they force smaller businesses to set aside significant working capital, narrowing their room for expansion.

The significance of this proposal is highlighted by several key data points:

• MSMEs accounted for 50% of the central government’s ₹2.30 trillion procurement of goods and services in FY26.
• A November 2025 report by axiTrust estimated that nearly ₹15 trillion (about 4.5% of India’s GDP) remains frozen in bank guarantees.
• The proposal is expected to provide relief to India's 74 million MSMEs, which account for over 30% of GDP and employ over 320 million people.

Expert Perspectives R. Gandhi, a former deputy governor of the Reserve Bank of India, described the idea as positive, noting that performance bank guarantees are an additional burden that often require fixed deposits as collateral. "If performance bank guarantees are not a requirement, their liquidity position also improves, and cost of operations also becomes lower," he said.

Veeramani C., professor and director at the Centre for Development Studies, added that MSMEs face higher risks than larger firms because their capital base is lower and their businesses are less diversified, making it difficult to balance a single contract failure with other successes. A performance bank guarantee safeguards contractual performance for the buyer, but replacing it with government credit guarantees could significantly reduce this financial strain on small enterprises.

Microsoft, others eye buyout of HR firm Darwinbox

Darwinbox has so far raised $290 million

By Sneha Shah

MUMBAI: KKR-backed human resource and payroll services provider Darwinbox is drawing buyout interest even as it prepares for a potential public listing over the next couple of years. Existing investors Salesforce and Microsoft, along with US-based HR and payroll services provider ADP, have approached its founders and board with the intention to buy others out, according to people familiar with the development.

Valuation and Investment Darwinbox was valued at around $1 billion when it raised $140 million from KKR and Partners Group in March last year. Sources now indicate the company is likely to be valued at approximately $1.8-2.0 billion. One person noted that high-growth SaaS (software as a service) companies with domain expertise are seeing significant traction from global financial and strategic investors.

To date, the firm has raised $290 million across various funding rounds. Its investor base includes:

• KKR and Partners Group
• 3one4 Capital
• Lightspeed
• Sequoia
• Salesforce
• Microsoft
• TCV

Company Response and Plans A spokesperson for Darwinbox denied any talks for a stake sale, stating that the company is on track to pursue an initial public offering (IPO) in the medium term. While Salesforce and Microsoft did not answer queries, an ADP spokesperson declined to comment. Industry insiders suggest that while Salesforce and Microsoft aim to add payroll services to their product bouquets, firms like ADP want to deepen their existing expertise.

Growth and Operations Founded in 2015 by Jayant Paleti, Rohit Chennamaneni, and Chaitanya Peddi, Darwinbox provides an end-to-end HR platform covering recruitment, onboarding, attendance, payroll, and people analytics. It serves over 1,000 clients, including major names such as Adani, Mahindra, JSW, Swiggy, Starbucks, Nivea, and Kotak.

According to an October 2026 report:

• Operating revenue jumped 50% to ₹533.9 crore in FY25, up from ₹334 crore in FY24.
• International expansion drove much of this growth, with overseas revenue up 83% year-on-year.
• International markets contributed 63% of new sales.

Sector Context Darwinbox operates in a thriving sub-segment; India currently has about 3,000 HR SaaS firms, with 324 of them having collectively raised over $2.08 billion in venture capital and private equity funding. Of these, 101 have reached Series A+ funding, and two, including Darwinbox, have achieved unicorn status.

Can India sustain its consumption revival in Q2?

By Neethi Lisa Rojan

The retail consumer sector experienced mixed growth during the April-June period (Q1FY27). While the quarter was marked by unprecedented raw material price hikes fueled by the West Asia war, GST cuts played a significant role in boosting consumption. As India moves into the second quarter, several factors are shaping whether this revival can be sustained.

Which consumer segments grew in Q1? Growth was most robust in rural consumption, premium fast-moving consumer goods (FMCG) categories, quick commerce, and consumer durables. Hindustan Unilever’s CEO, Priya Nair, noted a significant "step-up" in rural growth over the last few quarters. In the tech-led retail space, Zomato’s parent company, Eternal, reported a 268% year-on-year (y-o-y) jump in consolidated profit. Additionally, consumer durable firms saw strong revenue growth as a particularly harsh summer spiked sales for air conditioners.

How did retailers perform? Indian listed retailers generally had a strong first quarter, though performance varied by niche:

• Value Fashion: This segment outperformed general retail, with V Mart reporting a 40.5% increase in net profit.
• General Retail: Avenue Supermarts reported a more subdued quarter, as slowing sales at mature stores and higher operating costs weighed on profitability. The management indicated that the rapid store expansion seen last year (+20% y-o-y) might not be feasible for FY27.
• Supply Chain Risks: Trent (parent of Zudio and Westside) flagged emerging risks related to raw material inflation and supply chain disruptions.

What other factors are shaping demand? Several macroeconomic factors are influencing current demand:

• Monsoon and Inputs: Fears regarding El Niño have subsided following strong rains in July. Furthermore, crude oil prices have dropped to $70–80 per barrel, which has lowered costs for transportation and plastic packaging.
• Inflation Challenges: Rising food prices remain a hurdle. India’s retail inflation reached 4.45% in July, surpassing the RBI’s 4% midpoint target, with food inflation specifically rising to 5.52%.
• Specific Hits and Wins: While soap and detergent makers like HUL, Jyothy Labs, and Godrej Consumer were pinched by packaging costs, Marico saw a 45% drop in the price of copra (a key raw material), allowing it to cut prices and achieve a record 11% volume growth.

How may the coming quarters look? Most companies are optimistic about a stronger performance in the upcoming months. A primary driver is the extended festival season, which runs from August to November this year, providing a larger sales window than the previous year. Additionally, jewellery sales are expected to rebound; they were previously hampered in May by the adhik maas (an inauspicious period) but are now poised to pick up as international tensions subside. To capitalize on this, companies are currently restructuring portfolios and rolling out new products.

Why Big Tech’s AI spending is $3 trillion higher than it seems

Massive spending commitments for data-center leases and chips aren’t shown on companies’ balance sheets

By Peter Rudegeair & Peter Santilli

Google parent Alphabet, Meta Platforms, Oracle, and many others have disclosed massive capital expenditures on artificial intelligence infrastructure, but these figures do not capture the full extent of their future spending. A Wall Street Journal analysis of securities filings reveals that nine top tech companies have approximately $3 trillion in off-balance-sheet commitments, primarily related to AI.

The Scale of Obligations

These coming financial obligations are growing faster than traditional capital expenditures (capex), which totaled about $600 billion over the past reported year. The $3 trillion in commitments is roughly triple what these companies owe in outstanding leases and long-term borrowings. Under current accounting rules, purchase commitments typically remain off the balance sheet until the product or service is actually delivered.

Key examples of these burgeoning obligations include:

• Alphabet: Its purchase commitments and contractual obligations exploded to $811 billion as of June 30, a massive increase from the $332 billion reported just three months prior. These obligations, spanning several years, primarily relate to "technical infrastructure and inventory" and "energy for data center usage".
• Meta: The company disclosed $347 billion in total obligations for leases that haven't kicked in yet as of June. This includes the "Hyperion" datacenter project in Louisiana, which is the size of about 1,700 football fields. Meta has guaranteed to make bondholders whole even if it does not stay for the entire 20-year term, but since it does not view payments under that guarantee as "probable," no liability is recorded on its balance sheet.
• Nvidia: The firm committed to making $27 billion in equity investments between April 26 and the end of its fiscal year in January 2027.

The Risk of the AI Bet

Tech giants are placing these enormous bets on the assumption that demand for AI computing and hardware will continue to soar. Optimists point to current hardware shortages as proof that future revenue will easily cover these bills.

However, if these assumptions about technology and demand prove incorrect, these commitments could become a "monstrous burden" for companies and investors. Signs of strain are already appearing:

• Alphabet and Amazon recently reported negative free cash flow, meaning their capital spending exceeded the cash brought in from operations.
• Unlike some other expenses, purchase commitments and signed leases generally cannot be cancelled.
• If revenues do not arrive as expected, companies may be left paying for expensive infrastructure they cannot use profitably, potentially forcing them to borrow even more.

Morgan Stanley accounting analysts noted in April that as these off-balance-sheet commitments become larger and more complex, it is becoming "increasingly difficult for investors to assess companies’ total potential leverage".

The analysis covered commitments for Alphabet, Amazon, Microsoft, Meta, Oracle, Nvidia, Broadcom, SpaceX, and Advanced Micro Devices.

Haze over Hormuz

QUICK EDIT

With mutual strikes continuing and both the US and Iran having declared the unceremonious binning of their June memo on an interim truce, it’s effectively inconsequential whether the peace it promised gets a timeline extension after the 60-day period’s expiry on Monday. Yet, how the situation unfolds is being watched closely for what comes next.

With or without the memo’s renewal, the world must reckon with a muddle of claims on what matters to global markets: the status of the Gulf’s chokepoint, the Strait of Hormuz. The US-Iran deadlock arises from here. Both countries claim control of it. Both have asserted or hinted of permanent rights over it, signalling a world in which shipping lanes can be held hostage by military force.

Ship traffic through the strait remains a trickle regardless of who actually controls it. What’s clear is that this mutually assured obstruction must end before the oil reserves released by China and others run thin and lose their cooling effect on crude prices. To reduce the likelihood of an oil after-shock, the US may need to accept that its campaign has not yielded the results it sought. It is time to cut losses, put this war in the past and relieve markets.

Bollywood box office roars back but OTT deals stay flat

Every buyer today is far more focused on return on investment than simply acquiring content for scale.

By Lata Jha

NEW DELHI: India's box office is booming again, but that cheer isn’t spilling over into the market for films’ streaming, satellite and other ancillary rights.

The cumulative box office for January to June 2026 releases was ₹6,398 crore, making it the highest-grossing first half of any year since the pandemic, surpassing 2025 by nearly ₹650 crore. While this spark should have ideally resulted in greater enthusiasm for selling ancillary rights such as OTT and satellite TV, trade experts say there is still caution. Streaming and satellite rights fell by an estimated 50% and 70-80%, respectively, after the covid peak, and the trend has not reversed yet.

The Shift to Performance-Linked Value Platform economics are tighter than they were three or four years ago. Every buyer—whether a music label, a streamer, or a broadcaster—has learned to link value to demonstrated audience love rather than promise. While a few hits raise the ceiling, consistency is what will raise the floor, and industry executives say the industry isn't there yet.

"A successful theatrical run improves negotiating leverage, particularly because several streaming deals are now linked to box-office performance. However, it has not restored the earlier pre-sale market," said Rohit Dalmia, chairman and managing director of CineNow. He noted that while large films with stars remain easier to monetize, mid-budget and smaller films increasingly need theatrical validation or a clear platform fit.

Selective Buying and Profitability Digital and satellite-rights values remain under pressure as buyers prioritize profitability. Platforms now prefer performance-linked pricing, broadcasters assess television suitability, and music labels focus on repeat consumption. Even films that did "fair business" at the box office, such as Main Vaapas Aaunga and Pati Patni Aur Woh Do, only managed conservative deals.

Narendra Hirawat, chairman of NH Studioz, explained that entertainment is becoming more fragmented, with audiences choosing between creator-led content, gaming, and AI-generated content. "Naturally, broadcasters, music labels and streaming platforms have become much more selective before committing significant capital," he said.

End of Irrational Bidding Trade experts agree that the days of irrational bidding for every film are over. Platforms are now evaluating projects based on content, commercial potential, and audience fit rather than just the production house or star cast. Some have reduced acquisition budgets, while others focus exclusively on carefully curated titles. Additionally, industry consolidation, mergers, and changing consumption patterns have contributed to the market slowdown.

Iran’s secret plan to escalate the war

Intelligence suggest a strategic shift by hard-line leaders to raise the costs for the U.S. and its regional allies

By Benoit Faucon & Summer Said

Tehran's Hard-Line Strategy After President Trump signed a memorandum of understanding with Iran in mid-June, administration officials fanned out to build support for an agreement they hoped would reopen the Strait of Hormuz and start winding down the war. Iran’s hard-line leaders huddled in Tehran and came up with a different plan, according to Iranian and Arab officials. In their view, the pact was likely just an attempt by the U.S. and Israel to take pressure off the global economy and buy time for a bigger attack down the road. Instead of putting faith in talks, they took the past two months to prepare for a bigger fight.

Their efforts include giving the powerful Islamic Revolutionary Guard Corps (IRGC) more control of the country’s regular army, appointing hardened veterans of the war with Iraq and past internal crackdowns to key posts, expanding domestic counterintelligence operations, and ramping up production of missiles and drones. The leadership quickly seized the initiative, attacking ships to tighten Iran’s grip on Hormuz and expanding the battlefield to the Red Sea, which Saudi Arabia has used to get around Iran’s chokehold on the Persian Gulf.

Arab intelligence officials have picked up evidence—including communications between Iran and militia allies in countries such as Yemen and Iraq—of a strategic shift inside the country’s hard-line leadership to get their forces ready to widen the war and raise the costs for the U.S., officials familiar with the findings say. Alarming weaker Gulf countries like Kuwait, Iran’s leaders are increasingly talking about offensive operations on enemy territory. Their overriding goal is to inflict enough pain to ensure the kind of attacks Iran has endured during the continuing conflict are not repeated.

Diverging Perceptions of War “There is also a widespread view in Iran that the main war has not yet begun,” said Mohammad Hassan Sangtarash, a Tehran-based defense analyst close to the Iranian government. “What we have seen so far is increasingly interpreted through the lens of ‘salami-slicing’ tactics—limited, incremental escalation designed to weaken capabilities before a larger confrontation.” The Iranian preparations point to an enormous gulf between how Washington and Tehran are perceiving this stage of the war. This divergence has driven a hard-line negotiating stance and reluctance to close deals by Iran’s leaders.

Iran’s readiness to fight also highlights a deep lack of trust that is likely to keep the two sides from reaching a durable deal to end the conflict any time soon. While pragmatic members of the leadership, including President Masoud Pezeshkian, have warned that Iran needs a deal to end the war and gain sanctions relief or face economic collapse, the country is rebuilding its infrastructure and restoring access to missile bases much more quickly than expected. For the regime, “the baseline is war,” said Alan Eyre, a former senior U.S. diplomat and nuclear negotiator with Iran. “Iran will remain on a wartime footing, preparing for a subsequent attack.”

The Breakdown of the Memorandum When Trump signed the memorandum of understanding with Iran on June 17, it looked like the biggest hurdle would be convincing American critics it wasn't overly generous. The deal promised sanctions waivers and access to billions in frozen cash; in return, Iran was to open the Strait of Hormuz and negotiate in good faith on its nuclear program. However, when Iran started shooting at ships the U.S. was guiding through the strait in early July, it caught Washington by surprise.

In fact, Iran was pursuing a two-track policy. While diplomats pursued a peace deal, leader Mojtaba Khamenei was taking steps to prepare the security apparatus for an expanded confrontation. The Revolutionary Guard used the calm created by the memorandum to lay groundwork with allied militias, sending advisers to Iraq, Yemen, and Lebanon. Intelligence showed the IRGC sending commanders to Houthi-controlled areas to plan a stepped-up confrontation with Saudi Arabia, providing them with target lists including Saudi ports and energy facilities.

Escalation and Internal Reorganization The result was fighting that escalated through late July, with Houthis declaring the Bab al-Mandeb Strait closed to Saudi Arabia and launching drone attacks on its oil facilities. The IRGC threatened Gulf states it would destroy their energy facilities if the U.S. hit similar sites in Iran. Iran also escalated attacks on American troops, including firing five ballistic missiles at Jordan during a lull in the conflict. “We took full advantage of the ceasefire period,” Revolutionary Guard spokesman Brig. Gen. Hossein Mohebbi stated, noting enhanced capabilities and improved missile accuracy.

Behind the scenes, Supreme Leader Khamenei positioned his forces for a more aggressive fight, lining up seven key security leaders to run revamped military and repression institutions. These appointments aimed at tightening the military chain of command and turning ideological militias into neighborhood intelligence agencies. For instance, Mohsen Rezaei was named secretary of the Supreme National Security Council, and veteran Hossein Taeb returned to lead the Basij as a “popular intelligence network.”

Future Risks and Confident Demands The Revolutionary Guard has devised new plans for further escalation, including pre-emptive strikes and potential ground operations in Kuwait. In early May, Kuwaiti security forces intercepted six IRGC troops who had landed on a Kuwaiti island. Some Gulf officials say it is clear the IRGC hasn’t been defeated or deterred, and its hold on Hormuz has strengthened its regional position.

While mediators said Iranian diplomats agreed to a deal with Oman to gradually reopen Hormuz, those efforts were blocked by the Revolutionary Guard. As negotiations remain blocked, Iran’s leaders are slipping into a survival economy aimed at holding out. Strategic adviser Mehdi Mohammadi described the current stalemate as the “calm before the storm,” citing a “generational project for blood vengeance” for the killing of Supreme Leader Ali Khamenei in the opening strikes of the war. “Iran is prepared for the great confrontation,” Mohammadi warned.

China’s economic woes mount with disappointing start to half

Bloomberg

China’s economy got off to a sluggish start in the second half, reviving pressure to support growth as industrial output, consumption and investment all fared worse than forecast.

Key Economic Indicators for July:

• Industrial output expanded 4.5% from a year earlier, slowing for the first time in three months and missing estimates.
• Retail sales growth slowed to 0.6%, underperforming expectations.
• Fixed-asset investment fell at a pace of 6.7% year-on-year in the first seven months.
• The surveyed urban jobless rate rose to 5.2% from 5% in June.
• Passenger vehicle purchases fell 21% in July, a worrying sign for the auto sector, which is the largest goods component in retail sales.

July’s figures suggest that GDP growth likely decelerated to around 4.1%, falling below the 4.3% needed for Beijing to reach its annual growth target. Lackluster domestic demand and disruptions caused by extreme weather—including heavy rainfall and strong winds that temporarily shut factories—are setting back an economy already weakened by months of fiscal austerity. While exports have been booming, momentum appears to have weakened further at the start of August.

The National Bureau of Statistics (NBS) stated that while the economy has remained "stable" this year, the external environment is "complicated and volatile". The NBS acknowledged that domestic demand remains weak and that some companies are facing operational difficulties, noting that the foundation for economic stabilization "still needs to be consolidated".

A major factor weighing on household confidence is China’s ongoing property slump, which shows no signs of ending. New-home prices dropped at a faster clip in July, and real estate investment plunged 19.2% year-on-year in the first seven months, marking a fresh record low.

Jobless rate up in urban areas, down overall in Jul

By Subhash Narayan

NEW DELHI: India’s unemployment rate declined to 5.1% in July compared to 5.5% in June, as a marginal rise in joblessness in urban areas was compensated by a sharp easing of the rural unemployment rate.

According to the Periodic Labour Force Survey Monthly Bulletin (PLFS-M) released by the ministry of statistics and programme implementation on Monday:

• Urban Unemployment: The rate for those aged 15 years and above in urban areas rose to 6.7% in July from 6.6% in the previous month. This was driven primarily by an increase in the unemployment rate among females.
• Rural Unemployment: This segment witnessed a sharper easing, falling to 4.5% in July from a high of 5% in June. The male unemployment rate in rural areas fell from 4.9% to 4.6%, while female unemployment dropped from 5% to 4.3%.

Year-on-Year Comparison Compared with July 2025, the urban unemployment rate improved, falling from 7.2% to 6.7%. While the overall unemployment rate eased over the year, the rural unemployment rate saw a modest increase from 4.4% in July 2025 to 4.5% in July 2026.

The broken promise of education in India

Government spending on education has shrunk, and Indian families are footing an ever-growing bill for uncertain returns

By Sayantan Bera

Last month, a physics teacher at a government school in Delhi received a call from a former top student, 18-year-old Yashvardhan Kumar Mishra, that highlighted the distressing state of Indian education. Despite scoring in the 92nd percentile on the NEET exam, Mishra could not secure an affordable seat in a government medical college, as those require scores in the top 1%. Faced with private college fees exceeding ₹1 crore, Mishra is now entering his second "drop year" to attempt the exam again, a high-stakes gamble driven by a lack of viable alternatives.

A System of Exclusion During recent protests at Delhi’s Jantar Mantar, sparked by paper leaks, Gen Z youth and their parents voiced a growing sense of helplessness regarding sky-high education costs and stagnant job prospects. For families from middle- and low-income backgrounds, the hurdle is doubled by the need for expensive private coaching—Mishra's father, a garment sampling technologist, has already spent over ₹10 lakh on an elder son who earned a B.Tech but remains unemployed due to an "AI storm" impacting entry-level IT jobs.

The senior Mishra blames the state for abdicating its responsibilities. A Mint analysis reveals that Union government spending on school and higher education has nearly halved as a percentage of GDP over the last 15 years, falling to just 0.34%.

Falling Returns and Economic Insecurity The State of Working India 2026 Report by Azim Premji University provides empirical evidence of this crisis:

• Unemployment: Over 39% of young graduates (under 25) were unemployed in 2023, a sharper crisis than the 35% seen in 1983.
• Stagnant Earnings: Annual real earnings growth for male graduates (aged 20–29) was -0.8% between 2011 and 2017, compared to 3.4% growth between 2004 and 2011.

Venu Madhav Govindu, a professor at the Indian Institute of Science, notes that the state has ceded space to an "extractive and unaffordable" private sector, leaving the pathway to mind enrichment closed to all but an affluent minority.

"Reservation for the Rich" The crisis is particularly visible in medical education. According to the National Medical Council, India has 136,939 undergraduate medical seats, with more in private colleges (73,643) than government institutes (63,296). Educationist Maheshwer Peri argues that while the entrance system may be "transparent," it is not fair. Private seats essentially act as a "reservation for the rich," admitting students from wealthy families who can pay ₹1 crore even with low percentile scores. Meanwhile, government infrastructure struggles with a 37% vacancy rate in teaching posts across 20 AIIMS campuses.

Stifled Aspirations For those like Abhishek Kumar, the son of a marginal farmer from Sasaram, Bihar, engineering and medical dreams were never even on the radar. After his family spent ₹2 lakh on his sister’s unsuccessful bid for the civil services, Kumar scaled down his own goals to Group-B and Group-C government officer tests, for which online coaching is more affordable at ₹1,000 per month.

Sociologist Amman Madan points out that only about 15% of the relevant age group even makes it to the Class XII examination. He observes that roughly 85% of India is not even getting the chance to apply for vocational courses, let alone live up to their fullest potential, as they struggle against terrible odds to convert their talent into "merit".

Dovish inflation views: their supply may exceed takers

By Madan Sabnavis

One of the more complex concepts in economics is inflation, even though it simply refers to an increase in prices. When we say inflation has come down from, say, 6% to 2%, it means the rate of change of prices has come down, but prices are still going up. If prices fell across the board, it would reduce the incentive of producers to produce goods and services.

The Malleability of Interpretation The interpretation of inflation has had a distinct touch of malleability. Of late, there has been a tendency to argue that inflation is up only because of certain goods and services, excluding which would make the number less bothersome. However, the same argument is not put forth when inflation declines. A sharp fall in prices of pulses or vegetables, for example, can cool inflation. There exists a school which always argues that inflation is low; even when high, ‘momentum’ was tossed in, which simply meant looking at month-on-month change.

An argument often advanced is that inflation is due to supply pressures. True, if food prices go up, it is usually because of a supply shortfall or minimum support prices hiked by the government. If fuel prices rise, then it is because fuel retailers have raised prices, usually done in response to an oil squeeze. Even core inflation (which strips out food and fuel) or ‘core-core’ inflation (which excludes gold) can be attributed to supply factors. For instance, healthcare inflation rises due to higher prices charged by overloaded hospitals, and personal products get costlier when companies raise prices to cover costs driven up by input scarcities.

Supply vs. Demand Rarely is inflation caused solely by a demand surge, as companies plan production in line with sales projections that tend to show stable growth. The argument that supply factors are the primary cause is also ingenuous because all product categories have different reasons for price mark-ups. In the food basket, high overall production of tur daal can drive down prices, while localized tomato crop damage can make it dearer. The best we can do is track a weighted basket of items without leaving out ‘supply hit’ products.

Furthermore, the famous base effect has been cited frequently this year to justify lower interest rates. As inflation was 2.1% last year, some argue it will not be much of a burden this year. But when it was 2.1%, few noted it was low because of a higher rate (4.6%) the previous year.

Perception vs. Reality While there can be a debate on these issues, the practical reality is that the consumer price index is designed to gauge inflation for consumers. The Reserve Bank of India’s (RBI) inflation perception survey shows interesting results:

• In 2025-26, when official inflation averaged 2.1%, consumer perception placed it at 7.1%.
• In the first quarter of this fiscal year, average inflation was 3.9%, but perceptual inflation reached 7.7%.

While inflation doves "splice and dice" data to show it is not a problem, the story at the household level differs. Higher food bills have left less money for discretionary consumption, leading several companies to lower the grammage of their products, a practice known as ‘shrinkflation’.

An interesting point concerns senior citizens, who hold almost half the term deposits in India. For them, what matters is cumulative inflation over the tenure of their deposits, as that erodes purchasing power. This was almost 19% over the four post-covid years, which helps explain why so many companies have been lamenting weak demand. Ultimately, the regulatory target is headline retail inflation, and while doves abound who argue price instability isn't a problem, the case they make is unconvincing.

Madan Sabnavis is chief economist, Bank of Baroda, and author of ‘Corporate Quirks: The Darker Side of the Sun’.