The Indian economy is now looking far less fragile than it has been over the past two years. The gradual decline in inflation as well as the dramatic reduction in the current account deficit is a sure sign that excess demand pressures are finally easing.

A growth revival is not yet on the horizon. But the ability of the Indian economy to withstand a global shock is far higher than what it was during July 2013. It is no surprise that the rupee has been strengthening against the dollar in recent weeks despite the fact that the US is committed to keep trimming its extraordinary monetary stimulus.

Much of the credit for the growing stability should go to finance minister P. Chidambaram, who learnt the harsh lessons on offer in the weeks when the rupee seemed to be in free fall. Raghuram Rajan also flanked him since he took over as Reserve Bank of India governor. It is worth comparing the recent Indian success in reducing external imbalances with some of the other countries whose currencies were battered last year. India and Indonesia have worked hard to bring down their current account deficits; Turkey, Brazil and South Africa have done precious little.

Of course, the sceptics have a point when they say that the reduction in the current account deficit is an exaggeration because gold imports have been pushed underground by the import curbs imposed over the past year. And the decline in consumer price inflation is largely explained by the seasonal decline in vegetable prices; core inflation has not seen a similar decline. But the economy does seem more stable even after taking these criticisms on board.

However, the battle is far from over. India continues to be a high inflation economy. Retail inflation is around three percentage points higher than the average of nine comparable emerging market economies I have considered. The latest inflation reading is only 1.6 percentage points lower than its average since the new national consumer price inflation began to get calculated in January 2012. And the rate at which prices rose when India had a similar growth rate a decade ago was half the current rate, if one considers the consumer price index for industrial workers in fiscal year 2003.

What this means is that India is only in the early stages of disinflation. One easy thumb rule to figure out how much more inflation needs to fall is as follows. Central banks in the rich countries have a retail inflation target of 2%. It is often assumed that inflation in the high growth emerging markets should be around two percentage points higher than in the rich countries because of what economists call the Balassa-Samuelson effect, or around 4%. It is worth pointing out here that the Sukhamoy Chakravarty committee on monetary policy had said in 1985 that India should keep inflation below 4%.

The Urjit Patel committee has recommended a similar target in its recent report. But it has suggested that the Indian central bank should move to the eventual inflation target gradually—the so-called glide path that will ensure that there is no brutal monetary squeeze at a time when growth is so sluggish. The latest consumer price inflation data shows that Indian inflation is just a whisker above the target given by the Patel committee for January 2015, which is why many private sector economists are predicting in their reports that interest rates will not be touched in the monetary policy due in April.

Any prolonged fight against high inflation comes with output losses. There has been some work done by economists at the Indian central bank on the size of the sacrifice ratio—or how much growth has to be sacrificed for every one percentage point reduction in inflation. However, the current thinking is that Indian inflation is so high that its reduction will in fact help rather than hurt growth. To the mathematically minded, what senior central bank economists are now saying is that the function mapping the two variables is convex rather than a straight line.

The growing signs of stability in the Indian economy are thus welcome. Stability is essential before there is a growth revival; any attempt to prematurely stimulate growth at a time when there is high inflation and an unsustainable current account deficit will only push the economy back to the edge of an abyss. But economic stability will be of little use if it is not seen as an opportunity to eventually get growth back on track. There is a lot to be done here, especially getting companies back into investment mode. The battle promises to be a long one.

The United Progressive Alliance government will leave behind an economy that is in important ways much weaker than the one it inherited in 2004, if one looks at the latest combination of four parameters: economic growth, fiscal deficit, current account deficit and retail inflation. The numbers do not lie.

Niranjan Rajadhyaksha is executive editor of Mint. Comments are welcome at

To read Niranjan Rajadhyaksha’s previous columns, go to