Economic Survey 2025-26 Chapter 5 Summary for UPSC
Chapter 5 of the Economic Survey 2025-26, titled Inflation: Tamed and Anchored, explains how global and domestic inflation moderated sharply up to December 2025. It shows that India achieved a major decline in headline inflation while maintaining strong growth, reflecting macroeconomic stability, effective monetary policy, favourable agricultural conditions and timely supply-side interventions.
For UPSC, this chapter is important because inflation is not only a monetary policy topic. It connects with food security, agriculture, household welfare, rural-urban consumption, state-level price differences, manufacturing competitiveness and macroeconomic stability. The chapter also clarifies that India’s apparently sticky core inflation is largely due to gold and silver prices rather than broad-based demand pressure.
Chapter Snapshot: Most Important Facts
The core message of this chapter is: India’s inflation has been tamed without hurting growth. But UPSC answers should add nuance: the decline came mainly from food prices and favourable base effect, while core inflation needs to be interpreted after excluding precious metals.
Global Inflation Developments
Global inflation has moderated sharply from post-pandemic highs. Global headline inflation fell from 8.7% in CY2022 to 4.2% in CY2025. Advanced economies stabilised in the 2–3% range, while EMDE inflation declined from 9.7% to 5.3%.
Monetary Policy Responses of Global Central Banks
With inflation easing or remaining moderate, central banks in major advanced economies continued policy rate cuts. The UK, Euro Area and United States reduced rates by 75–100 basis points. India reduced its policy rate by 125 basis points. Japan was the outlier, raising policy rate by 50 basis points after moving away from chronic low inflation and deflation.
| Economy / Region | Inflation Trend in 2025 | Key Driver | UPSC Meaning |
|---|---|---|---|
| United States | 3.0% in 2024 to 2.7% in 2025 | Moderating core services and negative commodity inflation | Tariff pass-through may revive pressure. |
| Euro Region | 2.3% to 2.1% | Easing energy and food prices | Inflation softened despite Russia-Ukraine war. |
| United Kingdom | 2.5% to 3.4% | High services inflation and rate cuts | Outlier among major AEs. |
| Japan | 2.7% to 3.3% | Wage-driven inflation and weaker currency | Shift away from chronic low inflation. |
| China | 0.0% | Weak demand, tariff pressure and excess capacity | Deflationary or stagnant price conditions. |
| India | 2.8% as per IMF comparable period | Food disinflation and anchored expectations | Low inflation with robust growth. |
Commodity Drivers of Global Inflation
Global inflation moderated mainly because food and oil prices eased. Oil prices fell by more than 20% compared to the start of the year. Key metals such as aluminium and copper declined in the first half of 2025 but recovered later. Copper surged because of data centre and AI-related demand and tight supplies.
India’s disinflation is stronger when compared with several EMDEs because it happened with strong GDP growth. This supports the argument that inflation expectations are better anchored under India’s flexible inflation targeting framework.
Domestic Inflation: Sustained Moderation in CPI and WPI
India’s retail inflation followed a clear downward path over four years. CPI inflation declined from 6.65% in FY23 to 1.71% in FY26 up to December. WPI inflation remained lower than CPI inflation and exerted a moderating effect on consumer prices.
Monthly Inflation Trend
The disinflationary phase began in October 2024, when retail inflation was 6.2%. During H1 FY26, headline inflation declined from 3.2% in April 2025 to 1.4% in September 2025. In October 2025, inflation fell to 0.3%, the lowest reading in the current CPI 2012=100 series.
Base Effect and Momentum Effect
The chapter decomposes inflation into base effect and momentum effect. The momentum effect captures month-on-month price changes in the current year. The base effect captures the influence of price changes in the same month of the previous year. In FY26, the base effect dominated the inflation trajectory and pushed inflation down in seven out of nine months.
Core Inflation: Why It Looks Sticky but Is Actually Softer
Standard core inflation rose from 3.5% in FY25 to about 4.3% in FY26, and from 3.19% in April 2024 to 4.62% in December 2025. At first glance, this suggests sticky underlying inflation. But the Survey shows that this is mainly due to gold and silver prices, which surged because of global uncertainty and safe-haven demand.
Important Concept: Precious Metals Distortion
The wedge between standard core inflation and adjusted core measures was about 235 basis points when only precious metals were excluded. Between June and December 2025, core inflation excluding precious metals declined from 3.4% to 2.3%, even though standard core inflation stayed around 4.6%.
In Mains answers, do not simply write that core inflation is sticky. Write that apparent core stickiness is largely driven by precious metals, while underlying inflation excluding gold and silver is more subdued.
Major Components of Core Inflation
Four major components—clothing and footwear, housing, health, and transport and communication—account for nearly one-third of the CPI basket and more than 60% of the core measure. In FY26, disinflationary signs appeared in most of these components except housing, which remained stable because rentals are revised slowly and are often based on negotiated agreements.
| Core Component | Price Behaviour | Reason | UPSC Meaning |
|---|---|---|---|
| Housing | Declined in 2023 and early 2024, then stayed stable. | Rents are revised infrequently and through negotiated contracts. | Adds stability to core basket. |
| Health | Gradual easing and stable profile. | Service delivery costs and administered/institutional pricing adjust slowly. | Sticky but not highly volatile. |
| Clothing and Footwear | Fell sharply from elevated 2023 levels. | Easing input costs and competitive goods markets. | Responds faster to cost changes. |
| Transport and Communication | Lower average but episodic movements. | Fares, fuel-linked services and telecom pricing changes. | Short-lived fluctuations matter. |
Drivers of Food Disinflation
Food inflation declined steadily and entered deflationary territory from June 2025. October 2025 saw the biggest monthly decline of -5.02% in the current CPI series. The decline was driven mainly by vegetables, pulses and spices.
Pulses Price Management
Pulse prices had remained elevated in 2023 and 2024 due to production shortfalls and low carry-forward stocks. In FY26, domestic production recovered, imports remained stable and stock positions improved. This caused pulse inflation to ease.
| Policy / Market Factor | Details from Chapter | Purpose |
|---|---|---|
| Market Monitoring | Government monitors mandi prices using analytical tools. | Early warning signals for price movements. |
| Tur Procurement | 6.5 lakh metric tonnes procured in previous season. | Support domestic availability and price stability. |
| Yellow Peas Duty | 30% import duty imposed in October 2025. | Protect chana farmers before sowing season. |
| Masoor and Chana Duty | 10% import duty applied. | Balance consumer price and farmer interest. |
| Buffer Stock Management | Strategic stocks and market interventions used. | Reduce retail price volatility. |
Vegetables, TOP Commodities and Market Intervention
Tomatoes, onions and potatoes have high importance in household consumption and are volatile because of seasonality, perishability and weather sensitivity. In FY26, onion buffer stocks were released from September 2025 through discounted retail sales and supplies to mandis and wholesale markets. Rail transport for onion movement, initiated in FY25, was scaled up in FY26.
Edible Oils: Trade Policy and Inflation
Edible oils are structurally import-dependent, with over 50% of domestic consumption met through imports. This makes domestic prices sensitive to global prices, exchange rate movements and trade policy. In September 2024, basic customs duty on crude edible oils was raised to 20% to support domestic prices. In June 2025, it was reduced to 10% to ease upward price pressure.
Edible oil inflation moderated after August 2025 following the reduction of basic customs duty on crude edible oils from 20% to 10% in June 2025.
Agriculture Created a Benign Inflation Environment
The agricultural outlook in FY26 was favourable for inflation. About 30 States and UTs recorded normal or excess rainfall. Strong production, reservoir storage and soil moisture supported supply conditions and helped contain food inflation.
Rabi Sowing and Food Security
Total rabi cropped area expanded by 3.3% YoY. Pulses acreage increased by 3.8%, oilseeds sowing rose by 3.5%, and foodgrain area increased by 3.0%. This indicated a good rabi season and stronger food security prospects.
Food inflation management in India requires both monetary policy and supply-side policy. Agricultural output, buffer stocks, imports, duties, mandi monitoring and logistics matter as much as repo rate changes.
GDP Deflators: Manufacturing’s Reversal in Terms of Trade
The GDP deflator measures the general price level of the economy by comparing nominal GDP with real GDP. A sectoral deflator compares current-price GVA with constant-price GVA for a sector. The chapter uses deflators to show how manufacturing prices have moved relative to agriculture and services.
| Indicator | FY25 Value | Interpretation |
|---|---|---|
| Agriculture Deflator | 2.17 | Agricultural prices rose faster relative to 2011–12 base year. |
| Industry Deflator | 1.55 | Industrial prices rose slower than agriculture. |
| Manufacturing Deflator | 1.41 | Manufacturing prices grew relatively slowly. |
| Services Deflator | 1.75 | Services had stronger pricing power than manufacturing. |
| Manufacturing ToT with Agriculture | 0.65 | Declined by about 50% from FY05. |
| Manufacturing ToT with Services | 0.81 | Declined by about 25% by FY25. |
What This Means for Manufacturing
Agriculture prices have risen faster than manufacturing prices. Manufacturing’s terms of trade against agriculture declined from about 1.29 in FY05 to 0.65 in FY25. This can lower the current-price share of manufacturing in GVA, even when real manufacturing output is not necessarily falling.
Agriculture benefits from support prices and supply conditions, causing agricultural deflator to rise faster.
Global competition, cost-cutting technology and narrower margins restrain manufacturing prices.
Manufacturing share in current-price GVA fell to around 14% in FY25.
Manufacturing share in constant-price GVA and GVO stayed fairly stable at 18% and 38%.
The chapter argues for “Farm-to-Fork” policies to streamline supply chains, reduce intermediaries, improve freshness and reduce overall costs in the economy.
Inflation: Regional Picture
Rural versus Urban Inflation
During much of 2023 and 2024, rural inflation remained above urban inflation because rural households spend a larger share on food. When food inflation was high, rural inflation rose more. As food prices eased in 2025, rural inflation fell below urban inflation.
Why Rural Inflation Is More Volatile
State-Level Inflation Dynamics
State-level inflation in FY26 broadly followed the national trend, with inflation declining across most States and UTs. Kerala and Lakshadweep were exceptions where retail inflation breached the upper tolerance band of 6%. Most other States were within or below the RBI’s 2–6% tolerance band.
| State / UT Category | FY26 Apr-Dec Inflation Pattern | Examples | UPSC Meaning |
|---|---|---|---|
| Above 6% | Breached upper tolerance band | Kerala 8.05%, Lakshadweep 6.69% | Local price factors matter. |
| Near 4–6% | Within tolerance band but relatively higher | Goa 4.77%, Jammu & Kashmir 3.60%, Punjab 3.27% | State variation persists. |
| Moderate 2–3% | Comfortably within tolerance band | Tamil Nadu 2.45%, Mizoram 2.47%, Nagaland 2.79% | Stable regional inflation. |
| Very Low / Near Zero | Below lower tolerance band or near zero | Bihar 0.01%, Assam 0.16%, Telangana 0.20%, Uttar Pradesh 0.30% | Food deflation pulled down inflation. |
| Negative | Deflation in average CPI | Manipur -0.15% | Local disruptions and price dynamics require separate analysis. |
Persistence and Mean Gap Inflation
Using monthly State-wise CPI data from January 2014 to December 2025, the Survey examines whether States consistently have inflation above or below the national average. It finds that State-level inflation gaps are not purely temporary. All States show positive persistence, meaning deviations from the national average often continue beyond a single month.
The average difference between a State’s inflation rate and the national average.
Whether a State’s inflation gap fades quickly or carries over to later months.
Far-end States in South and Northeast often recorded inflation above national average with higher persistence.
Delhi and Himachal Pradesh were typically below national average with comparable persistence.
Drivers of State-Level Inflation Divergence
State-level inflation is positively associated with wage rates, state-level GDP growth and Covid impact. Industrial output share shows negative association with inflation, reflecting supply-side efficiency in manufacturing. GST was found to be price-neutral for state-level inflation differentials.
| Variable | Association with State Inflation | Interpretation |
|---|---|---|
| Wage Rate | Positive | Higher wages can increase local demand and costs. |
| State GSDP Growth | Positive | Higher activity may create demand-side pressure. |
| Covid Dummy | Positive | Covid created a structural step-up in prices. |
| Industrial Output Share | Negative | Manufacturing efficiency dampens price pressure. |
| GST | Price Neutral | No robust independent effect on state-level inflation differential. |
| Fiscal Deficit / Credit Intensity | Not Robust | No strong independent association after controls. |
Outlook for Inflation
The chapter concludes that inflation is likely to rise from the unusually low FY26 level but remain within the RBI target range of 4% ± 2%. RBI revised its FY26 inflation projection from 2.6% to 2.0% in December 2025 due to a good kharif harvest and healthy rabi sowing. IMF projected inflation at 2.8% in FY26 and 4.0% in FY27.
Inflation Outlook: Supportive and Risk Factors
| Factor | Likely Impact | Reason |
|---|---|---|
| Good Kharif Harvest | Moderates inflation | Improves food supply. |
| Healthy Rabi Sowing | Moderates inflation | Strengthens food security and stocks. |
| Fertiliser Supply Efforts | Moderates input cost | Controls agricultural production costs. |
| GST Rate Rationalisation | May lower commodity prices | Pass-through can reduce cost-side pressure. |
| Currency Depreciation | Raises imported inflation risk | Imports become costlier. |
| Soft Global Commodities | Limits import inflation | Crude oil oversupply expected to soften prices. |
| Base Metals | Moderate upward risk | Iron, copper and aluminium prices may increase. |
| Precious Metals | Core inflation pressure | Gold and silver demand as safe-haven assets may persist. |
India’s headline inflation and core inflation excluding precious metals are likely to be higher in FY27 than in FY26, but the Survey argues that inflation is unlikely to become a major concern if agricultural supply remains strong, commodity prices stay soft and policy vigilance continues.
UPSC Prelims, Mains and Essay Takeaways
- Global inflation declined from 8.7% in CY2022 to 4.2% in CY2025.
- India’s CPI inflation declined to 1.7% in FY26 up to December.
- October 2025 CPI inflation was 0.3%, the lowest in current CPI series.
- Food inflation entered deflation from June 2025.
- Core inflation was 4.62% in December 2025.
- Core excluding precious metals was 2.27% in December 2025.
- RBI revised FY26 inflation projection to 2.0%.
- IMF projected India’s FY27 inflation at 4.0%.
- India achieved low inflation without sacrificing growth.
- Food disinflation was driven by supply conditions and policy action.
- Core inflation must be interpreted after adjusting for precious metals.
- Rural inflation is more food-sensitive than urban inflation.
- State-level inflation is shaped by wages, growth and industrial structure.
- Manufacturing’s declining terms of trade may affect investment incentives.
- Macroeconomic stability as a growth foundation.
- Inflation targeting and anchored expectations.
- Food security and price stability.
- Supply-side reforms and inflation management.
- Farm-to-Fork reforms and cost reduction.
- Low inflation with high growth: India’s macro story.
Key Terms Explained
| Term | Simple Meaning | UPSC Use |
|---|---|---|
| CPI Inflation | Retail inflation faced by consumers. | Most important inflation measure for RBI targeting. |
| WPI Inflation | Wholesale or producer-level price inflation. | Useful for input cost and producer price analysis. |
| Core Inflation | Inflation excluding food and fuel. | Shows underlying price pressure. |
| Base Effect | Effect of last year’s prices on current YoY inflation. | Explains sudden inflation moderation or rise. |
| Momentum Effect | Current month-on-month price change. | Shows immediate price pressure. |
| GDP Deflator | Ratio of nominal GDP to real GDP. | Broad economy-wide price indicator. |
| Terms of Trade | Relative price movement between sectors. | Useful in manufacturing-agriculture analysis. |
| Mean Gap Inflation | Average difference between state inflation and national inflation. | Useful for state-level inflation answers. |
Internal Links for UPSC Economy Preparation
Continue your preparation with the Economic Survey 2025-26 complete summary for UPSC. You can also use these related IASment study sections:
- Previous Chapter: Economic Survey 2025-26 Chapter 4 External Sector
- UPSC Economy Notes for concept clarity.
- UPSC Prelims Economy Strategy for MCQ-focused preparation.
- UPSC Mains GS Paper 3 Economy Notes for analytical answer writing.
FAQs on Economic Survey 2025-26 Chapter 5
What is Economic Survey 2025-26 Chapter 5 about?
It explains global and domestic inflation trends up to December 2025, covering CPI, WPI, food inflation, core inflation, commodity prices, regional inflation, state-level inflation and FY27 inflation outlook.
Why is this chapter important for UPSC?
This chapter is important for GS Paper 3 because inflation affects monetary policy, food security, household welfare, agriculture markets, manufacturing competitiveness and macroeconomic stability.
What are the most important facts from this chapter?
The most important facts are: India’s CPI inflation declined to 1.7% in FY26 up to December, October 2025 inflation was 0.3%, food inflation turned negative, and core inflation excluding precious metals was only 2.27% in December 2025.
Why did India’s inflation decline sharply in FY26?
Inflation declined mainly because of lower food prices, especially vegetables, pulses and spices. Favourable agricultural conditions, higher production, better stocks, import policy and government market interventions supported disinflation.
Why is standard core inflation misleading in this chapter?
Standard core inflation appears sticky because gold and silver prices rose sharply due to safe-haven demand. Excluding precious metals, core inflation shows a softer and declining trend.
What is the difference between base effect and momentum effect?
The base effect comes from price movements in the same month of the previous year, while the momentum effect comes from month-on-month price changes in the current year. In FY26, base effect strongly pushed inflation downward.
What does the chapter say about state-level inflation?
Most States and UTs saw inflation decline within or below the RBI tolerance band. Kerala and Lakshadweep were exceptions. State-level inflation differences are linked to wages, GSDP growth, Covid impact and industrial output share.
What is the inflation outlook for FY27?
Inflation is expected to rise from the very low FY26 level but remain within the target range. IMF projects 4.0% for FY27, while RBI projects 3.9% for Q1 FY27 and 4.0% for Q2 FY27.
Official Source and Chapter Navigation
For the official document, refer to the Official Economic Survey 2025-26 source.
This IASment page is a UPSC-oriented educational summary prepared for revision, conceptual clarity and exam use.