Question 1
Sources for use with Section C
The economy of India
Figure 1 Budget balance as a percentage of real GDP, 2020 to 2024; Figure 2 Food price inflation and the rate of inflation as measured by the CPI, January 2022 to January 2025
Extract A Economic growth
India’s rate of economic growth was 5.9% in 2024. This was the slowest rate since 2022 and lower than 6.5% in 2023. Food price inflation, stagnant wages and high unemployment have caused this slowdown in the rate of economic growth.
The most recent government budget attempted to boost domestic consumption by reducing taxes for middle-income households. However, the majority of workers are employed in the informal sector and are therefore unlikely to benefit from these tax changes. These tax changes may also prevent the achievement of a balanced government budget.
Extract B Monetary policy and inflation
In February 2025 India’s central bank cut its base interest rate for the first time in almost five years by 0.25 percentage points to 6.25%. The aim of this policy change was to stimulate the rate of economic growth.
The Governor of India’s central bank said: “We felt the time has come to be more supportive of growth because inflation is coming down.” He said that the rate of inflation was expected to continue to fall from 5.2% in December 2024. India’s inflation target is 4% with a tolerance of 2 percentage points on either side of this target.
However, the Indian currency, the rupee, fell by around 2% against the US dollar in 2024. This raised concerns that the price of imports would increase, especially as India has a balance of trade deficit. In addition, some economists believe that uncertainties in the global economy may cause a rise in oil prices. For example, a $10 increase in the price of a barrel of oil could reduce India’s nominal GDP by 0.4% a year.
The Government provides subsidies on fuel for consumers. Consequently, a rise in the price of oil is likely to increase government spending on these subsidies. This would reduce the impact of the higher cost of fuel.
Rising import prices could reduce investment by firms and cause consumers to delay spending on higher-priced goods, such as cars.
With reference to Figure 1 and Extract A, explain what is meant by the term 'a balanced government budget'.