Why Government Interventions in Monetary Policy Won’t Spur Growth

Source: The post the Why Government Interventions in Monetary Policy Won’t Spur Growth has been created, based on the article “Pressuring the RBI to lower the interest rate isn’t going to solve the problem” published in “Indian Express” on 12^th December 2024.

UPSC Syllabus Topic: GS 3 Syllabus – Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development and Employment.

Context: The article addresses the ongoing debate about the role of the Reserve Bank of India (RBI) in steering economic growth amidst slowing growth rates and rising inflation. It critiques recent public statements made by India’s Commerce and Finance Ministers that subtly pressurize the RBI to lower interest rates to spur economic activity. Why Government Interventions in Monetary Policy Won’t Spur Growth?

What recent developments have prompted a debate on RBI’s autonomy?

1. Recent statements by India’s Commerce and Finance Ministers have indirectly suggested that the Reserve Bank of India (RBI) should lower interest rates, indicating government concerns over slowing growth.
2. Quarterly growth rates have been declining since April 2024, even though the GDP growth rate in 2023-24 was a historic 8.2%.

Why is this a significant issue?

The central question revolves around whether the government should interfere with the RBI’s functioning and whether the RBI can significantly influence current economic growth.

Is government interference in RBI’s functioning appropriate?

1. No, it is inappropriate for the government to interfere.
2. The RBI operates independently under its board, which is appointed with government involvement.
3. Once appointed, the board should act autonomously, in line with the principle of separation of powers.

What is the RBI’s primary mandate since 2016?

1. The RBI’s main mandate is to control inflation, with a target of 4%, as set by the government.
2. Publicly pressuring the RBI to act differently undermines its credibility as an independent institution.

How has economic growth been recently?

1. Real GDP grew by 6% in the first half of 2024-25, compared to 8.2% in the first half of 2023-24.
2. Manufacturing growth dropped to 4.5% from 9.6% over the same period.

Is the RBI capable of stimulating growth in this scenario?

1. No, the RBI’s tools, such as interest rate adjustments, are unlikely to stimulate growth when the core issue lies in weak demand.
2. Lowering interest rates will not prompt firms to increase production if they do not anticipate higher sales.
3. Firms expand production based on rising demand, not lower borrowing costs.
4. A reduction in interest rates is a supply-side solution, but the current issue is a demand-side problem.

What has been proposed regarding food inflation?

1. The Commerce Minister and Chief Economic Advisor suggested excluding food inflation from the official inflation index.
2. High food inflation (above 10% in October 2024) reduces consumer spending on non-food items, negatively impacting manufacturing.
3. Ignoring food inflation without addressing its causes is equivalent to abandoning inflation control.