India must coordinate monetary and fiscal strategy for recovery

Source: The post India must coordinate monetary and fiscal strategy for recovery has been created, based on the article “Need for monetary, fiscal support” published in “Businessline” on 5 June 2025. India must coordinate monetary and fiscal strategy for recovery

UPSC Syllabus Topic: GS Paper3- Economy- growth and development

Context: India is navigating external conflicts, trade disruptions, and domestic economic challenges. The post-conflict scenario with Pakistan and global tariff wars raise questions about the appropriate roles of monetary and fiscal policy. This article discusses how the Monetary Policy Committee (MPC) and fiscal measures must coordinate to support recovery.

Evolving Role of Monetary Policy

1. Favourable Conditions for Rate Cut: With growth staying below potential and inflation at 4%, the MPC faces a favourable setting to cut interest rates. The main issue is determining the right quantum and its alignment with fiscal measures.
2. External Pressures on Policy: Rising Japanese yields and core inflation raise risks of yen carry-trade reversal. MPC decisions must account for such global factors while maintaining domestic stability.
3. Targeted Credit Support: Credit easing should focus on specific sectors. Fiscal policy must complement this to maximise policy effectiveness.

Fiscal Policy Imperatives Post-Conflict

1. Increased Defence and Infrastructure Spending: Post-Operation Sindoor, defence and infrastructure outlays will rise. Indigenous missile and drone production has improved, boosting related sectors.
2. Surge in Defence Sector Stocks: The Nifty India Defence Index rose 20% in 20 days, outperforming Nifty50. Firms like Cochin Shipyard and Bharat Dynamics are leading this growth.
3. Financing for Smaller Suppliers: Smaller supply-chain firms need adequate bank financing to sustain growth and promote manufacturing self-reliance.

Trade and Currency Management

1. Weak Global Demand Conditions: Uncertain global policies are affecting exporters and importers. Export credit growth remains sluggish, indicating demand weakness.
2. Beyond Credit: Structural Support Needed: Exports need infrastructure, digitalisation, and streamlined trade finance to regain momentum.
3. Flexible Exchange Rate Regime: Though the rupee is stable, a market-driven rate under orderly conditions enables firms to hedge risks and gives monetary policy more autonomy.

Inflation Control and Supply Reforms

1. Persistent Consumer Price Pressure: Despite recent low inflation driven by food prices, consumers face higher costs. FMCG firms using “double-shrinkflation” strategies hurt consumer welfare.
2. Supply-Side Reforms Essential: Improving storage, logistics, crop diversification, and easing input bottlenecks are necessary to ensure long-term price stability.
3. Leveraging Low Crude Prices: Passing on crude oil price benefits can ease inflation and create space for further rate cuts.

Strategic Global Positioning

1. Opportunities in Global Realignment: Conflicts and trade wars may open new trade routes and alliances. India should explore emerging connector countries to diversify trade.
2. Unlocking India’s Global Potential: These shifts can redefine India’s trade strategy and boost long-term growth.

Question for practice:

Examine how coordinated monetary and fiscal policies can help India manage economic recovery amid external conflicts and global trade disruptions.