India’s Economic Challenges and Policy Adjustments

Source: The post India’s Economic Challenges and Policy Adjustments has been created, based on the article “Monetary policy should lead the easing cycle our economy needs” published in “Live mint” on 8th January 2025

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

Context: The article discusses India’s economic challenges and policy decisions. It highlights slowing GDP growth, controlled core inflation, and weak domestic demand. Fiscal easing is unlikely, while monetary policy debates focus on managing inflation, wage demands, and potential RBI strategy changes.

For detailed information on India’s economic challenges in 2025 read this article here

What are the key economic challenges in India?

1. India’s GDP growth has been declining for three consecutive quarters.
2. Core inflation has been under control in the 12 months to November 2024.
3. The current account does not show excessive domestic demand spilling into imports.
4. Weak domestic demand from households, firms, and the government is a concern.

What are the Current Fiscal and Monetary Policies?

1. Fiscal Policy
2. The government is committed to reducing the fiscal deficit by the end of FY 2025-26.
3. Aims to manage finances to lower the public debt-to-GDP ratio.
4. Limited scope for fiscal stimulus due to the deficit reduction plan.
5. Monetary Policy
6. Inflation has been above the target range for most of the year, except for dips in July-August and a spike in October.
7. The RBI is cautious about price pressures, noting signs of inflation spreading from one sector to another (e.g., edible oils to processed foods).
8. Rising input costs have affected prices across goods and services, impacting consumer demand.
9. Despite food price spikes, some MPC members argue that their impact on core inflation has reduced due to changes in wage and price-setting practices.

What Might Change Under the New RBI Governor?

1. The new RBI Governor, Sanjay Malhotra, may influence future monetary policy, especially regarding the handling of the Indian rupee’s value against the dollar.
2. Recent depreciation of the rupee might indicate a shift in RBI’s strategy to possibly allow more flexibility in exchange rates.
3. Observers speculate this may reflect a new direction under the new RBI governor.

Question for practice:

Examine the key economic challenges India is currently facing and how fiscal and monetary policies are addressing them.