Source: The post Monetary easing alone cannot boost growth has been created, based on the article “Rate cuts alone won’t revive growth” published in “Businessline” on 14 June 2025. Monetary easing alone cannot boost growth.
UPSC Syllabus Topic: GS Paper3- Indian Economy and issues relating to planning, mobilisation, of resources, growth, development and employment.
Context: The RBI reduced the repo rate by 50 basis points to 5.5% on June 6 to stimulate growth. This move comes amid falling inflation and global uncertainties. However, the key concern is the continued weakness in consumer demand despite earlier liquidity measures.
For detailed information on India needs monetary easing to sustain cyclical growth recovery read this article here
RBI’s Policy Shift and Limited Impact
- Rate Cut and Policy Stance: The RBI’s 50 basis point rate cut is the largest since March 2020. Its stance shifted from ‘accommodative’ to ‘neutral,’ indicating limited future cuts.
- Liquidity Injection and Credit Uptake: Despite injecting ₹9.5 lakh crore into the system, credit growth has remained sluggish. Liquidity moved from a deficit to a ₹2.9 lakh crore surplus, but credit demand is still weak.
- Demand as a Structural Issue: Weak consumer demand remains the central problem. Liquidity alone is insufficient to boost economic activity without reviving demand.
Aggregate Demand Trends and Limitations
- Stable Consumption and Investment Ratios: Private consumption stands at 57% of GDP, while government consumption is around 10%. Investment levels—GCF at 35% and GFCF at 33%—show long-term stability with little dynamism.
- Capacity Utilisation Signals Caution: OBICUS data shows capacity utilisation around 74%, pointing to limited expansion. Businesses remain cautious due to uncertain demand and slow capital spending.
- Key Variations in Demand Components: Government and investment expenditures show higher variability than private consumption. These are more autonomous and can be used to raise demand in the short to medium term.
Challenges to Private Investment
- Demand Uncertainty and ROCE Concerns: Investment hesitancy is driven by uncertain demand. Firms are unwilling to reduce their ROCE, which has risen from 27% in 2010 to 31% in 2024 and may go higher in 2025.
- Trends in Capex Intentions: MoSPI data shows Capex rose 7% between 2021-22 and 2023-24. But it may decline 25% in 2025-26. Many firms plan to strengthen core assets (40.3%) or upgrade existing ones (28.4%).
- Sectoral Divergences: Sectors like healthcare and manufacturing are investing more due to visible demand. Real estate and trade show reduced investment due to falling demand and structural issues.
Policy Focus for Demand Revival
- Boosting Spending and Confidence: Policies like tax relief, infrastructure investment, and SME support can enhance consumer confidence and demand.
- Addressing Structural Gaps: Solving unemployment and inequality can raise disposable income. Improving ease of doing business can encourage private investment and job growth.
Way forward
- Beyond Monetary Tools: The repo rate cut is positive but insufficient alone. Structural and demand-side measures are essential to make monetary easing effective.
- Boosting Long-Term Capacity: A focus on investment, especially in infrastructure, can unlock multiplier effects and foster sustainable growth.
- Consumer Demand at the Core: True recovery hinges on boosting demand through coordinated monetary, fiscal, and structural reforms.
Question for practice:
Discuss how weak consumer demand and investment uncertainty limit the effectiveness of monetary policy in reviving economic growth.
