{"id":344017,"date":"2025-08-05T19:51:21","date_gmt":"2025-08-05T14:21:21","guid":{"rendered":"https:\/\/forumias.com\/blog\/?p=344017"},"modified":"2025-08-17T13:32:51","modified_gmt":"2025-08-17T08:02:51","slug":"coordinated-monetary-and-fiscal-policies-sustain-indias-growth-momentum","status":"publish","type":"post","link":"https:\/\/forumias.com\/blog\/coordinated-monetary-and-fiscal-policies-sustain-indias-growth-momentum\/","title":{"rendered":"Coordinated monetary and fiscal policies sustain India’s growth momentum"},"content":{"rendered":"

Source<\/strong>: The post Coordinated monetary and fiscal policies sustain India’s growth momentum has been created, based on the article \u201cTowards an Indian growth model \u2014 III<\/strong>\u201d published in \u201cBusinessline<\/strong>\u201d on 5th August 2025. Coordinated monetary and fiscal policies sustain India’s growth momentum.<\/strong><\/p>\n

\"Coordinated<\/p>\n

UPSC Syllabus Topic:<\/strong> GS Paper <\/strong>3- <\/strong>Indian Economy and issues relating to planning, mobilisation, of resources, growth, development and employment.<\/p>\n

Context<\/strong>: India\u2019s macroeconomic challenges require a shift in how monetary and fiscal policies are coordinated to support stable, long-term growth. Recent experience after the pandemic shows that careful countercyclical macroeconomic management can help reduce inflation and sustain growth, even amid global shocks.<\/p>\n

Rethinking Macroeconomic Strategy<\/strong><\/h2>\n
    \n
  1. Shift from Structural to Stabilisation Focus:<\/strong> India has often emphasized long-term structural reforms while neglecting short-term stabilisation. This made the economy vulnerable to large growth swings during shocks. A more balanced approach is now needed.<\/li>\n
  2. Countercyclical Policies Show Promise:<\/strong> Post-pandemic policy responses demonstrated that countercyclical tools, adapted to domestic structures and shocks, can simultaneously reduce inflation and boost growth. This provides a foundation for new coordination strategies.<\/li>\n<\/ol>\n

    Principles of Monetary-Fiscal Coordination<\/strong><\/h2>\n
      \n
    1. Coordinated Role in Supporting Growth: <\/strong>Fiscal policy targeting supply-side inflation enables monetary policy to maintain low real interest rates that encourage demand. This coordination is consistent with central bank independence if inflation remains low.<\/li>\n
    2. Fiscal Consolidation and Quality Spending:<\/strong> India\u2019s high debt and fiscal deficit limit room for demand-driven stimulus. Therefore, fiscal policy should focus on infrastructure, social welfare, and productivity to raise potential non-inflationary growth.<\/li>\n
    3. Supply-Side Focus without Neglecting Demand: <\/strong>Well-structured fiscal measures\u2014supporting income growth, innovation, and exports\u2014stimulate broader demand while addressing supply constraints. This combination strengthens overall macroeconomic balance.<\/li>\n
    4. Encouraging Federal Competition:<\/strong> Politically sensitive reforms, like liberalizing factor markets, are best left to states. Inter-state competition can gradually drive efficiency without central imposition.<\/li>\n<\/ol>\n

      Designing a Growth-Oriented Monetary Policy<\/strong><\/h2>\n
        \n
      1. Real Rates Should Support Growth:<\/strong> Monetary policy should aim for low but positive real interest rates\u2014around 1%\u2014to maintain borrowing incentives while ensuring returns to savers. Higher rates, as seen in the 2010s and 2024, dampen growth.<\/li>\n
      2. Importance of Anchored Inflation:<\/strong> Stable inflation under flexible inflation targeting reduces rate volatility. Fine-tuned policy adjustments can maintain real rates close to neutral, smoothing growth and reacting efficiently to shocks.<\/li>\n
      3. Growth Fuels Savings More Than High Rates:<\/strong> Long-term resource mobilisation improves when incomes rise with growth, rather than through high real interest rates. Financial deepening also aids efficient allocation of savings.<\/li>\n<\/ol>\n

        Calibrating Current Monetary Policy<\/strong><\/h2>\n
          \n
        1. Real Rates Too High Despite Rate Cuts:<\/strong> Even after recent cuts, India\u2019s real interest rates exceed 3%. Had inflation forecasts been more accurate, rate hikes would have been milder. Current high rates are slowing growth.<\/li>\n
        2. Need for More Front-Loaded Cuts:<\/strong> For large deviations from the equilibrium real rate, quick front-loaded cuts are preferable. The recent 50 bps cut was appropriate, but further adjustment may still be required.<\/li>\n
        3. Misplaced Inflation Expectations:<\/strong> Forecasts assume future inflation will rise due to base effects, but core inflation excluding gold is already below 3.5%. With inflation likely anchored near 4%, another 25 bps cut is justified.<\/li>\n<\/ol>\n

          Ensuring a Smooth Policy Landing<\/strong><\/h2>\n
            \n
          1. Use of Data-Driven Neutral Stance:<\/strong> A neutral policy stance signals flexibility. Monetary response should be guided by high-frequency data pointing to slowing growth and external shocks, not temporary food price volatility.<\/li>\n
          2. Careful Liquidity Management:<\/strong> Short-term liquidity adjustments should maintain the call money rate close to the repo. Durable liquidity should stay mildly in surplus to absorb external liquidity shocks without causing market instability.<\/li>\n
          3. Metaphor of Smooth Landing:<\/strong> As with an aircraft\u2019s landing, policy adjustments must now be gentle and well-timed to ensure stability while achieving growth close to potential.<\/li>\n<\/ol>\n

            Question for practice:<\/strong><\/p>\n

            Examine how coordinated monetary and fiscal policies can support stable and sustained economic growth in India.<\/p>\n","protected":false},"excerpt":{"rendered":"

            Source: The post Coordinated monetary and fiscal policies sustain India’s growth momentum has been created, based on the article \u201cTowards an Indian growth model \u2014 III\u201d published in \u201cBusinessline\u201d on 5th August 2025. Coordinated monetary and fiscal policies sustain India’s growth momentum. UPSC Syllabus Topic: GS Paper 3- Indian Economy and issues relating to planning,… Continue reading Coordinated monetary and fiscal policies sustain India’s growth momentum<\/span><\/a><\/p>\n","protected":false},"author":10320,"featured_media":344627,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"footnotes":""},"categories":[1230],"tags":[12121,216,8184],"class_list":["post-344017","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-9-pm-daily-articles","tag-businessline","tag-gs-paper-3","tag-indian-economy","entry"],"jetpack_featured_media_url":"https:\/\/i0.wp.com\/forumias.com\/blog\/wp-content\/uploads\/2025\/08\/Coordinated-monetary-and-fiscal-policies-sustain-Indias-growth-momentum.png?fit=1280%2C850&ssl=1","views":"","jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/344017","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/users\/10320"}],"replies":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/comments?post=344017"}],"version-history":[{"count":0,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/344017\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/media\/344627"}],"wp:attachment":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/media?parent=344017"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/categories?post=344017"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/tags?post=344017"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}