Macroeconomic Policy in India

India’s macroeconomic policy comprises three main dimensions: fiscal policy, monetary policy, and current account and exchange rate policy. These policies aim to promote high and stable growth, ensure moderate and stable inflation, and prevent external account crises and currency volatility.

Current Economic Context

• The growth ambitions have moderated, with the aspirations of achieving double-digit or even 8% growth being quite unrealistic now.
• There is a high dependency on agriculture, with the sector's share of the population being the highest in recent times.
• The manufacturing sector's contribution to GDP is only 13%, the lowest this century.
• India has a significant informal sector and is not a major exporter, relying heavily on foreign inflows to balance its current account deficit (CAD).
• Human development levels are particularly poor in north and east India.
• Even those earning significantly above the per-capita income are struggling to maintain living standards, despite recent tax exemptions.

Challenges in Macroeconomic Management

The years 2014-2020 were relatively benign with limited structural shocks. However, the current period is marked by incompetence and a lack of a coherent strategy:

• Fiscal Policy: India faces a silent fiscal crisis since 2018, with the government failing to meet its tax revenue aspirations and disinvestment efforts failing.
• The RBI dividend has become a significant source of government revenue due to reduced fiscal space.
• The government has struggled to balance public investment and the necessity of subsidies, particularly in food for a large population.
• Tax cuts and revenue reductions from import tariffs and capital gains tax will further limit fiscal capabilities.

Monetary Policy and Exchange Rate Management

• Post the adoption of an inflation-targeting framework, the RBI was expected to maintain inflation within a 4-6% band but has failed to do so consistently since 2019.
• The RBI's decision-making lacks transparency, with minutes and statements often confusing to economists and stakeholders.
• The exchange rate policy, previously managed with interventions to ensure orderly depreciation, is now faltering due to recent interventions aimed at keeping an almost fixed exchange rate.
• The rupee now exhibits increased volatility, partly due to a government-driven ideology for a 'strong rupee'.

Conclusion and Future Outlook

A credible and coherent medium-term macroeconomic strategy is urgently needed to address these issues. The lack of political urgency is a challenge, as economic prosperity has not significantly influenced electoral outcomes. There is hope that historical judgment may eventually motivate the government to act effectively.