Overview of Macroeconomic Policy in India

The macroeconomic policy landscape in India revolves around two significant issues: weak private investment over an extended period and developments in the global economy that present opportunities for India.

Private Investment Concerns

• India's economic growth partly depends on large, high-productivity private firms.
• Investment in terms of net fixed assets grew by an average of 6.6% from 2016-17 to 2023-24, translating to a real growth rate of 2.6% if inflation is considered at a 4% target.
• The decline in private investment intensity is attributed to central planning issues and rule of law challenges, leading to policy and expropriation risks.
• Improving the financing environment, particularly by reducing capital costs through easing capital controls, is essential for boosting investment.

Monetary Policy Adjustments

• The Reserve Bank of India's (RBI) inflation targeting at 4% is crucial for stable economic growth.
• Significant deflation was achieved, reducing inflation from about 6% (Aug 2020 - Dec 2022) to about 4% currently, making rate cuts rational.

Global Economic Shifts

• Global firms are decreasing reliance on China due to international dynamics, presenting opportunities for India.
• A key metric is the ratio of China’s to India's exports to the US, which has improved from 8 in 2019 to 2.63 in March 2025.
• India's goods and services exports (excluding petroleum and gold) have shown growth, peaking at $70 billion per month.

Barriers and Opportunities in Globalisation

• India faces challenges in globalisation due to tariff and non-tariff barriers and capital controls, affecting the cost of raw materials and capital.
• Recent gains in trade liberalisation, such as the India-UK free-trade agreement, signal potential growth in exports.
• Future trade agreements with the US and EU could further reduce barriers, promoting a liberalised trade environment.

Implications of Trade Liberalisation

• Lower tariffs can increase import demand, affecting trade balance and requiring rupee depreciation to maintain equilibrium.
• If India capitalises on reduced tariffs, global firms' interest, and capital-account decontrol, it can attract capital flows to counterbalance depreciation forces.
• Strategic use of policy levers can manage rupee depreciation during this critical alignment of global economic factors favorable to India.

Policy Recommendations

• The ideal macro policy mix includes trade liberalisation, accommodative monetary policy, addressing central planning and rule of law issues, capital account decontrol, and a weaker rupee.