Context:
India is currently pursuing both expansionary fiscal and monetary policies to boost growth amid signs of slowing demand and rising unemployment. While inflation is low, questions arise about coordination and long-term sustainability of this approach.
Relevance: GS 3 ( Indian Economy, Monetary & Fiscal Policy, Growth & Inflation)
- Dual Expansionary Approach:
RBI has reduced repo rates to 5.5% alongside government tax cuts, both aimed at stimulating demand and investment. - Coordination Challenge:
Simultaneous expansionary fiscal and monetary policies can raise inflation risks if not well-coordinated, a concern seen in global examples like the U.K. and U.S. - Muted Growth Indicators:
Despite policy moves, credit growth fell to 9% and unemployment rose to 5.6% in May 2025, showing weak demand and labour market stress. - Lag in Policy Impact:
Expected gains from tax cuts have not materialised yet in consumer spending—contradicting standard economic assumptions of forward-looking behaviour. - Deficit Risk:
If output doesn’t rise, revenue shortfalls could widen the fiscal deficit, forcing cuts in public spending, potentially affecting welfare schemes. - External Risks:
Global factors like U.S. tariff tensions and instability in West Asia may further dampen growth and investor sentiment. - Structural Concerns:
Market-driven mechanisms may be insufficient; redistribution via wage support and targeted government spending may be needed to boost bottom-tier consumption.
Conclusion:
- Effective coordination between fiscal and monetary policy is essential to avoid inflationary shocks and ensure sustainable growth.
- Structural interventions focused on inclusive consumption and investment are key to revitalising a slowing economy.
