WAT Topics for MBA: Indian economy lacks coherent Fiscal and monetary policies

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This WAT the Topic for MBA is on Indian economy lacks coherent Fiscal and monetary policies and will also provide inputs for your WAT round.

Ideally a countrys economy is controlled by two types of economic measures by the policy makers Fiscal and Monetary. While Fiscal policy is framed and implemented by the government with regulation of its spending and collection of revenue, the monetary policy is controlled by the Central Bank of the country (in India it is The Reserve Bank of India).

How do these policies work?
These policies may be designed and implemented for the expansion or contraction of the economy. Policy measures aimed to increase GDP and economic growth are called expansionary. The measures taken to check the inflationary trends in the economy are the contractionary measures Conceptually, when demand is low in the economy, the government can step in and increase its spending to stimulate demand. It may also lower taxes to increase disposable income for people and corporations in the economy. It is the manipulation of the level of aggregate demand in the economy to achieve economic objectives of price stability, full employment, and economic growth.

Monetary policy, on the other hand, is termed as the process by which the monetary authority of a country (Reserve Bank of India) controls the supply of money, by adopting different Quantitative or qualitative measures like bringing changes to Bank rate policy often targeting correction in rate of interest, Cash Reserve Ratio and Statutory Liquidity Ratio to leave more /less disposable funds with financial institutions to influence outcomes like economic growth, inflation, exchange rates with other currencies and unemployment.

Mismatch in India
Both the Fiscal and Monetary policies have to be framed and implemented coherently to attain a set of objectives, oriented towards the growth and stability of the economy. However, in India for the past two decades, the mismatch between the fiscal and monetary policies has remained a major concern in the emerging market economy.

Unsustainable fiscal deficits and public debt levels created the specter of fiscal dominance, leading to high and volatile inflation and elevated risk on government debt. An unfavorable exchange rate dynamic linked to weak fiscal and monetary policy credibility has been the key factor in the destabilized capital outflows. If the Fiscal Authority i.e. the Government during the period of inflationary trends brings out more budgetary deficits, resorts to fortune of subsidies, more public spending and more public debt, resorts to hefty deficit financing, it increases money supply in the economy and assists in increasing the rate of inflation instead of checking it.

On the contrary, Reserve Bank of India, the Monetary Authority, in order to curtail money supply resorts to quantitative control measures like higher bank rate policy and higher CRR & SLR. This mismatch in fact, nullifies the contractionary effect of monetary policy with the implementation of expansionary fiscal policy. It is argued that in India Fiscal policy is more oriented to achieve the political gains than the economic ones. For 2012-13 though the fiscal deficit target was pegged at 5.1 per cent of the GDP, the government found it difficult to stick to the Budget estimates mainly because both the policies are not supportive to each other.
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Coherence is the need
Indian economy that is on its path of growth requires Monetary and Fiscal policies following each other in right perspective. RBI Dy. Governor H.R. Khan was of the view As we have articulated time and again, it (monetary policy) has to be in tandem with the fiscal policy. It has to be a joint venture. It is not a solo play, It is important to focus on the primary deficit. The indicator of understanding where we stand is the primary deficit, deficit net of interest payments. Under normal circumstances, a country should always run primary surpluses.

In 1999, India had Kargil war; one or two years of primary deficit might be understood. In 2008-09, there was a global crisis; one year of primary deficit would be enough to recover out of it. But in every normal year, we should be running primary surpluses.

Conclusion: steps taken so far
The Government has taken some bold steps now like reduction in subsidies, FDI in retail, etc. and it appears that the country is coming out of current account deficit and the balance of payments is moving into surplus territory, appreciation in the rupee is expected, money markets are expected to react positively to it withthe greater confidence of foreign investors. To support these growth prospects a well designed monetary policy is required.
Dr. Raghuraman after taking over the reins of RBI has taken a few bold steps to check the galloping inflation and falling value of Indian Rupee in order to strengthen the Indian Economy.

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