Macroeconomic Policymaking Challenges in India (2025)
Macroeconomic policymaking in India faces significant challenges due to external economic pressures and internal growth dynamics. The complex global and domestic economic landscape requires India to navigate carefully to sustain growth and stability.
External Economic Pressures
- American Exceptionalism:
- Resilient growth in the US has tightened global financial conditions.
- US Federal Reserve's reduced rate cuts expectations have led to increased bond yields and a strong dollar.
- These changes put pressure on emerging-market currencies, including the rupee.
- Trump 2.0 Risks:
- US tariffs increase global uncertainties, depressing capex and growth.
- Potential redirection of Chinese excess capacity to countries like India.
- Trade wars could result in weaker global growth but a stronger US economy.
Domestic Growth Dynamics
- Slowing Growth Momentum:
- Urban consumption has diminished as pandemic savings exhaust and lending tightens.
- Rural consumption is rising but at a gradual pace.
- Private investment is cautious, awaiting better demand visibility.
Policy Response and Strategy
Monetary Policy
- Interest Rate Strategy:
- Avoid using interest rates solely to defend the rupee.
- Focus on domestic growth and inflation dynamics.
- Use FX reserves to manage exchange rate adjustments.
- Inflation Management:
- Food prices show relief, aiding inflation control.
- Core inflation remains moderate, indicating economic slack.
Fiscal Policy
- Debt and Deficit Management:
- Public debt/GDP is rising due to slow GDP growth.
- Gradual fiscal consolidation is essential to avoid pro-cyclicality.
Opportunities and Reforms
Structural Reforms
- Labour-Intensive Growth:
- Focus on accelerating growth through structural reforms.
- Enhance the economy's external attractiveness amid global trade shifts.
Strategic Positioning
- US-China Trade War:
- Position India as an attractive alternative for global firms.
- Utilize the current government's political capital to push for reforms.
Overall, India must balance domestic policy adjustments with global economic dynamics, seizing the opportunity for reforms and growth amidst external challenges.