Macro Challenges to the Economy
STORIES, ANALYSES, EXPERT VIEWS
Macroeconomic policy, writes Rathin Roy (former member, EAC-PM) has three main dimensions: fiscal, monetary, and current account and exchange rate policy. Together, they are expected to deliver high and stable growth, secure moderate and stable inflation, and avert external account crises and currency volatility.”
Macroeconomic management constraint by structural weakness
In India, “macroeconomic management happens against a backdrop of structural weakness. Growth ambitions have moderated. Aspirations of double-digit or even 8% growth have been quietly buried. The share of the population dependent on agriculture is at its highest…. The share of manufacturing in GDP, at 13%, is the lowest this century. India continues to have a significant informal sector, is an insignificant exporter, and is dependent on foreign inflows to balance its current account deficit (CAD)…..”
Policymakers, says the economist “have abandoned any pretence of designing and executing a coherent macroeconomic strategy for the short and medium term…..things are falling apart, and incompetence and the absence of a coherent strategy have started to hurt.”
Fiscal policy: This continues to be tightly constrained, according to Roy. “Since 2018, India has been in the grip of a silent fiscal crisis. GoI, for years, has been unable to collect the tax revenues it aspires to and has now given up and moderated its tax/GDP ambitions…..
Constraints on budget capex: After increasing on-budget capex to compensate for public sector investment shortfalls, “GoI has now been forced to abandon this policy. Sustained immiseration has required ever-increasing subsidies and transfers - it's expensive to subsidise food for 800 million people. A forced tax cut plus reduction in revenues from import tariffs (Trump) and from the capital gains tax (stock market downturn) will further hurt revenue mobilisation and limit fiscal headroom.”
Inflation: After the introduction of the inflation-targeting framework, it was expected that RBI would keep inflation within a 4-6% band. “It did so credibly until 2019. Since then, the inflation target has often been missed……MPC meetings are now an analytically empty bimonthly circus, which fools the effete Indian business media but not any serious actor.”
CAD: The author has long defended India's (correctly) unwritten exchange rate policy. India has capital controls and CAD. “Together, these require interventions to ensure orderly depreciation in the exchange rate, with target annual depreciation calculated based on the expected current account deficit and oil price movements. This is clearly but informally communicated to market players together with action to ensure the dampening of volatility so that the main source of CAD financing - foreign investment - does not find India an unattractive destination because of volatility, or excessive depreciation. RBI ran this policy fairly successfully until recently, when it decided to intervene to keep the exchange rate ‘stable’……The result is that the rupee is now falling rapidly and is more volatile.”
Roy concludes ‘a credible, coherent medium-term macroeconomic strategy that addresses the above issues and outlines pathways to a solution is now an urgent necessity….”
