Expansionary Fiscal and Monetary Policies

Context

India is currently witnessing an extraordinary segment wherein each fiscal and monetary policies are expansionary.

Key Policies Adopted Recently

• In Union Budget 2025–26, ₹11.21 lakh crore earmarked for infrastructure, agriculture, MSMEs, and virtual connectivity (strong emphasis on capital expenditure).
• Income Tax cuts announced had been intended to enhance consumption at some stage in a slowdown.
• RBI reduced the repo price to 5.5% to encourage borrowing and investment amid a slowing boom.
• The RBI’s dual mandate — price stability and boom — has led to:
  • Rate cuts to inspire borrowing.
  • Inflation concentrated on, with retail inflation falling to 4.6% in 2024–25.
  • Liquidity assistance for financial establishments and NBFCs.

Issues & Challenges

• Lack of Policy Coordination: If both guidelines work collectively without coordination, it might overheat the economy causing inflation.
• Muted Demand Response: People aren’t spending an awful lot, in spite of tax cuts. This demanding situations the Rational Expectations Theory (core to inflation targeting)
• Widening Fiscal Deficit Risk: If growth doesn’t rise, tax sales will fall, leading to a financial deficit. To plug the distance, the government may reduce welfare spending, hurting vulnerable organizations.
• Rising Inequality and Weak Wages: Corporate incomes rising, however actual wages stagnant. Expansion regulations may also gain capital more than labour.

Instances of Expansionary Policies Adopted in Past

• • The New Deal (Nineteen Thirties): By the US, in reaction to the Great Depression.
  • Post-2008 Global Financial Crisis: By Central Banks and US Federal Reserve; Slashed interest rates to near zero and brought quantitative easing — buying government securities to inject liquidity into the economy.
    • In India, RBI slashed the repo rate from 9% in 2008 to 4.75% by April 2009.
  • Japan’s Abenomics (2012–2020): Three-pronged strategy:
    • Monetary easing by the Bank of Japan;
    • Fiscal stimulus through government spending; and
    • Structural reforms to revive Japan’s stagnant economic system.

• COVID-19 Pandemic Response (2020–2021):

• • • Massive financial stimulus applications — direct cash transfers, unemployment benefits, and business loans — while significant banks reduce interest rates and accelerated asset purchases to cushion the economic blow.
    • India rolled out the Aatmanirbhar Bharat Abhiyan, a ₹20 lakh crore package

• Other steps:

• • Repo rate cuts to a historic low of 4%.
  • Loan moratoriums and liquidity aid for NBFCs and housing finance corporations.

Benefits of Expansionary Policies in India

• Boosts Aggregate Demand: Expansionary monetary guidelines like tax cuts and multiplied public spending raise disposable income and consumption.
• Supports Employment: Government-funded infrastructure projects and MSME support schemes can generate jobs, especially in rural and casual sectors, decreasing unemployment throughout downturns.
• Encourages Private Investment: Lower borrowing costs and progressed consumer sentiment can incentivize groups to put money into capacity expansion, innovation, and hiring.
• Stabilizes Financial Markets: Liquidity injections through the RBI and credit guarantees for NBFCs and banks assist keep monetary balance and prevent credit crunches.
• Short-Term Economic Relief: During emergencies like the COVID-19 pandemic, direct cash transfers and food security features provided instantaneous remedy to prone populations.

Way Forward 

• Strengthen Policy Coordination Mechanism: Institutionalised talk between RBI and Ministry of Finance.
• Prioritise Targeted Transfers: growth DBTs and salary support schemes to boost bottom-up demand.
• Revise Tax Structures Holistically: Combine income tax remedy with indirect tax (GST) rationalisation.
• Monitor Inflation Proactively: Preemptively tighten financial policy if demand-pull inflation rises.

Conclusion

• Expansionary policies have performed an important function in India’s economic management, especially all through crises. However, their success depends on timing, focused on, and coordination.
• Policymakers need to balance short-term stimulus with long-term monetary prudence and structural reforms to ensure sustainable growth.

Source: The Hindu

Mains PYQ

Q. Do you agree with the view that steady GDP growth and low inflation have left the Indian economy in good shape? Give reasons in support of your arguments. (2019)

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