Concerted Fiscal-Monetary Steps Need of the Hour

Global economic environment is changing fast, weighed down by inward looking policy measures and reversal to autarky across the globe. Underlying the broader theme of ‘Making America Great Again’ under Donald Trump presidency, the USA threats of higher tariffs and consequent retaliation by China, Europe and Mexico weigh down on global growth outlook and trade volumes.

Amongst Advanced Economies, the USA in particular, has displayed remarkable resilience with its GDP growth at 2.8 per cent in 2024. The Euro zone delivered a modest rise in GDP at 0.7 per cent for 2024 whereas Japan Q4 GDP at 2.8 per cent depicts rebound in corporate spending and exports. Amid developing nations, China’s stimulus push, and export boom seem to bode well with 2024 GDP growth rate at 5 per cent. At the domestic front, real GDP growth for India has been revised upwards at 6.5 per cent for Financial Year 2024-25, compared to the previous Advance Estimates of 6.4 per cent. It continues to remain the fastest growing economy in the world despite looming uncertainty and geopolitical volatility. The need, however, is to put economy on a higher growth trajectory to realise ‘Viksit Bharat by 2047’ aspirations.

To put India’s current growth performance in perspective, India clocked 6.5 per cent average real GDP growth in two decades to Pandemic. After undergoing contraction in output in Pandemic disrupted year 2020-21, GDP growth rebound to average 8.8 per cent in three-year period of 2021-24. The current year estimates thus seem like GDP growth reverting to decadal average pre-pandemic. Sustaining growth at 6.5 per cent may still be admirable considering global economic growth is seen 3.2 per cent, half-a-percentage points lower than pre-pandemic average growth of 3.7 per cent for two decades of 2000-19. Aspiring for higher growth for India while global growth stutters call for strategic coordination of fiscal and monetary levers, while undertaking structural reforms to raise growth potential.

On fiscal policy, the Union Budget 2025 set the right balance in offering targeted relief and stimulus to middle class while keeping the capex focus and fiscal consolidation intact. This is essential to make India lower the cost of capital on a sustained basis.

Global central banks have adopted a cautious ‘wait-and-watch’ stance, with the US Federal Reserve now seen delivering fewer rate cuts than previously projected. In contrast, weaker growth prospects in the UK and Eurozone may prompt further easing to support their economies, while the Bank of Canada might hold off on a rate cut in March 2025 due to rising inflationary pressures.

In India, the RBI cut the policy repo rate by 25 bps in its February 2025 monetary policy, citing better rabi crop production to likely tame food inflation (the stickiest sub-component till now). The monetary policy committee retained policy stance as ‘neutral’ to retain flexibility in an uncertain global environment. The scope and timing of further rate cuts thus depend upon incoming economic data.

Looking at the high frequency indicators, growth is seen recovering modestly in Q4 of FY2024-25. Inflation, meanwhile, has been declining with the recent print at 4.2 per cent for January 2025 mainly attributable to falling food inflation. Liquidity situation meanwhile gotten tighter on forex interventions of central bank as also incremental credit of banks outpacing deposit growth in fourth quarter of financial year. The RBI has been engaging in continuous liquidity infusing measures via variable repo rate (VRR) auctions, open market operations (OMO) etc. to bring back liquidity deficit at comfortable levels.

At the external front, the merchandise trade deficit stood at its third highest level in February 2025 in the current financial year at (-) 23 billion USD. Encouragingly, net services inflow stood at its highest level at 20.3 bn USD in February 2025. The foreign portfolio investment, however, remained net sellers in February 2025 although the momentum moderated compared to January 2025. The Indian rupee thus remains under pressure against the greenback.

Monetary policy thus must carefully balance the near-term imperative of external sector stability, especially the pressure on capital and financial account, vis-à-vis supporting growth through accommodating monetary conditions. The strategic use of foreign exchange reserves has helped rupee withstand the external sector developments in orderly way. The medium-to-long term strategy, however, remains in the realm of fiscal policy, by making it easier to invest and do business in India.  The Union Budget 2025 is assuring to note as it emphasizes deregulation as means to unleash animal spirits of economy.