Handling fiscal dominance

27 FEB,2022 | MEDC


 

The Indian economy is currently experiencing fiscal dominance – a situation wherein the state of public finances limits the influence of monetary policy. India’s fiscal position continues to remain rather precarious, with important policy implications for growth and inflation. Persistently high deficits have created a distinctive economic fragility for India. We now face a paradoxical situation wherein economic growth may be necessary to secure the integrity of monetary policy. Not only does the economy, the government, and policymakers need rapid growth, but, ironically, the RBI may be needing it even more badly, to escape some uncomfortable choices and preserve the image of its autonomy and efficacy. The way out now for policymakers is a gradual trimming of the deficit and hoping that no major and unforeseen shocks to the system arise on the landscape. Managing inflation is also of paramount importance.

 *Photo Credit: Google

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