GLOBAL ECONOMIC WOES MASK INDIA’S POLICY CONFUSION
Storm clouds may be on the horizon for India’s economy while India’s policy makers continue to emphasize the relatively high real GDP growth of 7.6% in FY2016 along with macroeconomic stability. Recent monetary policy and fiscal policy announcements have not been encouraging, but in fact confusing. RBI, as we shall see below, now has two monetary policy frameworks – inflation targeting and “monetary targeting’’ – that it wants to follow – and these could be contradictory creating confusion about monetary policy intent. The RBI’s policy quandary has to an extent been driven by the poor quality of the fiscal adjustment that the government has undertaken. The Indian government’s fiscal consolidation efforts thus far have been an accounting mirage. The political and the monetary authorities will need to work together to frame appropriate and coordinated policies to ward off the emerging risks to the economy. These policies would primarily need to include structural reforms to make prices more market oriented while the RBI may need to adopt a more eclectic monetary policy with greater transparency about its intent.