India is presently experiencing an unusual period in which both fiscal and monetary policies are accommodating

Recent Key Policies Implemented

In the Union Budget for 2025–26, ₹11.21 lakh crore set aside for infrastructure, agriculture, MSMEs, and digital connectivity (with a strong focus on capital spending).

The announced income tax reductions aimed to stimulate spending amid an economic downturn.

RBI reduced the repo rate to 5.5% to stimulate borrowing and investment due to decelerating growth.

The RBI’s twin objectives — maintaining price stability and promoting growth — have resulted in:

Interest rate reductions to stimulate lending.

Inflation targeting aims for retail inflation to decrease to 4.6% in 2024–25.

Financial institutions and NBFCs receiving liquidity assistance.

Problems & Difficulties

Absence of Policy Coordination: If both policies function simultaneously without alignment, it could lead to economic overheating, resulting in inflation.

Even with these policies, growth remains sluggish, credit expansion is feeble, and unemployment is increasing.

Reduced Demand Response: Consumers are not spending significantly, despite tax reductions. This calls into question the Rational Expectations Theory (central to inflation targeting).

Expanding Fiscal Deficit Threat: Should growth not increase, tax income will decrease, resulting in a fiscal deficit. To fill the void, the government might need to reduce welfare expenditures, negatively impacting at-risk populations.

Increasing Inequality and Stagnant Wages: Corporate earnings are up, yet real wages remain unchanged. Expansion policies might favor capital over labor.

Examples of Expansionary Policies Implemented Previously

The New Deal (1930s): Implemented by the United States as a reaction to the Great Depression.

After the 2008 Global Financial Crisis, Central Banks and the US Federal Reserve lowered interest rates to nearly zero and implemented quantitative easing by purchasing government securities to enhance liquidity in the economy.

In India, the RBI reduced the repo rate from 9% in 2008 to 4.75% by April 2009.

• Abenomics in Japan (2012–2020): Tri-faceted approach:
• Quantitative easing implemented by the Bank of Japan;
• Government expenditure as a means of fiscal stimulus; and
• Structural changes to rejuvenate Japan’s sluggish economy.

Advantages of Expansionary Strategies in India

Enhances Overall Demand: Expansionary fiscal measures such as tax reductions and higher government spending increase disposable income and spending.

In the same way, reduced interest rates stimulate borrowing and investment, contributing to the resurgence of demand in various sectors.

Promotes Employment: Infrastructure projects funded by the government and support programs for MSMEs can create job opportunities, particularly in rural and informal sectors, helping to lower unemployment during economic declines.

Boosts Private Investment: Reduced borrowing expenses and enhanced consumer confidence may motivate companies to invest in expanding capacity, innovation, and workforce recruitment.

Ensures Financial Market Stability: The RBI's liquidity infusions and credit assurances for NBFCs and banks support financial stability and avert credit shortages.

Immediate Economic Aid: In crises such as the COVID-19 pandemic, direct financial assistance and food security initiatives offered prompt support to at-risk groups.

Path Ahead

Enhance Policy Coordination Framework: Established communication between RBI and Ministry of Finance.

Focus on Targeted Transfers: Enhance DBTs and wage support programs to stimulate grassroots demand.

Reassess Tax Frameworks Comprehensively: Merge income tax reductions with indirect tax (GST) adjustments.

Closely Observe Inflation: Actively tighten monetary policy if there’s an increase in demand-pull inflation.

Final thoughts

Expansionary measures have been crucial in managing India’s economy, particularly in times of crisis. Their success relies on timing, targeting, and coordination.

Policymakers must juggle immediate stimulus efforts with long-term fiscal responsibility and structural changes to achieve sustainable growth.