New issues in Indian macro policy
Ajay Shah*
NIPFP, New Delhi
http://www.mayin.org/ajayshah
May 10, 2008
Abstract
Macroeconomic policy thinking in India has been rooted in an environment with
five key parameters: agricultural shocks rather than a conventional business cycle,
a closed economy, deeply distortionary tax policy coupled with a fiscal crisis, finan-
cial markets that lacked speculative price discovery, and a monetary policy shaped
by deficit financing. This environment has been completely altered through India’s
integration into the world economy, the rise of one financial market (the equity mar-
ket), the reduced importance of the monsoon, the rise of conventional business cycle
dynamics, a partial abatement of the fiscal crisis and a monetary policy environment
with loss of autonomy owing to exchange rate pegging. These changes call for a
rethink of the macroeconomic policy framework. The agenda of assuring fiscal sta-
bility needs to be seen to its conclusion. Monetary policy and fiscal policy need to
be converted into tools for macroeconomic stabilisation.
*This is a preliminary version of the article New issues in Indian macro policy, which appeared in
Business Standard India, edited by T. N. Ninan, Business Standard Books, 2008. I am grateful to Vijay
Kelkar, M. Govinda Rao, Amaresh Bagchi, Ila Patnaik, Raghuram Rajan, Eswar Prasad, Percy Mistry,
Ashok Desai and Joydeep Mukherji for valuable discussions.