Macroeconomic Policies Of India Essay

New issues in Indian macro policy
Ajay Shah

Working Paper 2008-51
May 2008

NIPFP-DEA Research Program on Capital Flows and their Consequences
National Institute of Public Finance and Policy
New Delhi
http://www.nipfp.org.in/nipfp-dea-program/index.html

New issues in Indian macro policy
Ajay Shah∗
NIPFP, New Delhi
http://www.mayin.org/ajayshah
May 6, 2008

Contents
1 The old world

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2 What has changed
2.1 Globalisation . . . . . . . . . . . . . . . . . . . .
2.2 Government control of finance has partially eased
2.3 The business cycle . . . . . . . . . . . . . . . . .
2.3.1 Monsoon shocks matter less . . . . . . . .
2.3.2 A more conventional business cycle . . . .
2.4 Exchange rate inflexibility . . . . . . . . . . . . .
2.5 The fiscal crisis has partially abated . . . . . . . .
3 Looking forward
3.1 Fiscal stability . . . . . .
3.2 Stabilisation . . . . . . .
3.2.1 Monetary policy .
3.2.2 Fiscal policy . . .

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4 Conclusion

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∗

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.

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The old world

For many decades, macro-policy in India was conducted in an environment
with five key elements:
ˆ Agricultural...