Expansionary Policies In A Slowing Economy

India is currently implementing simultaneously expansionary fiscal and monetary policies to address a slowing economy

Monetary Policy

Monetary policy refers to the set of actions undertaken by the Reserve Bank of India (RBI) to regulate the supply of money, credit availability, and interest rates in the economy.

Accommodative Stance: (Expansionary)
- RBI may reduce policy rates to boost liquidity.
- Adopted during economic slowdowns to stimulate growth.
Neutral Stance:
- RBI keeps the option open to increase or decrease rates, depending on macroeconomic indicators.
- Adopted when inflation is stable and flexibility is needed.
Calibrated Tightening: (Contractionary)
- RBI may increase or maintain rates, but not reduce them.
- Used when inflationary pressures are high.

The Reserve Bank of India (RBI) has adopted an expansionary monetary policy:
- April 2025: Repo rate cut by 25 basis points.
- June 2025: Additional 50 basis point cut.
- Current repo rate: 5.5%.

Expansionary monetary policy is encouraged by:
- weak demand,
- low inflation within the band of 4% +/- 2%;
- an encouraging forecast of 6.5% GDP growth for 2025-26.

Fiscal policy involves the use of government spending, taxation, borrowing, and investment policies to influence the country’s economic conditions.
It is framed by the Ministry of Finance and implemented through the Union Budget and related policy decisions.

Expansionary Fiscal Policy:
- Purpose: Stimulate economic activity, especially during a recession.
- Tools:
  - Increased Government Spending: On infrastructure, welfare schemes (e.g., PMAY, MGNREGA).
  - Tax Cuts: To increase disposable income and boost demand.
Contractionary Fiscal Policy
- Purpose: Control inflation and reduce fiscal deficit.
- Tools:
  - Reduced Public Spending: Cuts in subsidies or infrastructure budgets.
  - Tax Hikes: Especially on consumption or high-income groups.

Expansionary fiscal policy: Income tax cuts announced in February 2025 aimed to boost disposable income and consumption.

Inflation: Fell to 3%, the lowest in six years, due to a good monsoon and harvest.
Credit growth: Slowed to 9% in May 2025, a three-year low.
Unemployment: Increased from 5.1% (April) to 5.6% (May 2025).
Despite policies, aggregate demand remains weak.

Both policies impact aggregate demand and inflation:
- Monetary policy: Lower interest rates → more investment → higher demand.
- Fiscal policy: Tax cuts/spending increases → more consumption → higher demand.
Coordinated action ensures that neither policy cancels the effect of the other.
In past crises (e.g., 2008), when monetary policy was ineffective (zero rates), fiscal policy stepped in to stimulate demand.

For the economy to work smoothly, the RBI (monetary policy) and the Government (fiscal policy) must coordinate their actions.
If both push in the same direction, it can boost growth — but they must be careful not to cause too much inflation.

Additional reading: RBI’s Monetary Policy

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