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Macroeconomic Policy for an India in Transition
Two types of macroeconomic policies, categorised as Type I and Type II, are developed. A comparison shows why Type II would lead to better growth and infl ation outcomes in the Indian context. Analytical frameworks, data, and fundamentals, all of which are found to support Type II policy, are discussed, showing that India’s recent macroeconomic policy has tended towards that of Type I. This implies that growth and employment creation fall below potential even as the potential itself falls. Ironically, the primary infl ation expectations anchoring the function of infl ation targeting are underutilised.
This article is an expanded version of a public lecture given at the Nehru Memorial Museum and Library, New Delhi, in May 2017. I thank Shakti Sinha for the invite, audience participants for their enthusiastic questions and comments, and Reshma Aguiar for secretarial assistance.
Change is faster than our perception or understanding of it. Discussion and debate on India in transition is therefore required to demonstrate the contribution of ideas to development.
Extremes themselves lend to ideology. Moreover, established theories are easier to understand compared to nuanced “middles,” so the intellectual ball seems to toss only between old verities of underperformance and modes of analysis more suitable to developed economies. Studying underdevelopment perhaps may lead one to lose the ability to see development. It would be incorrect to apply advanced economy (AE) equilibrium concepts to an economy in transition.
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