The challenge is to get our mix of fiscal and monetary policy right
Mint Mumbai|February 01, 2024
India is at an inflection point in its growth-inflation dynamics. A judicious budget deficit will give RBI more policy space
MYTHILI BHUSNURMATH
The challenge is to get our mix of fiscal and monetary policy right

With the interim budget for the fiscal year 2024-25 just a few days away, it is a good time to reflect on what can be best described as a perennial problem in macroeconomic policy formulation; a problem the budget exercise exemplifies—arriving at the right mix of fiscal and monetary policy. The Goldilocks Mean, if you will.

After all, the foremost objective of macroeconomic policy in any country is to achieve sustainable economic growth with price stability and a healthy external sector. This is possible only if the two main policy instruments available to policymakers to achieve this objective—monetary and fiscal policy—work in tandem, rather than at cross-purposes. At least over the long-term, even if they seem to be at odds with each other in the short-term.

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