Reserve Bank of India (RBI) deputy governor, Michael Debabrata Patra, highlighted the significant role of India's monetary policy in the country's journey towards becoming a developed economy during a discussion with Indian Administrative Service (IAS) officials. He stressed the importance of adopting proactive and forward-looking monetary policies to effectively tackle future challenges and seize opportunities.
Mr Patra highlighted the essential principles of monetary policy, noting its quick deployability as a stabilising tool. It aligns aggregate demand with productive capacity, controlling inflationary pressures when demand exceeds potential and stimulating the economy during deflationary conditions.
Effective monetary policy is inherently forward-looking, anticipating future conditions due to the lag in economic data and delayed impact of policy measures. Mr Patra also stressed the importance of focusing on a singular goal with one instrument, as per Jan Tinbergen's rule, to maintain policy effectiveness.
Transparency and clear communication of policy intentions are crucial for credibility and macroeconomic stability. Mr Patra described India's economic journey, noting its emergence as a US$3.6trn (trillion) economy with a per capita income of $2,500 in 2023-24. He projected that with a 9.6% annual growth rate, India could achieve developed country status by 2047, with a per capita income of US$34,000.
In purchasing power parity (PPP) terms, India is the third-largest economy globally, aiming to become a US$5 trillion economy by 2027 and potentially overtaking the US as the second-largest in PPP terms by 2048, according to the OECD (Organisation for Economic Co-operation and Development).
Mr Patra identified positive forces shaping India's future: robust capital accumulation, macroeconomic stability, financial sector resilience, and a young, growing workforce. India's investment rate, financed mainly by domestic savings, provides a stable growth foundation. Despite external shocks, India's external sector remains robust with manageable debt levels and strong foreign exchange reserves.
Macroeconomic stability, supported by prudent financial policies and active supervision, has strengthened India's financial sector. The decline in non-performing assets and strong capital buffers support a credit upswing, aiding growth intermediation.
India's demographic dividend presents significant growth opportunities. Efforts to re-skill the labor force, formalise employment and increase female labor participation are critical for leveraging this advantage. The digital revolution, driven by initiatives like the JAM trinity (Jan Dhan, Aadhaar and mobile connectivity) and the Unified Payment Interface (UPI), is enhancing financial inclusion and boosting economic growth.
However, challenges remain. Building high-quality infrastructure, developing a robust manufacturing base, boosting exports and managing climate change are vital for sustained growth. Infrastructure investment must be scaled up, manufacturing growth accelerated, and labor productivity enhanced to leverage the demographic dividend.
In conclusion, Michael Debabrata Patra emphasised the pivotal role of monetary policy in shaping India's economic future. By adhering to guiding principles, leveraging positive forces and addressing challenges, India can navigate its path to becoming a developed economy. The proactive and forward-looking approach of the RBI, combined with the resolve of policy-makers and stakeholders, will prepare India for its ambitious journey toward economic prosperity and global leadership.
