Is RBI's Inaction Stalling India's Growth?

Monetary policy actions can explain the puzzles in the episodic growth and slowdowns of the Indian economy

- Amit Kapoor

The role of interest rate in India’s growth is grossly underplayed. The movement of interest rates has been strongly linked to episodes of high growth and slowdowns in the last few decades. There are two major puzzles of the Indian economy that have been surprisingly left unquestioned and can be explained with India’s monetary policy actions.

First, contrary to popular belief, the Indian economy did not accelerate in the decade following the economic reforms of 1991 any differently than it was doing in the previous decade. The decadal growth rates of the 1980s and 1990s are more or less similar. Second, the economy began to accelerate at an unprecedented pace after 2003 without the benefit of any new phase of reforms. There have hardly been any studies to explain the “why” behind these two trends.

One of the first studies highlighting the constancy of India’s growth rate for the 1980s and 1990s was produced by Surjit Bhalla, who showed that non-overlapping three year averages of any economic indicator — GDP growth, money supply, fiscal deficits, industrial production — were an unchanging constant throughout these two decades. In fact, GDP growth from 1980-89 was 5.7% and between 1990-2002 was 5.2%. Bhalla (2010) points out that the GDP growth did accelerate to 7.4% in each of the three years between 1994 and 1997 in response to economic liberalisation.