An opening for Indian gains as many aspects of macro policy are clarifying

The overall context of macroeconomic policy comprises two main issues. The first issue is the sustained problem of weak private investment over a long period. The second is the remarkable developments in the global economy and a glimmer of possibility for a better position for India. The recent moves by the monetary policy committee, of cutting rates, are in the right direction, and should be seen in the larger context of macro policy. 

The most important element of India’s growth is the emergence of large, high-productivity private firms which control greater resources of labour and capital. Hence, watching the growth of these firms is of the essence in understanding the Indian journey. In the Annual Reports of large private non-financial firms, a good measure of investment is the year-on-year growth of the net fixed assets. This has averaged 6.6 per cent from 2016-17 to 2023-24 (a period of eight years). If we think of the inflation target as 4 per cent, this is a real growth rate of 2.6 per cent a year, which is not consistent with Indian success. 

Why did private Indian firms reduce the intensity of their investment? Largely speaking, this has to do with the problems of central planning and rule of law. Building a business requires immense commitments of emotional energy, time, effort, capital, and children. When the external environment imposes unreasonable levels of policy risk and expropriation risk, private persons feel inclined to pull back. This is the essence of how the socialist pattern of society — of government control of products and processes inside private firms, coupled with arbitrary power in picking winners — induces stagnation. 

Holding these things constant, a better financing environment will help matters. Holding these risks constant, if more capital were available at a lower cost, this would give higher investment. One perennial lever for this lies in the capital-control regime. Removing capital controls in India is always a good idea because this reduces the cost of capital within India. There has been some progress of this nature in the recent period, and we hope that much more can happen in the coming year.

And then, there is monetary policy. The fundamental foundation of the Reserve Bank of India (RBI) has to be the inflation target of 4 per cent. The biggest contribution that the RBI can make to Indian prosperity is to make inflation predictable and stable. When we look at the core CPI (consumer price index), the RBI got a big deflation done, getting the inflation rate down from about 6 per cent in the August 2020 to December 2022 period, to about 4 per cent today. This makes cutting rates today sensible.

The international environment has changed in ways that open up new possibilities for India. Recent events have estranged China even more from the core of the world economy. Global firms are trying even harder to reduce their dependence on China as compared with the way things worked earlier. Difficulties in the United States (US) also encourage global firms to do more in global capability centres and other contracting mechanisms in India. 

For a long time, I have been sceptical about the “China plus one” claims made about India: I have kept my eyes glued on the foreign direct investment (FDI) and goods exports data, and noticed that these didn’t really budge so far. But it’s possible to see early signs of gains now. A ratio to watch is China’s exports into the US divided by India’s exports to the US. In March 2025, this got down to a historically low value of 2.63. It has trended down from values like eight in 2019, and slowly gotten better in India’s favour. 

A good measure of Indian exports is goods plus services exports, excluding petroleum products and excluding gold. These were stagnant at about $55 billion per month for 2022-24. They have shown some growth in recent months, going up to a peak value near $70 billion per month. The FDI data remains very weak. It is hard to imagine a path to sustained Indian success without much better performance in FDI in India, as foreign firms hold the keys to globalisation and to the knowledge of how high-productivity firms work. 

An important problem holding India back on exporting is the barriers to globalisation. Tariff and non-tariff barriers make raw materials expensive for Indian producers. Capital controls make capital expensive for Indian producers, and capital is the biggest raw material in many industries. For the first time in many years, we are starting to see gains on these. This bodes well for growth in Indian exports. 

The India-United Kingdom free-trade agreement made gains on Indian trade liberalisation, the likes of which had eluded Indian policymakers in preceding years. We may hope that similar big removals of trade barriers would feature in future India-US and India-European Union agreements. And then, once a few important countries have low barriers, the case for trade barriers against anyone else melts away. The wise path for Indian trade policy lies in focusing on China's macroeconomic crisis, and dumping by China Inc, with liberalisation for everyone else. 

Every trade liberalisation exerts forces upon the macroeconomy. Lower tariffs stimulate import demand, leading to a deterioration of the trade balance. This trade deficit induces rupee depreciation to restore equilibrium. Cutting the domestic interest rate also reduces capital inflows, which pushes in the same direction. 

If India succeeds as a venue for globalised production, through reduced tariffs, through the desire of global firms for “China plus US plus one” production, and through Indian capital-account decontrol, then there can be gains in capital flows into India and that can countervail the forces of depreciation. 

Levers of policy are often used to try to fight rupee depreciation. This is a critical time in India’s history, where the stars are aligning in favour of Indian success. The best stance of macro policy is a combination of trade liberalisation, soft monetary policy, improvements on the foundations of policy (the problems of central planning and rule of law), capital account decontrol, and a weaker rupee.

The author is a researcher at the XKDR Forum