Fiscal policy strongly supportive of growth: RBI Deputy Guv Poonam Gupta

What India should aspire to be, a developed nation, an emerged nation, or an emerged market, is an important one, says Gupta

A majority of the respondents to the discussion paper on inflation-targeting framework suggested maintaining the current framework, keeping headline consumer price index (CPI) as the target as there was an agreement the 4 per cent target suits India’s current income level and growth stage, said Poonam Gupta, deputy governor, the Reserve Bank of India (RBI), on Wednesday at Business Standard BFSI Summit in a conversation with A K Bhattacharya.

 

While India’s policy framework has worked well, are you concerned about two factors: one, there’s growing talk globally of a potential market meltdown. And second, protectionist tendencies are rising, with tariffs almost becoming weaponised. In such a scenario, how should emerging markets, particularly India, navigate a rapidly changing global environment?

 

What India should aspire to be — a developed nation, an emerged nation, or an emerged market — is an important one. These goals go hand in hand as economic prosperity is essential to becoming an emerged nation. The terminology may differ, but the objective remains the same. When an economy grows larger and more prosperous, while maintaining macroeconomic stability and evolving its policy frameworks in line with both domestic and global complexities, it gains greater insulation from external shocks. That’s how countries transition into the advanced-economy club as we’ve seen with South Korea, which is now close to joining that group.

 

On your question about navigating global protectionism, the challenge lies in identifying new sources of growth to sustain an accelerated trajectory. Trade has not been a strong driver in recent years, and is unlikely to return to the levels seen during the phase of hyper-globalisation. So, two things are essential, and India is already doing both. First, maintaining a steady focus on reforms, continuously improving in every area, whether it’s ease of doing business, financial intermediation, innovation, or research and development (R&D). Second, strengthening domestic growth drivers. India has historically been more dependent on domestic consumption, which makes up around 60 per cent of its gross domestic product (GDP). If recent consumption-supporting measures help boost demand even by one to two percentage points, that could significantly lift GDP growth, given consumption’s large share in the economy. So, the focus must remain on improving across all sectors — private enterprise, policymaking, and household behaviour — while enhancing both global competitiveness and domestic growth engines. Encouragingly, this is the direction in which the economy is moving.

 

What role do you see for India’s export sector in this environment? Given the rise in global protectionism, how should we view export prospects and growth potential? The first six months’ data looks reassuring, but what’s your outlook going forward?

 

It helps to view exports in two categories — services and merchandise. In services, India has performed very well over the past two decades, and continues to have substantial potential. Merchandise exports, however, still have untapped opportunities. If we look cross-country, nations dependent on natural resources, like Canada, Chile, or New Zealand, face inherent limits to growth. Similarly, countries with adverse demographics or excessive reliance on commodities eventually reach their potential ceiling. India’s merchandise export basket is highly diversified, encompassing labour, capital, R&D, and skill-intensive sectors. With such diversity and scale, there’s no reason India cannot continue improving its export performance. Notably, much of our progress so far has come at a time when global trade itself was subdued. Significant advances in infrastructure, logistics, and policy reforms have enhanced competitiveness. Given this, and the diversification of both products and markets, I see strong potential for merchandise trade to expand meaningfully in the coming years.

 

You also mentioned that India’s GDP growth has remained robust, with strong first-quarter data and expectations of continued momentum in the second quarter. While the RBI projects some moderation next year, what role do monetary and fiscal policies play in sustaining growth? Is there scope for further policy easing?

 

I generally avoid commenting on monetary policy, but let me attempt an answer.

 

Growth results from a combination of factors, fiscal and monetary policy, structural reforms, entrepreneurship, availability of key inputs, and demand conditions. So, when growth discussions focus narrowly on monetary policy, the framing becomes incomplete, even, at times, simplistic. Monetary policy supports growth in two ways: structurally, by keeping interest rates consistent with the economy’s long-term needs; and cyclically, by responding to short-term fluctuations. But beyond that, many other factors drive growth. If monetary policy alone could deliver prosperity, far more countries would be rich today.

 

When too much weight is placed on one element, say monetary policy, the overall outcome suffers. As the (RBI) Governor has said repeatedly, India is growing well at 6.5 per cent, with a forecast of 6.8 per cent for this year, but that’s not our destination, potential, or aspiration. The room for policy action remains, but timing and magnitude will depend on evolving conditions. Fiscal policy has been strongly supportive of growth. This has come through two key channels, a steadily improving tax system and a decisive shift in spending from revenue expenditure to capital expenditure.

 

Public investment in infrastructure, combined with a focus on sound fiscal outcomes and transparency in budget reporting, has strengthened fiscal credibility. Both fiscal and monetary policy are aligned to recognising and delivering on their respective roles.

 

Turning to inflation, you mentioned in your presentation that the current year’s estimate is around 2.5 per cent. Does this suggest we are entering a structural disinflation phase? What should investors and markets expect going forward?

 

To understand this better, inflation needs to be viewed in three components: food prices, core inflation, and precious metals, each moving differently.

 

The current decline in inflation is primarily driven by food prices, which are in deflationary territory, a situation likely to self-correct due to base effects. Core inflation, excluding precious metals, has remained range-bound, and is expected to stay that way. While projections are subject to uncertainty, current assessments indicate that core inflation will remain stable, with precious metals contributing to some upward pressure. When different components move in varied directions, a single narrative doesn’t capture the full picture. Over the medium to long term, however, India’s structural inflation trajectory has clearly moderated. When inflation-targeting was introduced about nine years ago, inflation was in the 8-10 per cent range. Since then, it has come down structurally to around 4 per cent, plus or minus, and volatility has reduced significantly. This lower volatility, in both growth and inflation, is a key achievement. It makes outcomes more predictable, which benefits investors and gives policymakers greater room to focus on structural priorities. Because volatility has been tamed through a resilient and credible policy framework, I expect this stability to continue. And less volatility in economic outcomes.

 

The RBI recently released a discussion paper on the monetary policy framework, now open for public feedback. Could you outline the next steps and timeline?

 

The discussion paper was open for public comments for about a month, and we received extensive and thoughtful feedback. We reviewed comments sent directly, as well as those published in op-eds, editorials, and even on social media.

 

A clear majority of respondents have suggested maintaining the current framework, keeping headline CPI as the target. Many have also noted that India’s upcoming revised CPI series should be updated more frequently than in the past.

 

There’s broad agreement that the 4 per cent target suits India’s current income level and growth stage, and that the 2 per cent-6 per cent tolerance band remains appropriate in today’s volatile global environment. Some have suggested adopting an asymmetric band, but such frameworks risk creating confusion about whether the midpoint or the announced target is the true anchor. All these inputs are being compiled and will be shared with the government, which will take the final decision on the framework. The indicative timeline for these decisions is the first quarter of 2026. Our role is to gather, analyse, and transmit the feedback, which we will be doing shortly. 

India frontrunner in implementing reforms: Gupta 

Despite uncertainty in global policy, geopolitical tensions, and trade disruptions, emerging markets (EMs) have demonstrated remarkable stability, supported by strengthened macroeconomic frameworks, flexible exchange rates, prudent capital account management, and credible fiscal and monetary policies, said Poonam Gupta, deputy governor, Reserve Bank of India, in her opening remarks at the Business Standard BFSI Summit.

 

She said India has been a frontrunner in implementing reforms. Its external account remains resilient, with a balanced current account supported by strong services exports and remittances, while external debt remains low and largely domestically held.