ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

A+| A| A-

Interest Rate and India’s Economic Revival

The Indian economy is not just in a trough of a usual business cycle, it is also going through a structural crisis.


Is there another recession waiting to hit the global economy? Apart from the trade war, media in the United States is actively discussing this in the context of a relative fall in the returns of long-term government bonds vis-à-vis bonds of shorter maturity; the so-called “inverted yield curve.” Whether there is another deeper recession on the horizon or not is a matter of speculation, but can it be pre-empted and prevented through active policy? The experience of government responses since the global recession of 2008, which preferred monetary easing over a genuine fiscal stimulus across the globe, does not inspire much confidence. Indian policymakers too do not seem to have learnt much from the global failure of monetary policy as a way out of a slowdown. There seems to be a general consensus among the policymakers, despite concrete evidence to the contrary, that economic activity can be manoeuvred through changes in the interest rates. The Reserve Bank of India has accepted the government’s view and decreased the repo rates by 0.35% in its last monetary policy review meeting. The expectation is that credit-financed private investment and consumption would pick up as a result of a fall in the cost of credit and bring the Indian economy back on its feet. Keynes would have, in sharp contrast, said, “there’s many a slip between the cup and the lip” when it comes to the expansionary effects of monetary policy. An economy which is in a downward spiral, like the Indian economy at present, requires a countercyclical measure to reverse the spiral. Such a countercyclical measure, by its very nature, has to be exogenous to the entire process. Can interest rates provide that countercyclical push?

Let’s look at consumption first. A relationship in macroeconomics that holds true almost like an axiom is between consumption and current income, especially when current incomes are low and expectations of future incomes are bleak. It is for this reason that Keynes called consumption a passive factor when it came to the question of how to revive a flailing economy. Consumption being a function of income attaches a cyclicality to it, thereby making it an unsuitable instrument for revival.

Dear Reader,

To continue reading, become a subscriber.

Explore our attractive subscription offers.

Click here


To gain instant access to this article (download).

Pay INR 50.00

(Readers in India)

Pay $ 6.00

(Readers outside India)

Updated On : 26th Aug, 2019
Back to Top