Monetary Policies and Economic Growth in India

The general economic performance of India was boosted by the widespread globalization of the 1990s. The difference in economic performance raised questions on the effectiveness of economic liberalization and economic forces across the different regions. Introduction of market reforms also brought to light the possibility that perhaps the richer regions in India would grow in their wealth while the poorer regions lagged behind as compared to the projected outcomes of bringing about economic convergence across the regions (Sachs, Bajpai & Ramiah, 32). Disparities in economic growth across regions also depend on the exposure of these regions to international trade and policies implemented in the regions over different time periods. Being an agricultural land, the great surge in economic growth in India happened during the Green Revolution after the implementation of market reforms that increased grain productivity.

Taking disparities in regional economic growth into consideration based on exposure of these regions and their large populations, it is right to conclude that urbanization is a key determinant in the process of economic growth and the extent to which it occurs. Urbanization has been linked to high agricultural productivity levels and the proximity to geographical factors and good infrastructure (Sachs, Bajpai & Ramiah, 44). Public-sector investment by the government has also contributed to economic growth in the country. This is evident in the investment funds released by the central government into local governments which was influential in the rapid electrification of villages. India is also a tourist hub that attracts thousands to its scenic sights, enticing culture and religious monuments. This would go a long way in the curbing of money laundering practices and tax avoidance strategies.

The cost of the banking industry services is also conveniently minimized. This policy would however be limited in that it is susceptible to unresponsive attitudes from the masses especially those illiterate, cyber fraud and inefficacy within this digital system (Garg & Manvi, 117). The country’s monetary policy would stand to benefit the most in that a stable monetary policy would be maintained and the country’s levels of inflation would be deflated. The country has exhibited higher levels of money in circulation within the economy as compared to other countries, to a tune of 76. This calls for them to heavily and consistently invest in the necessary technological advancements necessary to ensure strong networks, ease of use and security of money and records.

The digital migration is a tough call on small retailers who cannot understand the necessity of this shift given the ease and convenience of cash transactions and the expenses involved in investing in electronic payment infrastructure (Garg & Manvi, 117). It is also possible for the government through the Central Bank to lose their grip on the monetary policies without strong fiscal policies. A report conducted by PwC in 2015 depicted that millions of Indians are in no capacity to embrace and use the cashless economy (Garg & Manvi, 119). Economic development is often linked to the availability of social opportunities. This increase is mainly attributed to an influx of Foreign Direct Investment (FDI), such that India was categorized by the World Bank to be among the developing countries receiving the largest amounts of FDI.

These foreign investments are effective when channeled through Multinational Companies since they have established contacts and are well versed in foreign markets (Sharma, 3). By lowering tariff and non-tariff barriers and through the liberalization of investments, India opened up its market. Other factors that also contributed to an increase in exports in India are taking advantage of export subsidy policies, the depreciation of Indian policy and improved price competitiveness between firms and between industries. To control the impact of FDI, the government rolled out restrictive policies in the institutional and legal specters such as the Monopolies and Restrictive Trade Practice (MRTP) and Foreign Exchange Restriction Act (FERA). In attempts to stabilize the economy, fiscal deficit is an effective money financing strategy that controls inflation.

Based on the economic assumption that money is neutral the monetarist approach deals with inflation and money supply as factors that are highly correlated (Ashra, Chattopadhyay & Chaudhuri, 288). This monetarist theory is grounded in the Quantity Theory of Money which asserts that quantity of money only affects nominal rather than real variables in the macroeconomic perspective. In the case of India, research showed that that price level and money shared a bi-directional causality influenced by the fact that money is non-neutral. In the long run, money in the Indian economy is not exogenous and therefore fiscal deficit and money is non-existent (Ashra, Chattopadhyay & Chaudhuri, 289). When dividend payments are steady, signals are sent about the performance of the firms that may remain undisclosed in financial reports.

When companies pay dividend, effective corporate tax rates are raised (Pandey & Ramesh, 6). Restrictive monetary policies increase the costs of debt and ultimately eternal financing where it is pushed up and spread over various levels of financial obligations within the firm. The demand for money in developing countries is important in the formulation of monetary policies and in the targeting of monetary economic variables (Bhaskara & Sing, 1322). Financial crises bring to the core the need to investigate the impact of monetary policy transmission based on bank lending channels. India is a fast growing economy made so especially by the liberalization of its economy. Indian companies resort to banks for borrowing due to lack of developed market for corporate bonds. As a result, bank lending in India plays a primary role in transmission of monetary policies.