This paper examines the performance of the Indian economy and reviews the macroeconomic policy approach, especially demand management. After the Global Financial Crisis (GFC), India’s economy did not experience a significant downturn due to a timely fiscal stimulus by the government. The government also convinced the Reserve Bank of India (RBI) to expand liquidity to reverse the liquidity contraction caused by the GFC. However, as fiscal stimulus was phased out from 2011-12, the RBI raised interest rates, leading to economic slowdown from 2012-13 onwards. Tight monetary policy persisted until 2016, driven by rising inflation, which the RBI attributed to both core and non-core Consumer Price Index (CPI) components. Closer scrutiny reveals much of the rise in core inflation was spurious, primarily due to increases in house rents linked to the 6th Pay Commission implementation.

In 2013-14, the RBI adopted inflation targeting, keeping interest rates high, which attracted expensive foreign capital inflows. Despite this, market rates remained above the policy repo rate, undermining the RBI’s monetary policy. As a result, the RBI’s inflation forecasts were consistently higher than actual inflation, highlighting the flaws in its approach. Additionally, the RBI’s focus on current CPI inflation rather than forward-looking core inflation led to poor market reactions to policy rate changes, distorting monetary policy transmission.

On the fiscal side, investment was negatively affected by policy paralysis during the final years of the UPA government and the underfunding of social schemes like MNREGS under Modi-I. The government’s commitment to fiscal deficit targets further suppressed demand. Private investment growth collapsed, and public investment was often sub optimally directed. Although the economy briefly recovered post-demonetization, growth slowed again by 2020, partly due to poor policy execution and a lack of transformative reforms.

Despite efforts to increase public value through initiatives like Direct Benefit Transfers and the GST, the government struggled with implementation. Structural and tax reforms were not well-integrated with demand management, leading to increased tax rates that further suppressed demand. Bank lending issues, worsened by governmental interference and delayed recapitalization, further hindered economic growth. In conclusion, India missed several opportunities for growth, particularly in leveraging low oil prices and boosting exports, due to inefficient policy execution and lack of coordination.