India’s Fiscal Policy and Monetary Policy – are they complementary or competitive in nature?

Acknowledgement: This paper was presented in the ‘International Accounting, Finance, Economics and Banking Conference’ organised by FLAME University, Pune in association with Indian Accounting Association Research Foundation on 17-18 December 2017. I am thankful to the reviewers for their inputs and comments for further developing my paper.


Based on the available data, it is evident that India’s fiscal policy was tight or contractionary, whereas the monetary policy was easy or expansionary in nature from the period 2013 to 2017. As per Article 112, the annual financial statement is presented before the Parliament every year, which is nothing but the fiscal policy of India. On the other side, the monetary policy is a quarterly policy which changes four times in a year. So, the roadmap set by the fiscal policymaker for the entire year needs to be supplemented by the monetary policymaker by intervening in the economy as and when required. In both policies, there were instances of conflict between fiscal policymakers versus monetary decision makers. However, both policy objectives are to achieve price stability, to promote and encourage economic growth and to ensure economic stability at full employment or potential level of output. To streamline the coordination between monetary versus fiscal policy, Section 45ZB(2)(c) of the Reserve Bank of India Act, 1934 was amended by the Finance Act, 2017, which has provided an institutionalised structure for the Monetary Policy Committee (MPC). The MPC has been entrusted with the task of inflation targeting of 4% within a band of plus or minus 2%. Both the policies are framed based on assumptions such as stability in crude oil price (petrol price), exchange rate stability and global economic growth. Therefore, the macroeconomic policies are concerned with the analysis of the behaviour of the economic system in totality, in which both policies should work in better coordination for stimulating economic growth and development. This paper attempts to find out whether the fiscal policy and monetary policy work in isolation or unison, whether there is an institutionalised framework for better coordination between fiscal policy and monetary policy and whether India’s Fiscal Policy and Monetary Policy are complementary or competitive in nature.

 Keywords: Fiscal Policy, Monetary Policy, Monetary Policy Committee (MPC), Inflation Targeting


Macroeconomics deals with the analysis of the behaviour of the economic system in totality. The goal of macroeconomics policymaker is to maintain equilibrium in the economic system as a whole. The fiscal policy and monetary policy take care of equilibrium, in which the country’s general price level remains Read Full Article