Macroeconomic Policy is a concept and scheme referring to the measures a government and its central bank take to influence the performance and overall health of the economy. The primary goals of this policy are to achieve economic growth, full employment, and price stability. The two main types are Fiscal Policy and Monetary Policy.
The modern framework's origin in India is rooted in the economic crisis of 1991, which necessitated a comprehensive liberalization of trade, investment, and exchange rate policies. This shift moved away from the central planning model adopted after Independence in 1947 and aimed to set the GDP growth rate on a higher path.
Fiscal Policy is managed by the Ministry of Finance and works through the government's annual budget, utilizing tools like taxation (direct and indirect taxes) and expenditure (capital and revenue expenditure) to stimulate or stabilize the economy. Monetary Policy is the domain of the Reserve Bank of India (RBI), which regulates the money supply and interest rates. The mechanism involves the Monetary Policy Committee (MPC) setting key policy rates, such as the repo rate, to influence liquidity and control inflation.
A key related concept is the Inflation Targeting Framework, which was originally implemented in 2016 and has been recently renewed until March 2031. This framework mandates the RBI to maintain the Consumer Price Index (CPI) inflation at 4% with a tolerance band of +/-2%. This formalization of the price stability objective is a significant recent change, enhancing coordination between fiscal and monetary bodies.