UPSC Mains Answer Writing

Question-

The success of the monetary policy is subject to some crucial limiting factors. Discuss in brief the limitations of monetary policy in India.

Model Answer-

Monetary policy in a developing country is an important instrument in the hands of the central bank which may be used to ensure economic growth. But it has its own inherent limitation that affects its effectiveness and poses a challenge to the economic growth of the nation. India is no exception to these limitations.

In India, Monetary fails to bring quick results because

1. Large Non-monetized sector- practicing the barter system in rural areas fails to influence this segment of society and limits the impact of the policy. Example- fertilizers- in exchange for a share in farmer’s produce

2. Under-developed Money market and Capital Market

3. A large number of Non-Banking Financial Institutions

4. High liquidity of commercial banks

5. Impact of foreign banks in the domestic market

6. Lack of financial inclusion- people outside the banking net still rely on moneylenders for money requirements. It leads them to pay a higher interest rate. It also an accumulation of Black money in the market.

7. People invest money in gold, jewelry, real estate, speculations, and conspicuous consumptions, etc. rather than depositing money with banks, which lies outside the control of the monetary authority.

8. Monsoon uncertainty, cyclone, flood, drought, and their effect on food production lead to food inflation.

9. Crude oil and gold imports have a negative effect and lead to devaluation of Rupee as Forex reserves are not adequate to sustain the fall in the value of Rupee.

10. Too many social welfare schemes which do not add infrastructure to the economy and also don’t raise the wages of the people.

11. Fiscal deficit, subsidy leakages, Black money, Underground economy, and parallel economy also impact the effectiveness of the monetary policy.

Despite inherent weaknesses in the Indian Economy, the RBI is trying hard to make the monetary policy a successful tool in combating inflation and driving economic growth. The steps like using a multi-indicator approach, using CPI in place of WPI are taken in this direction. There is also a need for aligning fiscal policy with the monetary policy to make it effective.

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