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A Critical Appraisal of India and Pakistan’s Monetary Policy

Monetary Policy is the process by which the central bank of a country controls the supply, availability and cost of money. It is often contrasted with fiscal policy, which is associated with changes in government expenditure and taxation. In the context of Pakistan and India, the central banks of both the countries, i.e. Reserve Bank of India (RBI) and State Bank of Pakistan (SBP) are empowered to conduct and implement monetary policy of their respective countries. The central banks use various instruments of Monetary Policy like Open Market Operations, Bank Rate Policy, Variation in Reserve Ratios and other credit controls to achieve economic stability.In the backdrop of severe energy shortages and dismal law and order conditions, Pakistan’s economy is currently facing persistence of double digit inflation, falling private investment, low growth, and rising total debt. The Indian economy has oriented itself towards market forces, with a healthy rate of GDP growth and a modest rate of inflation. The SBP, dominated by the Ministry of Finance, has pursued a tight monetary policy with ad-hoc and frequent corrective changes in policy instruments. This, coupled with an expansionary fiscal policy has diluted the impact if tight monetary policy. Private consumption has grown faster than economy itself. The policy has failed to curb inflation and resulted in collapse of investment and economic growth leading to unemployment and poverty. It has also worsened the country’s fiscal balance with increased domestic borrowing. In contrast to this ‘knee-jerk’ approach, the RBI has pursued a more ‘gradual’ monetary policy approach.Policymakers in India had been engaged in the development of sound and efficient financial intermediaries and markets. The adoption of an augmented multiple indicators approach, combined with sound fiscal, administrative policies have resulted in success. Learning from the Indian experience, instead of tightening monetary policy, the Government of Pakistan needs to address supply-side causes of inflation. There is a need for restricting government borrowing from SBP, increasing financial depth and ensuring quality and timely assimilation of economic data followed by a well coordinated policy response by the stakeholders to changing macroeconomic conditions.