View: Leveraging monetary policy for India’s youth

The encouraging results of the GDP growth in the first quarter have brought all-round cheer and have reinforced the market sentiments. Government’s persistent and targeted interventions saw the economy surpass most estimates. The release of the latest data coincided with the significant assertion at the SCO meet, of India’s vision of ‘transforming shared geography into shared opportunities through the three pillars off Security, Connectivity, and Opportunity’.

Against this backdrop, India’s leadership in addressing the concerns of the youth will be significant. India, and countries with similar demographic patterns are at an inflexion point. A large young population can be a demographic dividend or a significant employment crisis. To deal with this, vigorous structural transformation of labor force participation across agriculture, manufacturing and services sectors is essential to expedite the nation’s journey to a Vikasit Bharat and set an example for other countries.

There is a significant opportunity for a renewed reform push and shifting gears. This involves reimagined skilling initiatives, stepping up manufacturing and services and diversification of agriculture as well as a plethora of other economic initiatives. But in the short term, a recalibration of monetary policy backed by a fiscal stimulus from the Government can set the tone for medium to long term initiatives and job creation.


No doubt, the West Asia conflict and rising import costs of fuel are driving the tight monetary policy stance to contain inflation. But high borrowing rates have a debilitating impact on growth, which directly impacts employment opportunities to the population below thirty. Monetary policy can be rewired to provide easier credit access to youth to innovate and look for employment opportunities such as in start-ups and MSMEs.

But inflation concerns are, understandably, holding back a dovish monetary policy. Inflation and the economy in general, have shown marked resilience in the face of external shocks. On the other hand, maintaining the growth momentum is essential to avert a job crisis. The Government introduced several financial measures such as easing barriers to foreign capital inflows. These steps can be further bolstered by a bold monetary policy.

Central Banks across the world have adopted a hawkish monetary policy in the face of the current West Asia crisis. Interestingly, this provides an opportunity for India to innovate in monetary policy to make investment in India more attractive. Lower repo rates can ease access to credit, but the concerns about resultant inflation are valid. To address this, the Central Bank can adopt a calibrated tiered reserve lending system or lower forward bank lending rates exclusively for youth centric economic activities to promote job creation. The European Central Bank uses variable rates for different sectors by deploying Targeted Longer-Term Refinancing Operations (TLTROs). The People’s Bank of China resorts to targeted medium term lending facilities to rural and green sectors. India’s RBI also uses such instruments in a limited and more targeted fashion.

Reserve Bank can introduce differential Bank lending rates to MSMEs and start-ups. A financial stimulus for the youth, such as interest subventions or subsidies, can ease the subsequent burden on banks, on account of targeted lower rates for youth centric sectors, on the lines of the Covid pandemic stimulus. Global Capacity Centers (GCCs), who are facing higher interest rates abroad, can partner with local investors who can benefit from lower interest rates. Other fiscal policy interventions could include incentives to large companies who train youth to employ them in house subsequently. Post harvest management and cold chains could be given concessional credit to create jobs in agriculture to boost growth and exports and help create jobs in rural areas. Courts could create separate windows such as mediation for quick resolution of commercial disputes for youth run industries, start-ups and MSMEs.

However, there are other concerns with lower interest rates. Rupee could depreciate further leading to a side effect that may help exports but will raise fuel and input costs. But this can be paired with a fiscal offset till the situation eases. Public concerns in this regard can be allayed with effective communication. The concern of increasing prices is grave, but with more money in people’s pocket with easier access to credit, this can be balanced with fiscal support from the Government to help absorb the shock. To offset inflation on account of higher wages, staggered employees provident fund encashment options and issue of convertible debentures to youngsters, are some measures that could be deployed to contain excessive money circulation.

Keynes, and more recently, Jospeh Stiglitz argued that strict austerity and conservative interest policies contract growth. Lars Svensson went a step further to seek unconventional negative interest rates to force commercial banks to lend and revive stagnant economies.

Clinton’s strategist, James Carville, famously coined the phrase, “it is the economy stupid”. The goldilocks situation of current economic resilience needs to be reinforced with enhanced employment opportunities for the youth. A carefully calibrated and targeted monetary policy backed with fiscal interventions holds the key for meeting the aspirations of our younger generation to innovate and realize their full potential, riding the wave of Artificial Intelligence and other emerging technologies.


The author served as the Chief Secretary of Haryana and worked earlier as a Lead economist at the World Bank.