Indian macro policy has been operating under an implicit 2-4-6-8 framework, which are the targets for the sustainable current account deficit, the desired level of retail inflation, the consolidated fiscal deficit target embedded in law and the aspirational rate of economic growth. There is a need to take a fresh look at this macro policy playbook for two reasons. First, the individual targets have been decided at different points of time by different parts of the economic policy ecosystem rather than emerging from a common analytical project. Two, there are reasons to doubt its internal coherence given that India has rarely been able to meet all four targets simultaneously over the past decade.

The tricky political economy decision for the new government elected in May 2019 is whether to ease some of the economic stability constraints such as the fiscal deficit, the current account deficit and retail inflation in a bid to maintain economic growth at 8 percent; or continue to prioritise hard-won economic stability while facing the risk of social unrest as lower economic growth fails to provide the adequate number of jobs in formal enterprises; or put in place policy reforms that can help raise potential growth without creating periodic bouts of macroeconomic instability. This working paper argues in favour of the third option with five sets of policy recommendations, so that economic growth accelerates without putting economic stability at risk.