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For the first time in decades, the global economic cycle is being shaped less by the movements of central banks and more by the decisions of fiscal authorities. With monetary policy constrained by high inflation, elevated interest rates, and limited room for further tightening or easing, governments across both advanced and emerging economies are relying on public spending, infrastructure investment, defence expansion, and energy-transition programmes to sustain growth. This marks a structural shift from the market-driven recoveries of earlier decades to a state-anchored growth model.

The Historical Turn: From Monetary Dominance to Fiscal Revival

Since the 1980s, monetary policy—led by independent central banks—was considered the primary tool for stabilising growth. The 2008 global financial crisis reaffirmed this dominance when near-zero interest rates and quantitative easing became the default response across major economies. Fiscal policy was often secondary, constrained by austerity politics and debt-sustainability debates.

The post-pandemic world reversed this hierarchy. Inflation surged to multi-decade highs across the US, Europe, India, and most emerging markets by 2022–23, reducing the effectiveness and political feasibility of aggressive monetary easing. With interest rates remaining high even in 2024–26, governments began stepping back into the driver’s seat, deploying fiscal tools to stabilise consumption, energise investment, and prevent deeper economic fractures.

Infrastructure, Defence, and Energy Transition: The New Fiscal Engines

Fiscal spending today is not just counter-cyclical—it is directional. Governments are using public investment to shape the next industrial era:

Infrastructure:
Massive capital expenditure commitments—from India’s National Infrastructure Pipeline and Gati Shakti corridors to the US Infrastructure Investment and Jobs Act and the EU’s Connecting Europe Facility—are functioning as growth backbones. Global infrastructure spending is expected to cross USD 3 trillion annually by 2030, driven almost entirely by public capital.

Defence:
Geopolitical tension is pushing countries to expand defence budgets. Europe alone is projected to add over USD 100 billion annually in defence outlays through 2030. This shift creates new industrial clusters and supply chains but also risks crowding out welfare spending.

Energy Transition:
The global green transition—solar, wind, hydrogen, EVs, and power-grid modernisation—is primarily funded by state incentives. The US Inflation Reduction Act (IRA), EU Green Deal Industrial Plan, India’s PLI schemes, and China’s renewable-energy subsidies anchor this trend. Over 70% of new clean-energy investments globally in 2025 are expected to have some fiscal support.

The result: public spending is now the growth engine, not just a stabiliser.

Why Monetary Policy Is Constrained

Central banks worldwide face a peculiar dilemma:
• Inflation is cooling, but not enough for deep rate cuts.
• Debt levels have climbed, making rate changes riskier.
• Financial stability concerns limit aggressive moves.

In India, the US, and the EU, real interest rates remain higher than the pre-pandemic average, dampening private investment. Many firms are hesitant to expand credit-based growth when borrowing costs remain structurally high. This makes fiscal leadership not a choice, but a necessity.

Why It Matters: State-Anchored Growth Is the New Normal

The world is entering a phase where market-led momentum is weakening and state-led direction is strengthening. This shift carries both opportunities and risks.

Opportunities:
• Public investment creates long-term productivity gains.
• Green-transition spending can reshape global manufacturing.
• Defence and infrastructure spending stabilize employment.
• Governments can correct market failures in climate, digitalization, and social protection.

Risks:
• Rising public debt may create future fiscal stress.
• Excessive state dependence can weaken private-sector dynamism.
• Politically motivated spending cycles can distort resource allocation.
• Strategic sectors may become over-regulated or inefficient.

The critical issue is whether governments can maintain fiscal discipline while driving structural transformation.

A Futuristic Outlook: Fiscal Policy as Industrial Strategy

Looking ahead to 2030 and beyond, the role of the state will be more than merely budgetary—it will be strategic. Around the world, fiscal policy is evolving into a form of industrial policy, shaping sectors such as semiconductors, critical minerals, green hydrogen, biotechnology, and defence technologies. Countries are moving toward “mission-oriented” fiscal spending, where public money actively builds capability, not just stabilises demand.

The next decade will likely see:
• hybrid public-private manufacturing ecosystems,
• sovereign supply-chain strategies,
• large-scale public digital infrastructure,
• stronger domestic industrial bases for climate technologies, and
• policy-driven innovation clusters.

As the global economy becomes more fragmented, fiscal power will increasingly mirror geopolitical power.

The Return of the Government in Growth

The global growth model is undergoing a profound shift. With monetary policy limited and private investment cautious, governments have become the central architects of economic momentum. Whether this leads to sustained, inclusive, and innovation-driven growth—or to debt accumulation and distorted incentives—depends on the quality, targeting, and governance of fiscal interventions.

What is clear is that the era of the state as a passive facilitator is over. The state has returned as an active economic actor—and the world’s growth trajectory now hinges on how responsibly and creatively fiscal power is deployed.

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