Impact of Covid-19 on the Indian Economy: An Analysis of Fiscal Scenarios

  • Ila Patnaik and Rajeswari Sengupta
  • Sep 2020
  • National Institite of Public Finance and Policy (NIPFP)
  • India

The outbreak of the Covid-19 pandemic is an unprecedented shock to almost every economy in the world. In response to the spread of the virus, many governments announced lockdowns. India announced a nationwide lockdown on March 24. This continued for close to two months and is currently continuing in some form or the other throughout the country. While rural areas opened up relatively quickly, urban India continues to see lower economic activity. Shocks to the economy during any crisis operate at two levels: supply-side disruptions and reductions in aggregate demand. Macroeconomic policy responses to an economic crisis are typically of two types: (i) Expansionary monetary policy which includes reduction in policy rates, reserve ratios and/or expansion of money supply, and (ii) Expansionary fiscal policy which involves an increase in government expenditure and/or a reduction in taxes. In India most of the policy response so far has been to try and ease supply constraints and allow movement and production of goods, particularly essential goods. There have also been some attempts at pushing up demand. The Reserve Bank of India has announced a slew of monetary measures (cut in repo rates, cut in CRR, freeing up liquidity in the banking sector etc) since the imposition of the lockdown. The Finance Minister has announced a package (“Atmanirbhar Bharat Abhiyaan” package) of policy initiatives targeted at low income households and micro, small and medium enterprises which are likely to be most vulnerable in the broad-based economic slowdown. The total amount of the package has been announced to be INR 20 trillion (or roughly 10% of GDP). However, a careful analysis reveals that the actual amount of fiscal stimulus offered by the government has been around 2-3% of GDP. As a result, demand for a larger fiscal stimulus has been emerging from various quarters..