The macroeconomic impact of Covid-19 on the Indian economy

Abstract

Covid-19 pandemic has not only brought health contagion across countries, but affected the interdependent global economy severely. The Indian economy is no exception, but it has a distinction. The economy was already facing a macroeconomic crisis before the onset of Covid-19 in the form of deficiency of aggregate demand leading to unintended inventory accumulation in various sectors of the economy and slowdown of GDP growth. Covid just made the problem worse. The components of aggregate demand were subdued for various reasons. Current consumer expenditure showed further decline due to a rising uncertainty and widening income inequality. Investment did not respond to Reserve Bank’s efforts in either reducing cost of capital or increasing liquidity on account of both business uncertainty and bank apathy. The current account in international trade showed improvement not in response to increase in global demand but rather to a significant slowdown of import due to a sluggish Indian economy. The only component which is left is government expenditure which is expected to follow Keynesian pump-priming theory. However, aggregate supply experienced sectoral negative shocks due to sudden lockdown and reverse migration of labour force. Thus, the economy shows lower than expected performance in the immediate short run, but in the medium and long term one cannot guarantee a sustained growth trajectory either without additional policy interventions. The chapter explores such macroeconomic effects in terms of some variants of aggregate demand (AD) and aggregate supply (AS) framework, introducing uncertainty and supply shocks in both static and growth perspective. © 2022 selection and editorial matter, Rajib Bhattacharyya, Ananya Ghosh Dastidar and Soumyen Sikdar;individual chapters, the contributors.