Covid-19 and an assessment of some policy actions adopted by India

Abstract

In order to combat the Covid-19-induced economic downturn, the RBI has pursued two successive rate cuts between March and May 2020. Further, the central government has raised excise duties on petrol and diesel with effect from May 2020. These measures are aimed at reviving domestic output and providing fiscal space to the government to pursue expansionary fiscal policy. This chapter serves two purposes. First, it constructs a theoretical short-run-open-economy model that can characterise the present Indian economy. Second, it examines the effects of these two policies on relevant endogenous variables. This chapter conjectures that the effect of rate cut on the Indian economy may have counter-intuitive result. Instead of raising output it might deepen recession. It will unambiguously lead to exchange rate depreciation and raise domestic price level. However, a rise in the indirect tax on petrol and diesel will unambiguously deepen the recession and raise domestic price level. Moreover, it is likely to depreciate the exchange rate and build up additional inflationary pressure. Thus, these two recent measures may not have the desired impact. © 2022 selection and editorial matter, Rajib Bhattacharyya, Ananya Ghosh Dastidar and Soumyen Sikdar;individual chapters, the contributors.