Repercussions of Covid-19: is the Indian economy setting up for a perfect crisis?

Abstract

COVID-19, the global pandemic, and the ensuing ‘Great Lockdown’ has pushed the world economy toward grave economic challenges, comparable to the Great Depression. This article focuses on the repercussions of the pandemic on India, a key developing economy in today’s global order. Specifically, the article discusses the adverse macroeconomic impact that the pandemic is likely to have on India’s national and sub-national output growth, industrial production, merchandise trade deficit, inward remittance flows, levels of unemployment, and the exchange rate. Based on an event study, the article argues that despite the economic package provided by the government and the country’s central bank, the Indian stock market has largely shrugged off the potential impact of the stimuli and settled at a lower equilibrium. It signals a concern for the country’s rising indebtedness and heightened risk to the financial system. The article argues how the COVID-19 pandemic may destabilise the banking system in India, which was already stressed by the poor quality ofloan assets and multiple defaults. The steps to infuse liquidity aimed at kickstarting an investment-led virtuous cycle of growth might push the banking system to the edge. An unsustainable rate of non-performing assets, in turn, can potentially lead a grave systemic risk. The article reckons that the government should act to revive aggregate demand and industrial production through a judicious policy mix of monetary and fiscal measures. Priority should be accorded to sectors and regions that can quickly drive the bottom-up demand growth in the economy.