The situation prior to the COVID, as brought out in Morris, Sebastian (2020), was problematic with major slowdown and heightened uncertainty in the financial sector in the last year before the Crisis. The response of the RBI, free from its conservative shackles, now followed the US into expanding liquidity and supporting the financial sector, in ways that were quite radical for the RBI which even during the Global Financial Crisis (GFC) had to be persuaded to act. There were no arguments against the need to adopt supportive and expansionary monetary measures, and the governor with no doctrinaire blinkers could address the reality. That helped the Indian financial sector and it may well have avoided a deep crisis.

However, the government in its fiscal response was barely adequate. The “20 lakh crore” stimulus was misleading. Only about Rs. 1.72 lakh crore involved expenditures directly or indirectly by raising consumer incomes. The rest were liquidity, credit and guarantee measures, and included a borrowing limit enhancement for the state governments. The response was in sharp contrast to the response to the GFC when the central government took the leadership role to put together a fiscal package and persuade the RBI to expand liquidity, to restore the growth to almost its original level. The administrative measures of territorial lockdowns may have done little to contain the spread, but imposed great hardship on the people, especially the migrant workers, besides curtailing production wantonly.

We estimate the unconditional impact of the crisis (i.e. without the fiscal response) should have taken the economy down from its 2019-20 value to between 8.86 and 12.23%, and conditional on the stimulus to a value of -6.21 to -9.68%, most likely closer to the latter. The very early estimates were somewhat worse, but the Reserve Bank of India (RBI) in responding swiftly and in-kind ensured that there would not be a monetary constraint, and hence a simpler expenditure model could be used. The negative impact, therefore, was unduly larger than what it need have been.
We bring out the performance of the economy over the crisis period and its subsequent recovery. Since the decline over the initial quarter of the COVID crisis was steep, being in the range of 20 to 30%, growth over subsequent quarters or months in relation to the very low levels appears high. The performance of the stock market which is seemingly out of line with the performance of the economy we consider first to explain why there is really no puzzle here, since both the discount rate had fallen considerably owing to the fall in the interest rates over various maturities, and costs such as interest, and tax (corporate) besides labour had fallen. The effect of the crisis was quite severe on the manufacturing sector, and not all segments have recovered. Capital goods and durables have yet to reach their pre-COVID levels. Employment recovery has been most problematic. We bring out the trends in employment, credit, portfolio, and direct investments, and also review the monetary developments. This paper is concerned with drawing out the trends and the nature of the recovery. We also examine the details of the government and RBI’s response to understand the nature of the recovery.

Working Paper No1 of 2022 / Goa Institute of Management, Panaji

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Morris, Sebastian, The COVID-19 Crisis in India - Impact, Response and Recovery (January 1, 2022). Available at SSRN: or

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