What Does the COVID-19 Experience Tell Us about Indian Growth Drivers?

In India’s battle with COVID-19, recovery was largely under-predicted and financial sector distress over-predicted on the view that more structural reforms were a prerequisite for growth. Inferences derived from better-than-expected outcomes are that beyond fundamental reforms, sustaining Indian growth requires continued fiscal supply-side action that reduces costs of doing business and inflation, allowing monetary policy to keep real interest rates below growth rates, thus stimulating demand and allowing public debt ratios to fall. External shocks have to be smoothed, while avoiding large domestic policy shocks in order to lower growth volatility and undertaking only feasible complementary reforms.

Acommon phrase used in the analysis of India’s perfor-mance during the COVID-19 period was that “the economy had been under-performing before Covid-19 hit …” Another common view was that the financial sector was stressed and Covid-19 would damage it further, thus reducing monetary transmission and making fiscal stimulus more effective. However, fiscal space was limited. Partly because of these perceptions, when the global pandemic hit, the majority of predictions for the economy were dire (Mundle and Sahu 2021; Sheel 2021). Small enterprises were thought to be in deep trouble with too little help. Higher unemployment without income support would reduce consumption. The recovery was expected to be slow and long-drawn-out, with long-term scarring lowering potential growth. Yet, the experience so far has been very different. This paper argues that the better-than-expected growth recoveries and financial stability imply (i) reforms, especially financial reforms, are adequate; and (ii) appropriate monetary–financial conditions, with supportive supply-side fiscal action, can deliver growth.