In Quest for Policy 'Silver Bullets' towards Triggering a V-shaped Recovery

Abstract

Our paper attempts to identify policy ‘silver bullets’ that ascertain a sustainable growth revival in the aftermath of the COVID-19 shock. The study focuses on India, one of the largest emerging market economies of strategic importance, globally. Using a novel business cycle dating algorithm, we identify up-cycle and down-cycle phases in India’s GDP growth rate cycle. Our paper also implements dynamic factor analysis using several high frequency indicators for tracking private investment activity in India. We find that a boost to private investment can arrest a growth deceleration (down-cycle), via consumption and output channels. In addition, we observe that both quantum and quality of public expenditure play an important role in arresting the growth deceleration. For both these channels to work, credit offtake is crucial for a bank-dominated economy such as India. Besides addressing legacy issues relating to banking NPAs, we also highlight that a timely reduction of monetary policy rate sup-ported by an accommodative liquidity stance could help smoothen the path to growth recovery.