“World Economic Slowdown: An Analysis of Impacts and Counter Measures Using a CGE Model”

Citation: Ganesh-Kumar, A. and M. Panda. 2009. “World Economic Slowdown: An Analysis of Impacts and Counter Measures Using a CGE Model”. Report submitted to the Planning Commission, New Delhi.

Abstract: The recession in the developed economies in 2008 has led to world-wide economic slowdown. In this paper, we examine the likely impact of global economic slowdown on the Indian economy and the counter measures adopted by the government. The impact has been examined by carrying out several simulation exercises using a static CGE model developed for India based around a SAM for the year 2003-04. We have examined here macroeconomic effects of external developments such as fall in Indian exports due to falling external demand, reduction in the foreign inflows into India, and fall in global oil prices. We then examine how much of the adverse impact could be offset by counter policies adopted by the government such as increase in government consumption, cut in indirect tax rate, and expansion of the rural employment guarantee scheme. The results show that the potential combined effect of the external factors on real GDP could be as much as -4.2%. About half of this combined effect could be offset by government counter measures examined here. Overall, these developments lead to decline in real investments, substantial rise in government dis-savings, and depreciation of the real exchange rate.

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