Estimating COVID-19’s Economic Impact on the Indian Economy Using Two Restricted VAR Models

In this paper, an issue of major policy significance pertaining to assessing the impact of COVID-19 beyond the short-term on India’s macroeconomy has been addressed by developing two restricted vector autoregression (VAR) models. These models enable an assessment of the detrimental impact of COVID-19 on India’s GDP growth and other major parameters in the medium term. The RVAR1 model includes the COVID year of 2020-21 while RVAR2 model excludes it. It is the difference between the outcomes of these models in the selected period extending from 2020-21Q1 to 2025-26Q4 which enables quantification of the impact of COVID on India’s macroeconomy. The observations are quarterly, covering the period 1997-98Q1 to 2020-21Q4. We estimate the cumulated loss to India’s GDP measured in USD terms at nearly USD 1 trillion over the medium term. Further, besides erosion of growth, the volatility in growth of major macro parameters also increases during the forecast period.