Abstract
Following a dream run during 2003–2004 to 2010–2011, when India’s annual growth rate averaged close to 9 per cent in the midst of remarkable balance of payments (BOP) stability (except for the year 2008–2009), India has slumped into a recession accompanied by severe BOP difficulties and high rates of consumer price inflation. The Government of India (GoI) has responded to it by cutting down subsidies and hiking indirect tax rates. This article develops a simple Keynesian model to assess the policies noted above. It argues that the policies adopted so far by the GoI are likely to aggravate the problems of recession, BOP difficulties and inflation. It recommends hikes in personal income tax rates with a suitable expenditure policy to get out of the present macroeconomic instability. JEL Classification: E12, E32, F41
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