Updated: November 13, 2020 7:28:24 am
The seal of the Reserve Bank of India (RBI) is displayed on a door outside the RBI headquarters in Mumbai. (Reuters photo: Danish Siddiqui)
In its last monthly newsletter, November, the Reserve Bank of India has devoted a chapter to the “State of the economy.” The idea is to provide a monthly snapshot of some of the key indicators of India’s economic health. “By doing so, you will revive a sacred tradition that began with the first issue of the Bulletin in January 1947, but has been discontinued for the period 1995 to date,” the bulletin said.
As part of the exercise, the RBI has started “forecasting now” or “predicting the present or very near future of the state of the economy.” And the first “immediate forecast” predicts that the Indian economy contract 8.6% in the second quarter (July, August, September) of the current fiscal year.
While this rate of contraction is considerably slower than the 23.9% decline in real gross domestic product (GDP) during the first quarter (April, May, June), the contraction in the second quarter is crucial because it implies that India has entered a recession ”in the first half of 2020-21, for the first time in its history.
To better understand the term “technical recession”, it must be distinguished from two other phrases: a recession and a recessive phase of an economy.
What is a recessive phase?
In its simplest form, in any economy, a recessionary phase is the counterpart of an expansionary phase. In other words, when the general production of goods and services, generally measured by GDP, increases from one quarter (or month) to another, the economy is said to be in an expansionary phase. And when GDP contracts from quarter to quarter, the economy is said to be in a recessionary phase.
Together, these two phases create what is called a “business cycle” in any economy. A complete business cycle could last between a year and a decade.
The line chart accompanying this article shows India’s real GDP quarterly growth since 1951. As you can see, this line goes up and down. The peaks and valleys show the different expansionary and recessional phases of the economy.
* RBI estimates: Source: Trading Economics
As the graph shows, there have been several boom and bust phases in the history of India.
How is a recession different?
“When a recessive phase lasts long enough, it is called a recession. In other words, when GDP contracts for a long enough period, the economy is said to be in recession. “
However, there is no universally accepted definition of recession – that is, how long GDP must contract before an economy is said to be in recession. But most economists agree with the definition used by the US National Bureau of Economic Research (NBER). According to NBER, “during a recession, a significant decline in economic activity spreads throughout the economy and can last from a few months to more than a year.”
Source: Trading Economics, with MoSPI data
The NBER Business Cycle Committee typically looks at several variables (employment, consumption, etc.) in addition to GDP growth to reach a decision. It also looks at the “depth, spread and duration” of the decline in economic activity to determine whether or not an economy is in recession.
For example, in the case of the most recent slump in economic activity in the US, which began in February 2020 as a result of the Covid-19 pandemic, the slump in activity has been so great and so widely spread. across the economy that the recession would have been classified as a recession even if it turned out to be quite brief. 📣 Express Explained is now on Telegram
So what is a technical recession?
While the basic idea behind the term “recession” – a significant contraction in economic activity – is clear, from the perspective of analysis of empirical data, there are too many unanswered questions.
For example, would quarterly GDP be sufficient to determine economic activity? Or should we also consider unemployment or personal consumption? It is quite possible that GDP will start to grow after a while, but unemployment levels do not fall properly.
During the global financial crisis of 2008, NBER set June 2009 as the end date for the recession, but some metrics did not recover for much longer. For example, “Nonfarm payroll employment did not rise above the previous peak until April 2014,” according to NBER.
To get around these empirical technicalities, commentators often consider a recession to be taking place when real GDP has declined for at least two consecutive quarters.
This is how quarterly real GDP has come to be accepted as a measure of economic activity and a “benchmark” for determining a “technical recession.” By this definition, as the data in the table shows, India entered a recession at the end of September. The UK is in its third quarter of recession. Brazil and Indonesia are also in recession, while South Africa has evaded it so far, but only marginally. China, where the pandemic began, has bucked the trend.
Read also | ‘Turned India’s strength into weakness’: Rahul Gandhi attacks Prime Minister Modi over RBI report on recession
Was India’s technical recession unexpected?
No. Given the nature of the problem, the pandemic, as soon as the shutdown was announced in March, most economists expected the Indian economy to go into recession. In fact, most estimates expect the economy to contract for at least one more quarter, that is, from October to December, currently underway.
How long do recessions last?
Recessions typically last a few quarters. If they continue for years, they are called “depressions.” But a depression is quite rare; the last was during the 1930s in the United States.
In the current scenario, the key determinant for any economy to emerge from recession is to control the spread of Covid-19.
In the case of India, Finance Minister Nirmala Sitharaman has expressed hope that India’s recession is over and that the economy will post positive growth in the current quarter.
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