What did the RBI warn about falling GDP amid the pandemic and what awaits us?
The story so far: The latest monthly newsletter of the Reserve Bank of India (RBI) features an article by an official in its Monetary Policy Department titled ‘An Index of Economic Activity for India’, where the author has, in an ‘immediate forecast’ (a forecast that estimates the outcome of a short-term event), he projected that India’s GDP (Gross Domestic Product) contracted by 8.6% in the July-September quarter of the financial year ending March 2021. Thus, “India entered a technical recession in the first half of 2020 -21 for the first time in its history, and the second quarter of 2020-21 is likely to see the second consecutive quarter of GDP contraction,” wrote the Article author Pankaj Kumar GDP had fallen 23.9% in the first quarter, according to the estimate of the National Statistical Office in August.
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What is a technical recession?
A technical recession is a term used to describe two consecutive quarters of decreased production. In the case of a nation’s economy, the term generally refers to consecutive contractions in real GDP. The most significant difference between a ‘technical recession’ and a ‘recession’ is that while the former term is used primarily to capture the trend in GDP, the latter term encompasses an appreciably broader decline in economic activity that covers various economic variables. including employment, family and corporate income, and business sales. Another key characteristic of a technical recession is that it is most often caused by a single event (in this case, the COVID-19 pandemic and the lockdowns imposed to combat it) and generally has a shorter duration.
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What are some of the other economies that have recently experienced a technical recession?
The COVID-19 pandemic has had a devastating impact on economic activity around the world. Indonesia, for example, fell into recession for the first time in two decades, as the real GDP of Southeast Asia’s largest economy shrank 3.49% in the three months ending in September. This was due to a 5.32% contraction in the previous quarter. The country had last seen consecutive contractions in the wake of the Asian financial crisis in the late 1990s.
The UK entered a recession when its economic output contracted by a record 21.7% in the April-June quarter. Britain’s GDP contracted 1.6% in the first quarter of 2020.
Brazil’s economy also experienced an 11.4% contraction in the three months ended June, following a 0.3% drop in production in the first quarter, which led to a recession.
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What are the signs that an economy is headed for a deeper recession?
In the US, the National Bureau of Economic Research (NBER) defines a recession as “a significant decrease in economic activity that spans the entire economy, lasting more than a few months, normally visible in real GDP. , real income, employment, industrial production, and wholesale-retail. ”To that extent, in addition to real GDP, policy-makers and economists should closely monitor data on unemployment, production in key sectors such as industry and services (which has the largest share of India’s gross value added or GVA) and real income at the household and business level to know how widespread and deep the contraction in economic activity is. It is important to note that recessions, when prolonged, can even lead to a depression, as happened in the US, from the late 1929 to the mid-1930s, and even affected the economy. global as a whole.
Read also | The world experiences one of the deepest recessions since the Great Depression due to COVID-19: World Bank
What does the technical recession portend for the outlook for the Indian economy?
However, the RBI bulletin that notes the technical recession also notes that economic activity in India has recovered and says: “The contraction is easing with the gradual normalization of activities and [is] it is expected to be short-lived. “In another article in the same bulletin, entitled ‘State of the economy’, the central bank has predicted that based on data from October and signs of a rebound in consumer and business confidence” there is optimism that the reactivation of the economic activity is stronger than the mere satiety of the repressed demand ”.
“If this rally is sustained over the next two months, there is a strong probability that the Indian economy will come out of the contraction” and return to positive growth in the third quarter, three months ahead of its October forecast, the RBI said. .
But the central bank also warned of “formidable” risks to this rosy outlook, the main one being “the relentless pressure of inflation.” The RBI warned that there is a real threat that price pressures will spread, undermining the credibility of political interventions. The headwinds from the drop in global demand as a result of the second wave of infections in Europe and the risks to the financial sector from tensions in the domestic and business sector are other concerns that he has raised.
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