All About : Technical Recession | UPSC

• The Reserve Bank of India has dedicated a chapter on the “State of the economy”.
• The idea is to provide a monthly snapshot of some of the key indicators of India’s economic health.
• A tradition that began with the first issue of the Bulletin in January 1947.
• As part of the exercise, the RBI has started “nowcasting” or “the prediction of the present or the very near future of the state of the economy.

• While this pace of contraction is considerably slower than the 23.9% decline in the real gross domestic product (GDP) during the first quarter (April, May, June)
• The contraction of Q2 is crucial because it implies India that has entered a “technical recession” in the first half of 2020-21— for the first time in its history.
• To better understand the term “technical recession”, one must distinguish it from two other phrases — a recession and a recessionary phase of an economy.

WHAT IS A RECESSIONARY PHASE?

• In other words, when the overall output of goods and services increases from one quarter to another, the economy is said to be in an expansionary phase.
• And when the GDP contracts from one quarter to another, the economy is said to be in a recessionary phase.

• A full business cycle could last anywhere between one year and a decade.
• The line graph accompanying this article maps India’s quarterly real GDP growth since 1951.
• As one can see, this line goes up and down.
• The peaks and troughs show the different expansionary and recessonary phases of the economy.

HOW IS A RECESSION DIFFERENT?

• When a recessionary phase sustains for long enough, it is called a recession.
• In other words, when the GDP contracts for a long enough period, the economy is said to be in a recession.

• But most economists agree with the definition that the National Bureau of Economic Research (NBER) in the United States uses.
• According to NBER, “During a recession, a significant decline in economic activity spreads across the economy and can last from a few months to more than a year”.

RBI estimates : Source: Trading EconomicsAs the graph shows, there have been several expansionary and recessionary phases in India’s history.

• It also looks at the “depth, diffusion, and duration” of decline in economic activity to determine whether an economy is in a recession or not.

WHAT IS A TECHNICAL RECESSION?

• The basic idea behind the term “recession” — significant contraction in economic activity .

• During the 2008 global financial crisis, NBER pegged June 2009 as the end date for the recession but some metrics did not recover for much longer.
• For instance, “non-farm payroll employment, did not exceed the level of the previous peak until April 2014.

• That is how real quarterly GDP has come to be accepted as a measure of economic activity and a “benchmark” for ascertaining 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 until now, but only marginally.
• China, where the pandemic began, has bucked the trend.

WAS INDIA’S TECHNICAL RECESSION UNEXPECTED?

• No. Given the nature of the problem ;the pandemic — as soon as the lockdown was announced in March, most economists expected the Indian economy to go into recession.

HOW LONG DO RECESSIONS LAST?

• Typically, recessions last for a few quarters.

• But a depression is quite rare; the last one was during the 1930s in the US.
• In the current scenario, the key determinant for any economy to come out of recession is to control the spread of Covid-19.
• Finance Minister has expressed hope that India’s recession could be already over and that the economy may register positive growth in the current quarter.