Latest RBI bulletin projects contraction for a second consecutive quarter, which means the economy, is in a ‘technical recession’.
Nowcasts by RBI
- In its latest monthly bulletin, 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.
- 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”.
- And the very first “nowcast” predicts that India’s economy will contract by 8.6% in the second quarter (July, August, September) of the current financial year.
- It implies India that has entered a “technical recession” in the first half of 2020-21— for the first time in its history.
What is a Recessionary Phase?
- At its simplest, in any economy, a recessionary phase is the counterpart of an expansionary phase.
- In simpler terms, when the overall output of goods and services — typically measured by the GDP — increases from one quarter (or month) 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.
- Together, these two phases create what is called a “business cycle” in any economy. A full business cycle could last anywhere between one year and a decade.
Now try this PYQ:
Q.Consider the following actions by the Government:
- Cutting the tax rates
- Increasing government spending
- Abolishing the subsidies
In the context of economic recession, which of the above actions can be considered a part of the “Fiscal stimulus” package?
(a) 1 and 2 only
(b) 2 only
(c) 1 and 3 only
(d) 1, 2 and 3
How is the Recession different?
- When a recessionary phase sustains for long enough, it is called a recession. That is, when the GDP contracts for a long enough period, the economy is said to be in a recession.
- There is, however, no universally accepted definition of a recession — as in, for how long should the GDP contract before an economy is said to be in a recession.
- But most economists agree with the US definition that 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.
Then, what is a Technical Recession?
- While the basic idea behind the term “recession” — significant contraction in economic activity — is clear, from the perspective of empirical data analysis, there are too many unanswered queries.
- For instance, would quarterly GDP be enough to determine economic activity? Or should one look at unemployment or personal consumption as well?
- It is entirely possible that GDP starts growing after a while but unemployment levels do not fall adequately.
- To get around these empirical technicalities, commentators often consider a recession to be in progress when real GDP has declined for at least two consecutive quarters.
- 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”.
How long do recessions last?
- Typically, recessions last for a few quarters. If they continue for years, they are referred to as “depressions”.
- But 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.
