Is the Indian Economy heading towards a Recession?
When the lockdown was imposed in March this year, we heard many economists predicting an economic slowdown. Some of them even went on to predict the worst ever “recession” the country has ever seen was on its way. Now that around nine months have passed since the lockdown announcement and GDP data for the past two quarters is available, we are in a position to analyze if the apprehensions of the economists were actually correct or were simply driven by emotions.
Through this article, we try to analyze if India is actually heading towards a recession. But before that, let’s define the term. According to the National Bureau of Economic Research (NBER), a recession occurs when a continuous decline in economic activity or a continuous contraction in the GDP is observed for a sustained period of time (ranging from few months to more than a year).
The first quarter of the current financial year, ie. April-June saw a rapid contraction in the GDP with the quarterly GDP Growth being -23.9%. Overall consumption demand was at an all-time low with people avoiding the purchase of non-essential items due to the pandemic fear. Services like hotels, tourism, travel, etc. were completely shut down and thousands of people experienced job losses or reductions in income. The lockdown imposed in March severely affected the manufacturing sector as a large number of factories had to be shut due to poor demand while the travel restrictions led to disruptions in the supply chains.
As the government announced a phase-wise unlock plan in July, a comparative improvement in the GDP growth figures for the second quarter was expected. As the GDP figures for the quarter July-September were released recently, there is definitely some silver lining as the GDP contraction rate has reduced significantly from 23.9% in the preceding quarter to 7.5%. However, this is the first-ever technical recession India is experiencing after 1996. A technical recession is a term used for the contraction of GDP for two successive quarters.
Before making our predictions for the future, let us try to understand the reasons behind a slight recovery in output in the second quarter from the sizable negative shock in the first quarter. The three sectors that performed better and showed a positive recovery in the second quarter are agriculture, electricity & gas, and manufacturing. As the post-lockdown resumption of industrial activity lifted power and water consumption, the electricity and other utility sector expanded by 4.4%. The manufacturing sector also gained 6.6% while the agriculture sector grew by 3.4%. A combination of pent-up demand, festive season, and rural push is expected to be the major drivers behind this recovery in the post lockdown period.
Now let’s come to the objective of this article and try to answer the not-so-simple question- “Is India heading towards a recession?” Well, despite some positives in the second quarter, many economists predict that India’s economy is not yet in a good condition. Here, we must not make the mistake of taking a slight recovery in the second quarter on its face. The festive demand leading to a growth in sectors such as automobiles played a very crucial role in pulling the economy slightly. As we make predictions for the upcoming quarters, we would have to discount this festive demand.
While there are estimates of a negative rate of growth for the third consecutive quarter, a gradual increase in government spending and the development of vaccines might help the country recover by the fourth quarter. However, 2020 has taught us all that the world is full of uncertainties. Recently, a new strain of coronavirus discovered in the UK has left the world in worry. If a new spree of Covid-19 infections takes place in the coming few months forcing the re-imposition of lockdowns in certain parts of the country, it seems a longer-term recession would be inevitable.
Written By- Nischal Upadhyay