Context: In its latest bulletin, RBI projects contraction for a second consecutive quarter, which means the economy is in a ‘technical recession’.
More on the news:
- Also the RBI predicts that India’s economy will contract by 8.6% in the second quarter (July, August, September) of the current financial year.
- This contraction 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.
Understanding technical recession:
- Recessionary phase: When the GDP contracts from one quarter to another, the economy is said to be in a recessionary phase. In any economy, a recessionary phase is the counterpart of an expansionary phase.
- Expansionary phase: When the overall output of goods and services (typically measured by the GDP), increases from one quarter to another.
- Together, these two phases create what is called a “business cycle” in any economy.
- Recession: When a recessionary phase sustains for long enough or when the GDP contracts for a long enough period, the economy is said to be in a recession.
- Typically, recessions last for a few quarters and if they continue for years, they are referred to as depressions - a rare phenomena - the last one was during the 1930s in the US.
- Technical recession: While the basic idea behind the term recession is clear, 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?
- To get around these empirical technicalities, economists 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”.
Nominal vs Real GDP:
- Nominal GDP is a macroeconomic assessment of the value of goods and services using current prices in its measure.
- Real GDP takes into consideration adjustments for changes in inflation. This means that if inflation is positive, real GDP will be lower than nominal, and vice versa.
- Without a real GDP adjustment, positive inflation greatly inflated GDP in nominal terms.
- Indian case: Given the nature of the problem - the pandemic - economists expected the Indian economy to go into recession. But, this can't be compared with technical recession.
In the current scenario, the key determinant for any economy to come out of recession is to control the spread of Covid-19. In India’s case, the 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.
Image Source: The Print