What Is Technical Recession – Burning Issues

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RBI

In its latest monthly bulletin — for November — 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.
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.

At its simplest, in any economy, a recessionary phase is the counterpart of an expansionary 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.

“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.”
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.

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.
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,” according to NBER.

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. In fact, most estimates expect the economy to contract for at least one more quarter — that is October to December, currently under way.

Typically, recessions last for a few quarters. If they continue for years, they are referred to as “depressions”. 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.
In India’s case, Finance Minister Nirmala Sitharaman has expressed hope that India’s recession could be already over and that the economy may register positive growth in the current quarter.