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Economy in Abyss of Recession?

That the economy is in deep pit is indisputable;what could be the alternative route maps to get out of the morass is the question. — KK Srivastava


The global rating agency Fitch recently forecast a global GDP contraction of 4.4.% for 2020. Except for China, which is estimated to grow positively at 2.7%, all the major economies will be in negative zone. The agency has cut its GDP forecast for emerging markets, again excluding China, to -5.7%, mainly on account of a major degrowth in India (-10.5%). See Table -1.

Global Gloom: FITCH
Country                  Growth(%)
UK                         -11.5
India                      -10.5
Brazil                     -5.8
US                         -4.6
China                    +2.7

India Ratings apprehends for India even a sharper contraction at -11.8%, Goldman Sachs, a decline of 14.8% Indeed all major forecasters have dismal picture to paint about India’s prospects in 2020 (See table 2). This is in background of India’s real GDP contracting by a record 24% in Q1 of FY21. India imposed one of the most stringent lockdowns, domestic demand fell massively, there was limited fiscal support, the financial system showed fragility while the virus attack is not abating. All of this has put a spanner in rapid normalization path. Covid infections are still rising, forcing some states to reimpose restrictions. This has continued to depress sentiments and disrupt economic activities. The entire recovery path has shifted southward. Both industry and services activities have been seriously impacted, the only bright spot from the supply side being agriculture which has witnessed a reasonable growth.

Mighty Indian Fail 
Agency Forecast                       (%)
Goldman Sachs                        -14.8
India Ratings                            -11.8
Nomura                                    -10.8
Fitch                                         -10.5
HSBC                                        -7.2
Morgan Stanley                         -5.0

The first lockdown imposed curbs on nearly 66% of GDP activities. This ratio declined subsequently; till the end of May 20% activities only were restricted. However, even now the economy is not fully freed, with about 10% of GDP still not operative due to both psychological barriers and remaining lockdown. The recessionary trends are breathing hard in the economy.

What is a recession? Well, in terms of Economics technology, a recession is typically defined as a phenomenon when there are two successive quarters with negative growth rate. For India in the Q1FY21 the growth has been negative; so will it be for Q2FY21. This recession is manmade since it was majorly caused by Covid crisis and the lockdown of the economy in its aftermath. There are both supply side end demand side factors impacting recession across all sectors barring agriculture which grew at 3.4% in the first quarter of FY21. In comparison the 2009 crisis was purely financial.

Of course lot of other nations are keeping company with India. Across the world nations are reeling under recessionary forces, barring China. Several supply chains have been disrupted, bringing industries down to their heels. Unemployment has risen phenomenally; in India it stood at 8.35% in August, while in the US it surged to 10.2% in July, 2020. According to World Bank the pandemic induced recession is likely to lead to global per capita GDP shrinking by 6.2%, the deepest decline since 1946. In India the situation is severe since the economy was in slowdown mode already in prelockdown phase. 

Analyzing sectorwise, agriculture, as mentioned earlier, has registered a positive growth. This is in contrast to  earlier recessions of 1957-58, 1965-66 and 1979-80 when agriculture would be in the negative zone while non-agricultural activities registered a positive growth. In contrast, according to Crisil, during 2020-21 while agriculture may grow at 2.5% the degrowth in non-agricultural sector is likely to be -6.3%, pulling down the whole economy by 5%. The monsoon this year has been good, Covid relatively less affecting the rural areas, and if the virus does not spread further in rural areas, hindering harvest and sales, then there would be some redemption. Surely, however, with only 15% weightage, agriculture cannot be the savior of the economy overall. 

The fact remains, however, that Covid will be tamed eventually and there will be revival of the economic growth at some point of time. For an economy, however, it is not merely revival which is the issue but also the question as to what shape is it likely to take. It could be sudden and steak, so called V shaped, or prolonged and deep, in L shape, or prolonged but eventually recovered, the U- shape. The extent and shape of recovering curve depends on both the macro-economic and business environmentswithin  acountry on one hand and successful implementation of policies and strategies on the other. What could be the possible paths to recovery?

Table 3:
GVA Year on Year (%)

                             1957-58           1965-66        1979-80            2020-21
Agriculture               -4.5                    -11                -13                 +2.5
Non-Agriculture       +30.6                +4.4               +0.7               -6.3
Total                          -1.2                 -3.7                -5.2                 -5.0

Well, the worst possibility is an Lshaped recovery in which the economy dives deep never to resurface, the growth rate never returning to its secular trend. Greece, for example, is in this situation for last 12 years. India is very unlikely to be in this night marish predicament due to our huge untapped potential for growth. Then there could be a Wshaped recovery. This may happen when there is a double dip. If the growth following the unlock measures slips below again due to resurgences of the pandemic then the economy will take a second dive. Naturally the economy would take a very long time to recover. Third, there is the Kshaped recovery.Indeed some commentators already fear that this is the current scenario in India in which the growth revival benefits the rich (via stock market, etc) while the poor hardly gain. While the new world economy may perform, the traditional businesses fail to revive. Fourth, there is thishockey stick recovery, wherein the initial recovery is very rapid, but soon it slows down so that the economy takes a long time to return to old growth path. This may be due to consumers lacking confidence to spend, for example. Fifth, in the so calledU-shaped recovery the economy, onesat thebottom may prefer to spend a long time there before resuming normalcy. The loss of output is much bigger damaging the economy quitea bit. Sixth, there is a possibility of V-shaped recovery, the most probable scenario for India in current times. Here the economic output, having fallen drastically suddenly due to an external shock, may climbs back to its old path quickly.The businesses have suffered a setback but not collapsed completely and workers come back to work. Finally, we may have a Z shaped recovery, the most desirable, when a recession is followed by  boom, the growth rate exceeding the trend rate for a while at last. So the growth is not destroyed but delayed. This is the unachievable ideal in present circumstances.

Coming back to India, though economic activities have resumed in India gradually, the Covid threat is still alive, vaccine is for away in future, mass vaccination – no one knows! so one is not sure if the green shoots are likely to wilt away or grow into a tree. So what should be done to nurture the plant? Well, more on this in our next article.

The author is Associate Professor, PDGAV Collage, University of Delhi.


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