Image Source: economictimes.indiatimes.com
The whole world is going through an economic recession. The situation of the recession was predicted even before the COVID-19 pandemic. The IMF reported in 2019 that the world is going through a “synchronized slowdown.” The slowdown in the manufacturing activities started in 2018 after achieving heights in 2017 and in addition to it, the corporate debt was increased. The US-China trade war and BREXIT also caused the slowdown in the economy. The world was heading towards a slowdown when the COVID-19 pandemic hit the globe. The world stock market crashed in February and lasted till March 2020. The growth prediction organizations revised their predictions to the negative GDP growth in many countries which later changed to negative global growth. The IMF in its World Economic Outlook estimated the growth in 2020 at -3.5%.
The earlier estimation for the growth of India in the FY of 2020-21 by the IMF was 7.4% which changed to -4.5% in June 2020. The worsened situation was high lightened when the NSO released the growth rate of the first quarter of 2020-21. The growth rate was -23.9%. But in later quarters, the growth in GDP rose significantly.
PREVIOUS RECESSIONS IN INDIA
The last recession India saw was in 2008. India retained its pre-crisis growth again in 2010. But failed to maintain financial stability and which resulted in the 2013 financial crisis. The fiscal deficit also swelled to 6.4%. India did not focus on financial stability which led to the inflation crisis and banking stress. Then India focused on financial stability.
A country goes into recession when the GDP growth goes negatives for consecutive two quarters. The number of quarters is not fixed as the National Bureau of Economic Research considers recession as a slowdown in the economy which remains for few months. There are some indicators such as real GDP, inflation, employment, manufacturing which shows the signs of recession. The signs of recession can be seen before it starts. The longer recessions are generally termed as depression like the Great Depression of 1930.
REASONS BEHIND CURRENT RECESSION
As per the report, in the first quarter of FY 2021, the GDP contracted by 23.9% and in the second quarter reported a contraction of 7.5%. In the third quarter, positive growth of 0.3% was reported in the third quarter after negative growth in the first two quarters of FY 2021. The financial year ended on Wednesday estimated to have a contraction of 8%. India recorded such contraction for the first time in its statistical history which it saw in the first quarter. The reasons behind this recession were several.
ONGOING SLOWDOWN: As already stated above, India’s growth was slowing down after reaching its peak in 2017 where it reported more than 8% growth and before this pandemic was unfolded the growth has come down to mere above 4% in FY2020. The reasons were many.
The global economic slowdown in 2019- The IMF reported the economic slowdown in 2019 which was at its lowest since the 2008 global economic crisis.
BREXIT- India has a trade surplus with Britain which means India’s exports are more than imports. Britain was serving India’s entry point to the European Union. India is the third-largest investor in Britain. The inflow of foreign funds and appreciation of the dollar against the rupee may change these statistics. In Britain, there are many Indian companies which were having the EU as a market for their goods. BREXIT is proving positive for India but it has created ripples in the global market for a shorter time period.
US-China Trade war: Tariffs were imposed by these countries on each other and the geo-political tension between these countries also impacted trade inflow.
Low Demand: India faced low demand from 2018. People were not secured enough for their jobs and income. Money was highly invested in real estates and gold. This further slowed down the growth
COVID-19: Around March when the WHO declared COVID-19 as a pandemic whole world goes into economic stagnancy. Lockdowns were imposed to protect the health of people which resulted in a temporary halt on industrial activities. This took the world into recession.
Unemployment: After the lockdown, which was not notified before, created deep impacts on employment. In the first phase of lockdown in April, people migrating from cities to their villages on foot were seen. The rate of unemployment reached nearly 24% which was around 8% in March. Unemployment affected the family income and which affect the spending capability and which resulted in low production.
Financial crisis- India already was facing financial problems due to Demonetization and GST. Gross NPAs were rising which hampered the growth of Banks. RBI on its Financial Stability Report of December 2020 reported that gross NPAs may raise upt0 to 14.8% by September 2021 which is nearly double 7.5% in the same period of 2020. PMC Bank and Yes bank crisis also add sorrows to these situations. Due to loss of employment and income due to the pandemic people are facing to repay the loan. RBI and Union government took steps like an extension of the date to handle this situation. The government is also facing financial problems to finance its schemes and projects. It launched some schemes like the Vivaad se Vishwas Scheme to collect money and demonetization.
Recession comes for a shorter time period but may take many years to reach the pre-recession growth levels.
The recession has become a decade story. Earlier, it came in 1997 than in 2008 and now in 2020. Reasons may be different. But the important thing that lies here is to handle this recession. As the Budget 2020 estimated that growth in 2021 will be in double-digit and some other rating agencies predicted the rating between 8% and 12 %. Government should focus on generating employment and handle this unemployment crisis and in addition to it should give more money in hands of common people which will raise the demand and as a result growth.