Uncertainties surrounding the recession


IMF puts the Great Lockdown recession as one of the worst recessions since the Great Depression making it much worse than the Global Financial crisis. As per the estimates, the global economy is expected to contract by 4.9 percent, whereas the contraction during the Global Financial Crisis was at 0.1 percent.

It is now official that recession began in the US economy in February. According to National Bureau of Economic Research (NBER), economic activities reached its peak in the US economy in February’20. NBER notes that a recession begins when the economy reaches a peak of economic activity and ends when the economy reaches its trough. The economy is said to be in expansion between the peak and trough. The expansionary phase in the US lasted for 128 months that began in June 2009. IMF forecasts the US economy to contract by 8 percent in 2020.

Recession with different characteristics

The current recession is unique as it is triggered by the spread of Covid-19, and the resulting measures taken by the respective governments to contain the virus. Unlike the current scenario, previous recessions were a result of oil price shock or trouble in the financial market. Presently, as a means to curb the spread of the virus, governments across the globe implemented lockdown measures that brought much of the global economic activity to a halt. Many companies were forced to cut down their production/operations with a large number of people facing job losses and pay cuts. In this background, it is feared that the global economy would enter a vicious cycle of low income, low consumption, and low investment. In the previous fiscal year, trade disputes between the US and China, and issues surrounding BREXIT negatively impacted global GDP growth. As the global economy was slowly recovering from those challenges, Covid-19 induced crisis added more layers to it.

Indian Scenario

Indian economy is also in a similar boat with the national lockdown that lasted for around two months. IMF projects the Indian economy to contract by 4.5 percent in 2020. And considering the nature and damage caused by Covid-19 on the economy, RBI has predicted that the GDP growth rate for FY21 would be in the negative territory. Though the RBI refrained from giving any exact figure, the predictions by other rating agencies were also on similar lines. For instance, S&P assumes the Indian economy to contract by 5 percent in the current fiscal, and Fitch also expects the economy to contract at a similar level.

It is well known that the Indian economy was already passing through a phase of economic slowdown. Recently, Moody’s has downgraded India’s sovereign credit rating citing the need for more structural reforms. GDP data released by National Statistical Organisation (NSO) for FY20 also support this argument. GDP growth rate for FY20 slumped to an 11-year low at 4.2 percent, compared to 6.1 percent in FY19. The impact of Covid-19 is not fully reflected in this GDP data as the lockdown started only from the last week of March.

Barring government expenditure, all other components of GDP registered a decline. For instance, consumption demand as measured by Private Final Consumption Expenditure (PFCE) declined to 5.3 percent in FY20 from 7.1 percent in FY19. During the same period, investment demand as measured by Gross Fixed Capital Formation (GFCF) registered a negative growth rate at -3 percent from 10 percent a year ago. Net exports as measured by the difference between exports and imports also fell to the negative territory at -4 percent from 12 percent in the previous fiscal year. On the other hand, government expenditure as measured by Government Final Consumption Expenditure (GFCE) registered an improvement from 10 percent in FY19 to 12 percent in FY20.

Gross Value Added (GVA), which is the value of output less the value of intermediate consumption measures the contribution of various sectors to GDP. GVA registered a growth rate of 4 percent in FY20, compared to 6 percent in FY19. Agriculture and allied sector registered an improvement in its growth rate from 2.4 percent in FY19 to 4 percent in FY20. However, growth rate in industry sector declined drastically from 5 percent to 0.92 percent during the same period. The growth rate in the services sector also declined from 7.7 percent in FY19 to 5.5 percent in FY20.

Policy Responses

Governments and central banks across the globe came up with various measures to deal with this unprecedented recession. However, the question is whether the measures would be adequate in dealing with the economic slowdown as it is connected to a health crisis. In the words of Fed Chairman, Jerome Powell “The extent of the downturn and the pace of recovery remain extraordinarily uncertain and will depend in large part on our success in containing the virus. We all want to get back to normal, but a full recovery is unlikely to occur until people are confident that it is safe to reengage in a broad range of activities”. The same is applicable to the Indian economy also. However, the crisis also provides an opportunity to fix the structural issues in the economy that would help India to emerge as the fastest growing economy in the world.


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