Did you google…
“A recession is when there are two-quarters of consecutive negative growth of GDP.”
WHAT CAUSES AN ECONOMIC RECESSION?
This question has long been the subject of heated debate among economists, and for good reason. A recession can be a mild decline in economic activity in a single country that lasts months, a long lasting downturn with global ramifications that last years, or anything in between. Complicating matters further, there are countless variables that contribute to an economy’s health, making it difficult to pinpoint specific causes.
People often say a recession is when the GDP growth rate is negative for two consecutive quarters or more. But a recession can quietly begin before the quarterly gross domestic product reports are out. That’s why the National Bureau of Economic Research measures the other four factors, for which data is published. When these economic indicators decline, so will GDP.
Gross Domestic Product, abbreviated as GDP, is looked at by economists as the most important and convincing of measures to calibrate if an economy has swivelled into a recession. The current economic slowdown caused by the coronavirus crisis plunged India into a recession, as deduced by GDP’s contraction by 24.4% in the April to June 2020 quarter, followed by a 7.4% shrinkage in the second quarter. It’s the largest contraction of GDP since the last recession and ends the longest economic expansion on record. India’s economy contracted 7.3 per cent in 2020–21- its worst recession since independence as coronavirus lockdowns put millions out of work.
Here’s a guide to understanding GDP and its significance in determining whether the country is in recession.
This is the formula the government uses to calculate GDP.
GDP = C + I + G + (X — M)
It tallies all the goods and services produced in India. From the dinners we serve at the restaurants, to the cars we produce in factories, and the flights we take from airports. According to the Commerce Department, India produced over $60 trillion worth of goods and services in 2020.
Because GDP is a measure of the entire economy and aims to capture almost everything that’s happening in an economy, economists have chosen the broad definition of a recession as two consecutive quarters of negative growth.
To calculate GDP, economists first calculate consumer spending or the day-to-day purchases that everyday Indians make. Consumer spending makes up about 59.05% of GDP. And that share has grown bigger over time, as the Indian manufacturing industry has grown smaller. Consumer spending fell by 40% during the pandemic-induced lockdown, as businesses shut down and government stay-at-home orders came into effect. Indians have continued to spend through online channels. But their frantic online purchases haven’t compensated for the loss of other economic activities since the onset of the pandemic.
Another major component of GDP is business investment. This includes things like companies building factories or buying machinery. That’s important to the economy not only because of the activity it produces but also because business investment produces productivity gains. For instance, by making factories more efficient or enabling the energy industry to extract more oil and gas. Business investment was on the decline before the outbreak and the sluggishness has continued with the pandemic.
Government spending also contributes to GDP. The Indian government spends money on everything from equipment for the military to government employee payrolls. And government spending has continued to rise through the first quarter of 2020. And it’s going to increase a lot more in the quarters ahead.
GDP also adds everything India exports and subtracts everything it imports to calculate net exports. India has been importing more than it has been exporting for several decades. In the first quarter of 2021, net exports rose, meaning there was a slight narrowing in the trade deficit. Normally a rise in net exports is perceived positively because it would mean that India is importing less. However, in actuality, what we are seeing is a fall in both exports and imports; It’s just that imports have been falling more than exports. This isn’t necessarily a good thing because it shows that demand is very weak. Forecasters expect a much larger contraction of GDP in the second quarter, producing the two consecutive quarters of decline that define a recession. It’s off the scale compared to what we’ve seen in even in recent recessions. On the other hand, the hopeful scenario is that we see this big drop in the second quarter, and then the economy might start to recover.
DO YOU KNOW “ PSYCHOLOGY ALSO CONTRIBUTES TO ECONOMIC RECESSION” ?
Psychology can also contribute to a recession. Fear of a recession can become a self-fulfilling prophecy if it causes people to pull back investing and spending. In response, producers might cut operating costs to help weather the expected decline in demand. That can lead to a vicious cycle as cost cuts eventually lower wages, leading to even lower demand. Even policy designed to help prevent recessions can contribute. When times are tough, governments and central banks may print money, increase spending, and lower central bank interest rates. Smaller lenders can in turn lower their interest rates, effectively making debt “cheaper” to boost spending. That can cause a recession if people have become too reliant on cheap debt and government stimulus.
AUTHOR- VAIDEHI CHAWLA
