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India's Great Slowdown

By Gauri Gupta

Vivekanand Institute of Professional Studies, GGSIPU

Recession is a period of temporary economic decline during which trade and industrial activity of a nation is reduced. It is a phase in the downturn of the economic cycle of a nation. It refers to a period of decline in the total output, income, employment and trade of a nation, usually lasting for a period of six months. Experts declare recession when a nation’s economy experiences negative gross domestic product (GDP), rising level of unemployment, falling retail prices, and contracting measure of income and manufacturing for an extended period of time. They are considered as an unavoidable part of the business cycle.

During a recession, the economy struggles, people lose work, companies make fewer sales and the country’s overall economic output declines. The causes of recession includes a sudden economic shock, excessive debt, asset bubbles, inflation, deflation and technological changes. Julius Shiskin provided us with the thumb rule of recession which is two down quarters of GDP.

The world economy went into a deep recession in the last few months of 2008 with the real GDP dropping at 6 percent annual rate. This was the worst decline in the world output, world industrial production and the world trade in the post – World War II era, with virtually all countries getting affected by the downturn. The United States dominated the world economy which had an impact on the other economies of the world leading to their slow growth and development.

From 1957 up to the pre – liberalisation period, India witnessed four years of an actual fall in output or negative growth in GDP. These were in the years 1957-58, 1965-66, 1972-73 and 1979-80. During this period, recession was mainly due to the increase in the oil prices along with the drought that led to a sharp fall in the agricultural output.

The Indian economy was relatively insulated from the global financial crises that began in August 2007 when the ‘sub-prime mortgage’ crisis first surfaced in the US. During this time, the Reserve Bank of India was raising interest rates till July 2008 with the view to maintain the growth rate and to contain inflationary pressures. As the financial meltdown turned into a global economic downturn with the collapse of the Lehman Brothers in 2008, the Indian economy was severely affected. The credit flows dried up immediately leading to an immediate increase in the market rate.

India has gone through a roller coaster ride through the last two decades. After liberalization, throughout the decades of 1990s, Indian economy grew at around 6-7% per annum. The pace picked up about 8-9% per annum from 2003-2008. The great recession of 2008 affected the Indian growth rate and it declined but quickly recovered within a year in 2009-10. This trend did not last for long. Indian economy started faltering from 2011. The growth rates slowed down to 5-6% per annum. The slowdown cannot be denied even though India did better than most of the other countries.

The Government of India avoided discussion on the economic slowdown. No finance minister confessed that the Indian economy had entered recession. Interestingly, the national income figures also showed a minimal impact on the growth.

There were two policy responses to the crisis:

1. Fiscal Stimulus

The Indian economy received a major fiscal stimulus as early as February 2008, when an election oriented budget for the fiscal year 2008-09 was announced. The budget included massive increases in the public outlays in support of employment guarantee schemes, farmer’s loans, pay hikes to the government employees, and increases in food and fertilizer subsidies. The government found that it did not have much fiscal space to take any further steps to counter the impact of the global downturn.

2. Monetary Policy Response

The Reserve Bank of India, since October 2008, injected considerable liquidity into the economy through a series of policy rate cuts. The cash reserve ration was brought down from 9% to 5%, and the repo rate by 425 basis points. Further, in order to discourage banks from parking overnight funds with the RBI, the reverse repo rate was reduced from 6% in November 2008 to 3.25% in April 2009.

The fiscal stimuli and the monetary policy measures reinforced the significant fiscal expansion undertaken in the year 2008-09 budget. It became very clear that the fiscal measures which effectively transferred substantial purchasing power to the rural sector was more effective in shoring up aggregate demand than monetary policy measures, whose traction has been evidently weak. The expansionary budget along the subsequent policy measures, ensured that the downturn in GDP growth was not as steep as some of the advanced and major emerging economies, ultimately suggesting that the economy could be brought back to its potential growth path in short term.

The World Bank’s June 2020 Global Economic Outlook report shows that a large number of economies will witness a decline in the per capita output this year – the biggest share since 1870. According to the World Bank, the current projections suggest that the global per capita GDP will decline by 6.2%. This will make it the deepest recession since

1945-46. This recession has been triggered solely because of the global pandemic followed by the actions that were taken by various nations to contain it. Previous recession were driven by various reasons such as oil pricing, financial crisis, monetary policy responses to high inflation among others.

Another distinct feature of the present recession is the level of synchronisation. Earlier, if US went into recession, it would affect the other economies of the world as well. However, now, the emerging economies would be hit, but there would be a slowdown in the growth rate rather than actual contradiction.

During the fiscal year of 2021, the global pandemic and the lockdown killed the economic activity of the nation. Michael Patra, the Deputy Governor of RBI, said that the ‘damage is so deep’ that the nation’s potential output has been pushed down and it will take years for us to grow and repair the same.

The experts have claimed that other than the agricultural sector, economic activity, may continue to remain sluggish even after the lifting of the lockdown due to the measures of social distancing along with the shortage of labour as a result of them migrating to their native places.

Economists have forecasted that the nation is expected to contract by at least 5 to 12% with a complete halt on the economic activity on account of the lockdown.

Janak Raj, executive director at the RBI, stated that India is staring at a huge negative growth in the current quarter and overall negative growth for the entire fiscal year.

He further stated and pointed out that, “Both demand and supply sides of the economy has collapsed. However, I believe that supplies would recover much faster than the demand. This is because the capacity to produce goods and services by and large remains intact, though non – availability of labour may temporarily hamper production for a few months. On the other hand, there has been substantial loss of demand.”

India’s GDP shrank nearly 24% in the second quarter of 2020. The contraction is the nation’s biggest in decades and the worst second quarter decline among the top five economies of the world.

India’s primary sector grew 3.4% in the second quarter, compared with the same period last year, but besides that, the results were grim. The other industries including the manufacturing industry, the hospitality industry and the trade industry suffered major setbacks. While the nation’s economy was already weakening, the pandemic sent it into a spiral.

India’s dual crisis – the flailing economy along with the pandemic left the government with a very few options.

In May 2020, the government released a $266 billion stimulus package, nearly 10% of the nation’s annual GDP. However, owing to the financial aspect of the lockdown, the government’s revenue generation is an all time low.

The Indian economy has taken a turn and stood the test of the time every time it was caught up in the vicious cycle of recession. The nation has showed the world that it is not a fairytale success story but it requires tons of hard work, diligence and intellectual expertise. India’s recovery has a lot to owe to the stimulus package that the government released in May 2020. The regulatory authorities like the RBI, foreign investment rules, banking institutions and even India’s foreign policy plays a major role during this time. I, personally, believe that the Indian Government needs to look into the future adversities and carve out a comprehensive policy to deal with the recession.

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