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The Recession in India world economy is facing a looming recession, with the US and other countries bracing for the possibility of a downturn in the coming years.
This risk has been amplified by factors such as inflation, energy crisis resulting from the Russia-Ukraine war, increasing interest rates, and massive tech layoffs.
Understandably, India is also feeling the impact of this predicted recession, with rising fuel prices, dropping currency values, and other economic indicators pointing towards a potential recession in late 2023 or early 2024.
Luckily for India, the government has taken measures to mitigate the economic damage that could be caused by a recession. Niti Ayog Vice President Rajeev Kumar has stated that “India will not be affected by the recession” and that “India will grow its economy by 6% to 7% by 2023-2024”.
What is Recession?
A Recession is a period of slow or rapid decline in economic performance that persists for two or more consecutive quarters. During a recession, domestic growth slows, consumer and business confidence wanes, and the effects can last for months or even years.
The National Bureau of Economic Research (NBER) in the United States defines a recession as an extended downturn between two peaks of the Business Cycle that lasts for at least two quarters, although this is not a hard-and-fast rule.
The extensive and persistent downturn in economic growth has caused a Recession in India , which is difficult to quantify with one single parameter.
Various signs of a recession period for a country or the world can be seen, such as: unemployment, soaring inflation along with a weakening currency rate, a contraction in industrial production and retail sales, and negative Gross Domestic Product (GDP) for at least 8 months.
Unemployment is arguably the most severe consequence of Recession in India , and it can take months or even years of hard work to restore positive economic growth after and during the recession period.
To help combat the effects of Recession, countries often employ monetary and fiscal policies set forth by their central bank.
Types of Recession
The Recession in India is one of the most difficult economic periods for any country, as it requires a dramatic transformation from negative GDP to a healthy economy.
Businesses must pay close attention to the shape of their graphs during this time, as each type of recession has its own unique characteristics that can help them make more informed decisions.
For example, if the graph is in a U-shape, it suggests that the economy is slowly recovering from the recession and businesses can be more proactive in their approach. On the other hand, if it takes on an L-shape, then it’s an indication that the economy is declining further and businesses must take a more conservative approach to ensure their survival.
No matter what form the recession takes, businesses must remain vigilant and strive to make the most of these difficult times.
Boom and Bust Recession in India
Economies inevitably experience highs and lows in their growth of GDP. During the economic boom, the economy runs at a rate that is higher than the expected long-term growth rate, which leads to a surge in inflation.
As this situation is unsustainable, central banks or other government agencies seek to counteract it by tightening up fiscal policy or increasing interest rates.
The inevitable result is a short-term recession, in which customers attempt to save more money by cutting back on their spending and paying off debts.
A notable example of a boom and bust recession is the one that occurred between 1990 and 1992 in the UK.
During this period, the UK economy experienced rapid expansion, followed by an equally sharp contraction as inflation rose drastically before eventually being brought back under control.
Balance Sheet Recession in India
The renowned economist Richard Koo coined the term “balance sheet recession”. This phenomenon occurs when banks or businesses experience an immense decline in their balance sheet, due to a surge in bad debt or rising liabilities.
When an economy is faced with an excessive amount of debt, the result is a balance sheet recession.
This is a lengthy and destructive scenario, characterized by plummeting asset prices and reduced consumer spending.
It is extremely difficult to erase the effects of this phenomenon, since it requires customers to save more money and reduce their expenditure.
Japan’s 1990 economic crisis was a prime example of a balance sheet Recession in India , which took several years for them to recover from. The 2008 financial crisis was also categorized as a balance sheet recession.
Depression
The recession of the past year has been a particularly long and severe one, resulting in an overall downturn in economic conditions that has officially been classified as a ‘depression’.
The effects of this depression have been far-reaching, with 10% GDP growth being suppressed, unemployment rising to 30%, and the economy becoming unstructured.
The most devastating effect of a depression is no doubt the massive surge in unemployment levels. This was certainly true during the Great Depression of the 1930s which remains one of history’s most notorious examples of such an economic crisis.
Supply Side Shock Recession in India
This Recession in India , which is not necessarily long-lasting but can still be fairly severe in its effects, takes its shape when there is a significant decrease in the supply of essential commodities or materials, such as oil.
This can be caused by various factors including war, natural disasters, and health crises; a notable example being the 1973 recession which was triggered by a dramatic increase in the price of oil that pushed it up to three times higher than its base price. At that time, many countries were heavily dependent on oil for both their energy needs and business operations.
Fortunately, over time more alternative sources of oil were discovered and utilized to reduce this dependency.
Recessions are identified after they have already occurred due to their unpredictable nature; the most recent example being the COVID-19 pandemic that has been described as a ‘black swan’ event due to its unexpectedness and severity.
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What are the Causes of Recession in India and the World?
The current Recession in India and across the globe is a complex phenomenon, with no single factor or cause. It is estimated that multiple contributing factors all played a significant role in sparking past recessions in India.
Most recently, high inflation and unemployment levels hovering around 3.7% have led many to speculate that the United States may be headed for another recessionary year. Although it’s impossible to predict exactly when this might occur, the World Bank serves as a reliable indicator of economic conditions around the world.
After extensive research into past Recession in India in both India and other countries, some of the most common causes include:
Rising Interest Rate
The steady rise of interest rates is a major obstacle in terms of the flow of liquidity. This presents an especially difficult challenge for ordinary people who are trying to make ends meet on a day-to-day basis, as not only do home loans become more expensive but the additional interest rate increase further adds to the total cost of borrowing.
This consequently reduces the demand for such services as it becomes nearly impossible for those on a limited budget to afford it.
Deflation
The decrease in prices of goods and commodities inevitably devalues them, resulting in deflation. Deflation is one of the primary causes of an economic recession, as it encourages people to wait for further price reductions and consequently weakens the currency.
A prime example of this phenomenon is the economic crisis that occurred in Sri Lanka: a country that was greatly impacted by the global financial crisis due to its reliance on exports, which had decreased in value due to deflationary pressures.
Consequently, Sri Lanka experienced a decrease in domestic demand and significant capital outflows as investors sought better returns elsewhere.
Inflation
Inflation has become an increasingly difficult burden for the everyday person to bear, making it difficult to afford even the most basic necessities.
This relentless inflation, if left unchecked, will eventually culminate in a recession – with less money in circulation and more people out of work.
This is an alarming trend that can have far-reaching consequences for individuals, businesses, and even entire economies. To avoid this outcome, it is essential that effective measures are taken by economic institutions to combat rising prices and ensure financial stability for all.
Weak Bank Management
Banks are incredibly important in the development and sustainability of an economy, as they are often responsible for managing the money flow throughout a country.
When banks fail to adequately manage their finances, it can lead to dire consequences such as a recession. The 1990 crisis was an example of this, with over 1,000 banks being implicated in illegal activities due to inadequate savings and loans practices.
As a result of this mismanagement, many of these banks were forced to declare bankruptcy and experienced an upsurge in fraudulent activities.
This led to a severe economic downturn for the entire nation, demonstrating just how vital it is for banks to properly manage their funds and resources.
Unbalanced Manufacture and Demand
When the demand for manufactured goods begins to diminish, the effects can be far-reaching and devastating for many people.
This was one of the earliest signs of economic trouble in 2008; by October 2007, orders for durable goods had started to decrease drastically, reaching their lowest point yet.
There are numerous other factors that can contribute to a recession, such as falling housing prices and sales, economic crisis, inadequate wages, and government price controls. All of these can have a detrimental impact on businesses and livelihoods throughout the country.
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Industries Affected by Recession in India
When it comes to economic downturns, such as a domestic or global Recession in India , the effects can be far-reaching and devastating across all sectors and industries. It can be difficult to determine which industries are most affected by a recession since the degree of impact varies depending on how much customers rely on and demand those services.
To get a better understanding of which industries are particularly vulnerable to recessions, let’s take a closer look at some that have been severely impacted by previous Recession in India.
Real Estate
The Recession in India of the last decade has had a profound effect on the real estate industry, causing customers to become more reluctant to spend money on housing or other construction projects.
This shift towards saving money has created a ripple effect that has impacted numerous individuals connected to the sector, including real estate agents, workers and suppliers.
The ramifications of the recession have been further exacerbated by the pandemic, as businesses shifted to a work-from-home culture and subsequently reduced their demand for office spaces.
This has caused a dramatic decrease in sales and profits for those involved in the real estate industry and necessitated many difficult decisions regarding staffing levels and financial management.
Tourism
The tourism sector is intrinsically linked to the spending habits of travelers, who generally prioritize leisure activities when they have extra disposable income.
During periods of economic recession, however, high inflation and low liquidity can make spending money on anything other than essential items an unfeasible option. As a result, the tourism industry often suffers when the economy is struggling, as people are less likely to allocate funds to experiences like travel and entertainment.
Retail
Retail stores that provide items deemed essential by their customers were able to remain open during the recession, while those selling non-essential items often saw customers tightening their budgets and spending less.
In India, as well as other countries around the world, the retail industry was hit hard by these economic downturns, resulting in significant losses for many businesses.
Restaurants
The dark swan recession of 2021, otherwise known as the COVID-19 pandemic, has caused drastic changes to the restaurant industry in India.
Many restaurants were forced to close their doors due to the restrictions put in place preventing people from physically going out and gathering in large groups.
Many restaurants were locked up, leaving those who worked there suddenly without jobs.
The owners who managed to stay afloat by delivering food straight to customers’ homes were able to still make a profit, but it wasn’t enough for many businesses to survive. The recession has only exacerbated issues such as unemployment and lack of liquidity, making it increasingly difficult for the restaurant industry as a whole to keep running smoothly.
IT sector
The US recession of 2008 had devastating consequences for the IT sector, with a drastic and sudden decline in growth that left the industry in shambles.
The effects of this collapse were felt for several years, as businesses struggled to recover and adjust to the new economic climate.
However, through hard work and determination, the IT sector has persevered and is now strong enough to withstand even the worst economic downturns. While there may still be bumps along the road, it is clear that this particular industry is now well-equipped to survive any impending economic Recession in India.
Manufacturing
The demand and supply of countless goods were drastically decreased to their nadir during the economic recession that struck India and the rest of the world.
Businesses found it difficult to remain afloat as demand for many products was close to nonexistent during this period. This manufacturing sector saw a rollercoaster of highs and lows during the recession, with many small businesses forced to shutter their doors due to lack of business.
Reasons for the Globally Predicted Recession
Economists predicted an economic crisis for late 2023 or early 2024, a result of the catastrophic impacts that the pandemic had on global Gross Domestic Product (GDP).
The pandemic caused an economic downturn, with businesses shutting down or operating at a reduced capacity and people unable to work due to lockdowns, leading to a dramatic decrease in GDP from its former level. This predicted economic crisis will be a result of this unprecedented disruption to the global economy.
The main reasons for the saying recession in 2023 are:
The Russia-Ukraine war has caused a surge in fuel prices and energy demands, leading to an increase in the World Bank’s interest rate due to rising inflation. In order to keep up with the inflation rate, the interest rate has seen an exponential growth.
This financial crisis is likely to have a severe impact on many developing countries, hampering their development. Central banks around the world have had to take drastic measures, as their interest rates have risen higher than they’ve been in the past five years.
To combat this economic crisis, central banks must focus on fiscal policies, demand and supply chains, global trade marketing, and other external factors that could influence the economy.
Darkest Global Recession Year 2007-2009
The Great Recession of 2007-09 was one of the most severe economic downturns in modern history, and even more impactful than the Great Depression of the 1930s in the United States.
The event was so catastrophic that it shook the entire world and served as a reminder of how fragile economic conditions can be.
The catalyst for this recession was a drastic shift in the US housing market, which saw mortgage-backed securities (MBS) and other derivatives take a steep plunge.
This occurred despite US GDP reaching a peak of 4.5% in 2007, prior to sliding 0.3% in 2008 and 2.8% in 2009. Unemployment also skyrocketed, rising from 5% to 9.5% by June 2009, while home prices dropped to their lowest level since 2005 at 5%.
Furthermore, the S&P 500 index plummeted from $69 trillion to $55 trillion in the same period.
Biggest Time for Recession in India: 2021 (COVID-19)
The outbreak of COVID-19 has been a particularly dark time for India, with two nation-wide lockdowns leading to the country’s first technical recession in history.
This recession was characterized by a level of uncertainty that could not be controlled, with job losses occurring sporadically across different sectors. Such an unprecedented event had catastrophic consequences, with many lives lost and businesses forced to close their doors.
India’s GDP shrank by 7.5%, and the situation worsened even further in April-June 2021 when it declined by 24.4%. This made India’s economy one of the worst affected in the world, with its contraction rate in 2020-21 coming in at 7.4%, significantly lower than other nations that were also experiencing the pandemic.
In 2020/21, the Indian economy suffered an unprecedented contraction compared to any other recession in India’s history; this led to higher unemployment and a sharp increase in poverty ratios.
The unemployment rate for 2020 hit a record low of 7.1%, with the poorer sections of society being impacted the most, and even the middle class witnessing reduced salaries.
As Indians grapple with the post-pandemic consequences, they are striving to return their lives to normalcy; sadly, broken families and orphaned children have become defining scars of COVID-19.
Nevertheless, the world’s largest economy is slowly regaining momentum as more startups are created and new technologies are explored to help citizens rebound from this crisis.
History of Recession in India
A Recession in India is a period of economic decline that is officially declared when there are two consecutive quarters of negative Gross Domestic Product (GDP) growth.
India recently experienced its first technical recession during the global Covid-19 pandemic, but there have been four other Recession in India history since independence. Each episode has had different causes, yet a common thread between them all has been poor monsoon seasons, which have often served as an underlying factor in India’s recessions.
1957-58: Recession in India
The Indian economy experienced its first recession in recent history, with negative GDP growth of 1.2%. Various factors have been attributed to this downturn, including the poor monsoon season which led to widespread drought conditions and an associated rise in commodity prices, a rising import bill due to increased global spending, and India’s costly war with China.
These combined elements had a devastating effect on the Indian economy, leading to the historic recession.
1966-67: Recession in India
India suffered immensely when the country experienced two consecutive years of drought, which drastically decreased food grain production by a whopping 20%.
This caused mass starvation amongst the population, prompting international aid from the USA to help India in its time of need. In addition to this dire environmental crisis, India’s economy was further strained due to two costly wars over a three-year span; The India-China war in 1962 and the India-Pakistan war in 1965. Both highly destructive conflicts had severe economic repercussions that resulted in a recession across India.
1973: Recession in India
India faced a dire energy crisis in the early 1970s when the Organization of Arab Petroleum Exporting Countries (OAPEC) proclaimed an embargo on oil shipments to any country that supported Israel, leading to an unprecedented 400% increase in oil prices, from $3 to $12 per barrel.
This drastic rise in oil prices caused a huge hole in India’s import bill, with expenditure rising from $414 million in 1972-73 to an astonishing $900 million by 1973-74. This left India struggling to find alternative sources of energy and completely changed the way it had previously sourced its fuel needs.
1980: Recession in India
The Iranian Revolution of 1979 had major economic implications, not only in Iran, but around the world. This was particularly evident in India, where it triggered yet another recession due to reduced oil production.
The decrease in oil production led to an increase in global oil prices, resulting in India spending more money than usual on importing the oil that it needed. This caused a ripple effect across the country’s economy and contributed significantly to the recessionary conditions that were already present.
The situation was further exacerbated by a lack of domestic oil production as well as other economic factors such as rising inflation and stagnant wages. All these cumulatively resulted in a severe economic downturn throughout India and beyond.
Conclusion
The COVID-19 pandemic of 2020 led to India’s first technical recession in recent years, characterized by an increase in unemployment, reduced demand for goods and services, and ultimately a decrease in the number of workers employed by businesses as a way to stay afloat financially.
Poverty levels rose significantly as people lost their businesses and livelihoods.
Though the pandemic was the proximate cause of the Recession in India, there are other factors that can contribute such as bad monsoon conditions, energy crises, and global recessions.
To be officially classified as a recession, two consecutive quarters of falling economic output must be experienced; however, there is no single set of criteria used to accurately identify and measure the cause of any given recession. In order to reverse this economic downturn both domestically and globally, central banks must implement fiscal and monetary policies to stimulate growth.
Frequently Asked Questions (FAQs)
A Recession in India is a significant and sustained decline in economic activity, typically measured by a decrease in Gross Domestic Product (GDP) for two consecutive quarters or more. It often leads to a slowdown in business activities, job losses, and decreased consumer spending.
Yes, India has experienced recessions in the past. Notable recessions occurred in 1957, 1966, 1980, and more recently during the global financial crisis of 2008-2009.
Recessions in India, as in other countries, can be triggered by various factors. Common causes include a global economic downturn, high inflation, fiscal mismanagement, external shocks, and banking crises.
The duration of a recession can vary widely depending on the underlying causes and the effectiveness of government policies. Recession in India can last for a few quarters to several years. India’s past recessions have had varying durations.
Recession in India can lead to a range of economic and social impacts, including job losses, reduced consumer spending, falling business investments, lower industrial production, and increased poverty levels. The severity of these effects can vary.
The Indian government typically employs a combination of fiscal and monetary policies to mitigate the impact of recessions. These may include reducing interest rates, increasing government spending on infrastructure projects, providing financial support to affected industries, and implementing reforms to boost economic growth.
To prepare for a recession, individuals can focus on building emergency savings, reducing debt, and cutting discretionary spending. Businesses can implement cost-saving measures, diversify their customer base, and review their financial strategies.
Economic indicators such as GDP growth rates, unemployment rates, inflation, and industrial production can provide early warning signs of a potential recession. Additionally, global economic conditions and geopolitical events can impact India’s economic outlook.
Yes, the Indian government continually monitors economic conditions and takes proactive measures to stabilize the economy. However, preventing recession in India entirely is challenging, as they often result from a combination of domestic and global factors.
India’s experience with recessions may differ from other countries due to its unique economic and demographic characteristics. The frequency and impact of recessions can vary widely between nations based on their economic structures and policies.