IAS Gyan

Daily News Analysis

Technical recession

19th November, 2020 Economy

What has the RBI cautioned about GDP decline amid the pandemic, and what lies ahead?

The story so far: The Reserve Bank of India’s (RBI) latest monthly bulletin features an article ‘An Economic Activity Index for India’, which projected that India’s GDP (Gross Domestic Product) contracted by 8.6% in the July-September quarter of the financial year ending in March 2021.

  • Thus, “India has entered a technical recession in the first half of 2020-21 for the first time in its history with Q2:2020-21 likely to record the second successive quarter of GDP contraction.

What is a technical recession?

  • A technical recession is a term used to describe two consecutive quarters of decline in output.
  • In the case of a nation’s economy, the term usually refers to back-to-back contractions in real GDP.

Difference between a ‘technical recession’ and a ‘recession’

  • Former term is mainly used to capture the trend in GDP, the latter expression encompasses an appreciably more broad-based decline in economic activity that covers several economic variables including employment, household and corporate incomes and sales at businesses.
  • Another key feature of a technical recession is that it is most often caused by a one-off event (in this case, the COVID-19 pandemic and the lockdowns imposed to combat it) and is generally shorter in duration.

Which are some of the other economies to have recently experienced a technical recession?

  • The COVID-19 pandemic has had a devastating impact on economic activity worldwide.
  • Indonesia, for instance, slid to a recession for the first time in two decades as real GDP in Southeast Asia’s largest economy shrank 3.49% in the three months ended September.
  • The country had last experienced consecutive contractions in the wake of the Asian financial crisis in the late 1990s.
  • The U.K. entered a recession when its economic output contracted by a record 21.7% in the April-June quarter. Britain’s GDP shrank by 1.6% in the first quarter of 2020.
  • Brazil’s economy also experienced a 11.4% contraction in the three months ended June, following a 0.3% fall in output in the first quarter, pushing it into a recession.

What does the technical recession presage for the Indian economy’s outlook?

  • The central bank has also warned of “formidable” risks to this upbeat outlook, the foremost being “the unrelenting pressure of inflation”.
  • The RBI has cautioned that there is a real threat that price pressures could become more generalised, undermining the credibility of policy interventions.