What are the reasons for recession in India’s economy in 2020?

recession india's economy 2020

what are the reasons for recession india's economy 2020

Let us clarify the definitions of Recession and Depression. 

What is a Recession?

A recession is a downward trend in the business cycle, one that is characterized by a decline in production and employment. This trend lowers household income and spending, which consequently causes many businesses and households to delay making large investments or purchases. 

What is a Depression?

Depression is a major downswing (far more severe than a downward trend) in the business cycle; one which is characterized by sharply reduced industrial production, widespread unemployment, a serious decline or cessation of growth in construction, and great reductions in international trade and capital movements.  

Is There a Real Difference between Recession Vs Depression? 

Another difference between a recession and a depression, in addition to the severity and effects of each, is that recessions may be limited geographically (limited to a single country), whereas depressions (such as the Great Depression of the 1930s) can occur across many nations. 

Impact of COVID 19 (Corona Virus) on Indian Economy

impact of covid-19 on Indian economy 2020

We are in mid-November 2020, the data published by the various newspaper about the data provided by the central bank deputy governor with the statement that the Indian economy possibly shrunk by around 8.5% over the previous two quarters, which is proven to be India is already in recession. 

Statements from RBI or Central Bank of India prove that the last two-quarters economy has been on the decline which is a clear indication of recession in the Indian economy.  

“India has entered a technical recession in the first half of 2020-21 for the first time in its history,” the authors wrote. The government is due to publish official statistics on November 27. 

What are the causes of this recession in mid-2020?

The Indian economy likely entered a technical recession for the first time in history at the end of the first half of 2020-21, according to the Reserve Bank of India. After an unprecedented decline of 23.9 percent in GDP in April-June as estimated by the National Statistical Office on August 31, the central bank has ‘nowcast’ that Gross Domestic Product (GDP) for July-September quarter is set for a contraction of 8.6 percent.  

Covid-19 pandemic had kept the economy shut for almost a year now, however, if we go into detail and do a proper analysis of the state of this recession. It is not only Covid-19, however, but there had also been signs of the downturn even before the Covid-19 hit India. 

If other reasons for the poor performance of the Indian economy are:- 

  • Crude Prices 
  • Ban on old currency bills/notes 
  • GST implementation 
  • Auto industry impact 

Crude Prices

Issues like Crude Prices also had a major impact, due to prolong lower crude prices let many companies let go of many jobs and streamline operations, learn to live in a low crude price environment. Those companies started to pull back with the huge downfall of crude prices, and many companies in public and private sectors were trying to come to terms with the realistic crude prices and were in recovery mode, by end of 2019, when the big blow of Covid-19 hit very hard to wipe away all the recovery created by many companies. 

Ban on old currency bills (Note ban in Indian terms, the note is nothing but a currency bill in India)

We all know, that the ban on those old Rs 500 and Rs 1000 currency bill had a huge impact on the Indian economy, it could have yielded some positive vibes in removing the black money or non-tax paid money to bring to surface from all the hidden places. However, it took too long to recover, many such instances influenced the economy. As we know cash is the main mode of transactions in India, many middle-class families had issues to use the funds struck in their bank accounts, where it impacted hugely as there was not enough money in hand to spend to keep the ball rolling in the economy. 

GST Implementation

It was a huge move to get the economy in seamless growth mode, however, in the short-term it impacted the struggling economy and it took time to recover. When everything was falling in place, there were many subsequent effects. 

Auto Industry slowdown

The auto industry contributes to a great part of the Indian economy, as mentioned above a couple of other factors like the currency ban and GST had a crippling effect on the auto industry. Also due to the crude prices, the world economy went in slow-growth mode before covid-19, which had an impact on the Indian Auto industry, which was already struggling. Domestic consumption of cars and bikes had fallen drastically before covid-19, which had severed the economy already. 

Indian economy in recent times, rather say past 2-3year had many such surprises blows and now it seems like the Indian economy is heading into depression, some say it could take 2-3years to recover and come out of negative growth.  

India's past recessions and it is progress towards depression.

Previous contractions in India’s GDP had common culprits – weak monsoon and energy crisis. But if India’s FY21 GDP contracts, as projected by analysts, its cause would be entirely different. 

India is no longer staring at a recession but a ‘depression’. It is believed that the government may start to face difficulty in paying salaries. Indian economy is huge and depression-like the situation will be a very hard blow, and not easy to get back to normal soon. 

It is always believed that India had been a growing economy all long, since its independence in 1947, however, there could have been slow or ups/downs but never had a long-term downturn.  

The number suggests that the Covid-19 pandemic could be taking the Indian economy into a ‘depression’ for the first time in its history, a possibility flagged by several economists. 

Factors or evidence for the depression

One survey conducted by CESP involving 1,000 persons interviewed,  

says that around 80 percent have put off any plans of buying non-essential goods like expensive electronic durables or changing to new furniture or buy any other expensive non-essential goods. 

Direct market sentiments from the retail sector that the economy is already in recession with many shops or outlets saying their sales have dropped almost 50% and some are finding it hard to pay off loans or debts.  

Many such individuals have started to reduce borrowings to buy a house or do any kind of investment with the borrowed money, as the future looks unclear. This has resulted in a drop in sales of housing and impacting the real estate sector badly. 

The auto industry is offering many promotions or offers; however, it seems the sales growth is does not seem to be near, and struggle and survival are what all in the auto industry are talking about.  

The Government of India must act fast and listen to those who are in key economic teams and keep a watch on-ground realities, about how India’s economy is coping is key to recover India’s economy fast enough. 

If India’s core recovery team misses the signals on-ground, we may be heading towards to see, many starving to death, a huge increase in crime rate, civil unrest, the failure of law and order, and total failure of the system.  

Hope transparent recovery measures are implemented to put back India’s economy into the recovery stage before it falls off the cliff and it would be hard to bring back to the olden days of super growth rates soon.