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Growth rates across the world have plummeted because of the pandemic

In its November 2020 Monthly Bulletin, the Reserve Bank of India has a ‘nowcast’ on the Indian Economy which predicts a contraction of 8.6 % in the Indian economy during the second quarter of our 2020-21 fiscal year. This figure, as widely reported, becomes important because it indicates that the Indian Economy has entered into a ‘recession’ phase for the first time in its history. While we should be certainly worried about what this sort of data might bode for the Indian economy in the short term, we must be very careful to interpret this data with caution.

 

Growth rates across the world have plummeted because of the pandemic. India is no exception.

 

Most importantly, one must read these numbers with one eye towards the COVID pandemic. Significant parts of the world have endured lockdowns and decline in economic activity during the past calendar year at some point of time or the other. There was a sudden halt to global trade in goods with these measures which saw significant disruptions in economic activity. The quarterly growth data for both G20 and major emerging market economies indicates significant decline in GDP growth in the second quarter of 2020. India has been no exception to this trend with one of the most stringent and longest lockdowns instituted.

[Figure 1 here: OECD, G20 Economy, Major EME growth rates]

What is the technical definition of a recession?

While the entire world contemplates the alphabetical shape of the recovery path taken by different economies, we grapple with the question of whether this period of significant economic downturn is a recession and if yes, how does this compare with other recessionary episodes in history. The pandemic has led to much sharper declines in economic activity than any other financial crisis on record with a precipitous drop in not just global production activity but also major trade in goods for a significant period of time in the past calendar year. The World Bank has already pointed out that this year is poised to oversee the deepest contraction in economic activity – 5.2% – since the Second World War, with the IMF projecting output losses of approximately 28 trillion USD.

The unusual nature of this pandemic has not been lost on policymakers in applying their definition of a recession to our current predicament. One must be very careful in understanding that a “recession” has no universally accepted definition except for “a decline in economic activity that lasts more than a few months” which is the major component of most amorphous considerations around this concept. For instance, while the National Bureau of Economic Research agrees that this pandemic has created an economic downturn very different from previous ones, the unprecedented magnitude of these declines “warrants the designation of this episode as a recession, even if it turns out to be briefer than earlier contractions.”

In comparison to the United States, the European Union and UK define a recession as “two consecutive quarters of negative economic growth” as measured by seasonally adjusted Quarter-on-Quarter growth figures for real GDP. According to these standard definitions, the Euro Area has technically been in a recession thrice in the past twelve years while member nations have simultaneously differed in their dates of these technically considered “recession”, thereby pointing to the significant differences that may exist within the same region in terms of the timing and duration of recessionary phases.

 

How should we be looking at a recession, normally under the circumstances of a pandemic?

The current state of the global economy needs to be viewed very differently in terms of how we would otherwise view any other global recession. For most of us, our only first hand experience with a global recession has been the 2007-08 Financial Crisis which not only saw sharp contractions in global growth but also coincided with a global trade shock. However, as most observers and experts have already pointed out, the origin of the current pandemic makes this situation not just remarkably different from that of 2007-08, but also sharper and of far greater magnitude in terms of its real-term implications.

What should be the barometer of analysis at this point of time?

 The Ministry of Statistics in India however reports quarterly GDP growth estimates on a Year-on-Year basis for every quarter i.e. comparing the GDP of the quarter in question, with the GDP of the same quarter from the previous financial year. India’s economic contracted by 23.9% in the April-June quarter if we take a Y-o-Y measure, and by 25.9% the same quarter if we shift the barometer of analysis to a Q-o-Q measure. Under such circumstances the figure of -8.6 % becomes key in terms of how we interpret the same.

Draft 1: Season of Tricky Numbers

In its November 2020 Monthly Bulletin, the Reserve Bank of India has a ‘nowcast’ on the Indian Economy which predicts a contraction of 8.6 % in the Indian economy during the second quarter of our 2020-21 fiscal year. This figure, as widely reported, becomes important because it indicates that the Indian Economy has entered into a ‘recession’ phase for the first time in its history. While we should be certainly worried about what this sort of data might bode for the Indian economy in the short term, we must be very careful to interpret any data in this regard with a mix of caution and context.

First and most importantly, we must address the elephant in the room: what characterizes a “recession”? The simple answer is that there is no universally accepted technical definition to a recession, except for characterizing it as a decline in economic activity that lasts more than a few months. The National Bureau of Economic Research (NBER) in the United States has a committee of economists dedicated to tracking Business Cycles in the United States who classify periods as recessionary based on a gamut of macroeconomic indicators. Meanwhile, across the Atlantic, the United Kingdom and the Eurozone adopt the two quarter rule i.e. a two-quarter consecutive contraction in economic activity is classified as a recession. This degree of subjectivity has led us to see different phases in some of the largest economies in the world based on quarterly growth data, specially in the last decade and a half.

Secondly, one must read any growth numbers released for 2020 with one eye towards the COVID pandemic. Significant parts of the world have endured lockdowns and decline in economic activity during the past calendar year, with a sudden halt to global trade in goods with these measures which saw significant disruptions in economic activity. This halt in virtually most areas of the global economy are what have set this pandemic induced recession apart from previous episodes. Never before have we seen such a simultaneous and large scale shut down in the global economy before, even in the middle of the World Wars. ­At the global level, the World Bank has already pointed out that this year is poised to oversee the deepest contraction in economic activity – 5.2% – since the Second World War, with the IMF projecting output losses of approximately 28 trillion USD. Both these numbers are clear indicators of us being in the midst of a global recession and the evidence is unequivocal.

The quarterly growth data for both G20 and major emerging market economies indicates significant decline in GDP growth in the second quarter of 2020. India has been no exception to this trend with one of the most stringent and longest lockdowns instituted.

[Insert figure here]

The Indian economy saw a 70 day nationwide lockdown which wiped almost a fourth of total economic activity from the previous quarter making it one of the worst performers among major economies for the second quarter of the 2020 calendar year. As the economy recovers from the effects of this lockdown, business confidence, freight volumes have shown signs of recovery with some degree of movement toward their pre-pandemic levels.

The numbers which might be released by the Ministry of Statistics at the end of November become interesting and watch-worthy in this regard. The MOSPI reports quarterly GDP growth estimates on a Year-on-Year basis for every quarter i.e. comparing the GDP of the quarter in question, with the GDP of the same quarter from the previous financial year. India’s economic contracted by 23.9% in the April-June quarter if we take a Y-o-Y measure, and by 25.9% the same quarter if we shift the barometer of analysis to a Q-o-Q measure. Hence any headline number which might be released by the Government will compare our level of economic activity in July-October, 2020 versus the same period in 2019.

The distinction between these two metrics can be clearly seen in the figure below which tracks India’s quarterly growth data based on the two metrices mentioned in the previous paragraph.  We see the data showing significant level of divergence based on the unit of reportage that we might want to consider. We see that the quarterly growth rates compared to the previous year’s GDP always overshoots the estimates which take the previous quarter as the baseline. Under such circumstances the figure of -8.6 % becomes key in terms of how we interpret the same.

This interpretation has two perspectives to it. Firstly, from a quarterly perspective, a more gradual normalization of economic activity will show sharp economic growth rates as compared to the previous quarter, thereby pointing to the normalization of economic activity in the economy. This number can range anywhere between 9% to 15% compared to the April-June quarter (where we had an ongoing lockdown) which would be historic in its own right as the highest quarterly growth rates recorded in the history of the country, while only capturing a rebound effect of an economy finding its feet after such a massive lockdown. This is important because we would not have seen these numbers even in periods which would have ordinarily considered to be golden periods of Indian growth.

The more conventional reportage of the MOSPI where the -8.6% figure might come from would indicate that while the economy is recovering, it is still some time off before we might reach pre-pandemic levels of economic activity and growth. While Y-o-Y can tend to overestimate quarterly growth metrics in the upward direction, we can see the same phenomenon playing out in the aftermath of a global pandemic and a stringent lockdown. The longer it takes for the economy to surmount this blip, the more painful will the recovery process be.  This is where government policy is key. By construction, most stimulus measures announced by the government have either been long term of more supply-side centric. Between the RBI easing credit supply into the economy and the government announcing schemes aimed at MSMEs and foreign manufacturers to set up shop in India, the measures would only begin to show fruition in the medium term or beyond a horizon of 12-18 months realistically. None of these measures are to boost short term demand or use demand-side measures to prop the economy up which would take a marginally shorter time to materialize and might have seen India report even higher growth numbers.

How do we then perceive the question of whether or not India is in a “technical recession” or not? On the basis of any subjective and broad-based analysis of the economy, the pace and magnitude of the decline in economic activity clearly points to the fact that the economy is/has been in a recession since March. However our numbers will probably not pass the two quarter test in terms of classifying a technical recession, simply because the restarting of such a large economy by India should push growth activity from the previous quarter only back up.

Does this mean that everything is hunky dory in the Indian context? Absolutely not. The ability of the government return to the pre-pandemic levels will still depend largely on a sound policy mix and sustained large injections of purchasing power on the consumer side, and incentives on the producers’ side to keep many ailing industries afloat.

Draft 2

In its November 2020 Monthly Bulletin, the Reserve Bank of India has a ‘nowcast’ on the Indian Economy which predicts a contraction of 8.6 % in the Indian economy during the second quarter of our 2020-21 fiscal year. This figure, as widely reported, becomes important because it indicates that the Indian Economy has entered into a ‘recession’ phase for the first time in its history. While we should be certainly worried about what this sort of data might bode for the Indian economy in the short term, we must be very careful to interpret any data in this regard with a mix of caution and context.

 

First of all we must be wary of how differently the MOSPI and the CSO in India report their headline growth numbers for the economy each quarter, from other major economies in the world. This difference was the source of much confusion and policy headspace which engulfed Indian media and social media around July-August. Most major economies in the world report their growth numbers at a quarterly level with a Quarter-on-Quarter basis (measuring the growth of the economy in the current quarter as compared to the previous one). The MOSPI however reports quarterly GDP growth estimates on a Year-on-Year basis for every quarter i.e. comparing the GDP of the quarter in question (2020 July – September), with the GDP of the same quarter from the previous financial year (2019 July – September). India’s economy contracted by 23.9% in the April-June quarter if we take a Y-o-Y measure, and by 25.9% the same quarter if we shift the barometer of analysis to a Q-o-Q measure. Hence any headline number which might be released by the Government will compare our level of economic activity in July-September, 2020 versus the same period in 2019.

The distinction between these two metrics can be clearly seen in the figure below which tracks India’s quarterly growth data based on the two metrices mentioned in the previous paragraph.  We see the data showing significant level of divergence based on the unit of reportage that we might want to consider. We see that the quarterly growth rates compared to the previous year’s GDP always remain above the estimates which take the previous quarter as the baseline. Under such circumstances the figure of -8.6 % becomes key, subject to interpretation.

Firstly, from a quarterly perspective, a more gradual normalization of economic activity will show sharp economic growth rates as compared to the previous quarter, thereby pointing to the normalization of economic activity in the economy. The dramatic contraction of 25% which India saw between April and June was a combination of the lockdown along with the declining growth rates of the country pre-COVID. Therefore when we are looking at data for the next quarter, where the level of economic activity slowly began to head back to more normal levels, we would expect to see a sharp jump in quarterly growth rates. This sharp jump can range anywhere between 9% to 15% compared to the April-June quarter (where we had an ongoing lockdown) which would be historic in its own right as the highest quarterly growth rates recorded in the history of the country, while only capturing a rebound effect of an economy finding its feet after such a massive lockdown. This is important because quarterly growth rates of even 4% have not been recorded in periods touted as golden phases of economic growth. The figure would help people understand exactly how fast and robust has the recovery process begun.

 

The more conventional reportage of the MOSPI where the -8.6% figure might come from would indicate that while the economy is recovering, it is still some time off before we might reach pre-pandemic levels of economic activity and growth. This figure would indicate that we have shrunk by almost 9% compared to a similar time last year, despite making considerable strides toward normalization in the last three months compared to the lockdown phase. While Y-o-Y reporting can tend to push quarterly growth metrics in the upward direction, we can see the same phenomenon playing out in the reverse direction in the aftermath of a global pandemic and a stringent lockdown . The longer it takes for the economy to surmount this blip, the more painful will the recovery process be.  This is where looking at government fiscal and stimulus policy is key. By construction, most stimulus measures announced by the government have either been long term of more supply-side centric. Between the RBI easing credit supply into the economy and the government announcing schemes aimed at MSMEs and foreign manufacturers to set up shop in India, the measures would only begin to show fruition in the medium term or beyond a horizon of 12-18 months realistically. None of these measures are to boost short term demand or use demand-side measures to prop the economy up which would take a marginally shorter time to materialize and might have seen India report even higher growth numbers.

 

Almost surely, every media house article will be aimed at the question of whether India is in a recession. The commonplace discourse is already setting in that India has set into a “technical recession”. While the entire world contemplates the alphabetical shape of the recovery path taken by different economies, we grapple with the question of whether this period of significant economic downturn is a recession and if yes, how does this compare with other recessionary episodes in history.

 

For that we must address the elephant in the room: what characterizes a “recession”? The simple answer is that there is no universally accepted technical definition to a recession, except for characterizing it as a decline in economic activity that lasts more than a few months. The National Bureau of Economic Research (NBER) in the United States has a committee of economists dedicated to tracking Business Cycles in the United States who classify periods as recessionary based on a gamut of macroeconomic indicators. Meanwhile, across the Atlantic, the United Kingdom and the Eurozone adopt the two quarter rule i.e. a two-quarter consecutive contraction in economic activity is classified as a recession. This degree of subjectivity has led us to see different phases in some of the largest economies in the world based on quarterly growth data, specially in the last decade and a half.

 

The pandemic has led to much sharper declines in economic activity than any other financial crisis on record with a precipitous drop in not just global production activity but also major trade in goods for a significant period of time in the past calendar year. The World Bank has already pointed out that this year is poised to oversee the deepest contraction in economic activity – 5.2% – since the Second World War, with the IMF projecting output losses of approximately 28 trillion USD. All the evidence at the global level points to a global economic recession.

 

The quarterly growth data for both G20 and major emerging market economies indicates significant decline in GDP growth in the second quarter of 2020. India has been no exception to this trend with one of the most stringent and longest lockdowns instituted. The Indian economy saw a 70 day nationwide lockdown which wiped almost a fourth of total economic activity from the previous quarter making it one of the worst performers among major economies for the second quarter of the 2020 calendar year. As the economy recovers from the effects of this lockdown, business confidence, freight volumes have shown signs of recovery with some degree of movement toward their pre-pandemic levels.

 

How do we then perceive the question of whether or not India is in a “technical recession” or not? On the basis of any subjective and broad-based analysis of the economy, the pace and magnitude of the decline in economic activity clearly points to the fact that the economy is/has been in a recession since March. The extent of the drop in levels of activity and the magnitude of output that might potentially be lost in such a short time points to the existence of a deep recession, coexisting with what is going in the rest of the global economy.

 

However our numbers will probably not pass the two quarter test in terms of classifying a technical recession, simply because the restarting of such a large economy by India should push growth activity from the previous quarter only back up. The instances of any economy following a contraction of 24% with another quarter of negative growth are almost unheard of and would only indicate that the economy is literally in a state of free-fall. This can be imagined in the context of the growth data from many of the Euro Area economies which were said to be in technical recessionary phases during the last decade, as part of the Eurozone crisis. These economies did not experience lockdowns or wholesale shutdowns in global trade networks which would propel the pace of contraction and their gradual contraction stemmed from multiple other factors, unlike the global economy’s current predicament. In terms of technicalities, most of these economies not only passed the two quarter rule of contraction (negative growth rates) across significant stretches of time (such as Greece) which implied that the decline in activity was prolonged over time rather than of steep magnitude as in the current pandemic.

 

 

Does this mean that everything is hunky dory in the Indian context? Absolutely not. The ability of the government return to the pre-pandemic levels will still depend largely on a sound policy mix and sustained large injections of purchasing power on the consumer side, and incentives on the producers’ side to keep many ailing industries afloat. We mut keep an eye out on higher frequency data such as indices of industrial production, business and investor confidence indices, freight volumes to more accurately judge the level of recovery that the Indian economy is currently undergoing.

Category: Pandemic | Published on: December 15, 2021