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  • 10 December, 2019

  • Min Read

Slowdown can be early warning for growth recession

Syllabus subtopic: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.

Prelims and Mains focus: About the growth recession and its impact on the Indian economy

News: The term ‘growth recession’ has gained traction after comments made by former RBI governor Raghuram Rajan. The question is whether the current economic slump is a recession, an economic slowdown or a growth recession.

What does growth recession mean?

Growth recession is a situation in which growth is slow for a few quarters but not negative to be a technical recession, when low growth pushes up unemployment. The term was coined by Solomon Fabricant. Growth recessions are more common than recessions as growth has often slowed at different periods in various countries. An indicator of growth recession is when the growth rate reduces substantially, coinciding with a job contraction. It combines the feature of both an economic slowdown and a recession as growth slows while the economy experiences job contractions just as during an economic recession.

What about recession and slowdown, then?

During a growth recession the economy continues to expand, albeit at a lower rate. That is, the economy experiences slow jobless growth. During a recession both the size of the economy and available jobs contract simultaneously. The difference with respect to an economic slowdown is in terms of employment: due to significant costs of hiring, companies are reluctant to cut back on employment as they expect a cyclical reversal. Therefore, as opposed to growth recession and recession, an economic slowdown does not always imply a reduction in the number of jobs.

Is India experiencing a growth recession?

The jury is out on whether India is experiencing a growth recession as we don’t have credible data on the number of jobs available. Payroll data suggests that there continues to be some job creation in the formal economy. Employment data from the Centre for Monitoring Indian Economy shows substantial deviation over the last couple of months.

Are there similar instances in the past?

India has experienced many growth recessions and slowdowns in the last two decades. A slowdown can be an early warning of a growth recession. In 2002, we experienced a slowdown that was reversed by 2003. There was a slowdown in 2008 due to the global financial crisis, which was followed by expansionary fiscal and monetary policy to address this. The 2011-2013 slump was a severe instance of growth recession as unemployment rose sharply and growth collapsed for successive quarters.

When will the recovery cycle begin?

Many have indicated that recovery will be slow and it will be two more quarters before we return to 7% growth. Recent evidence suggests a V-shaped recovery is unlikely and we may experience sub-6% growth this quarter and the next. The finance ministry has initiated policy interventions, including a corporate tax cut. Such interventions will start showing an impact from the second quarter of 2020 and the next fiscal might see a growth rate of 7%.

Source: mint

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