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When and how does a recession occur?

A recession occurs when a fall in a measure of aggregate economic activity causes cascading declines in the other key measures of activity, according to a 2006 working paper co-authored by Delhi School of Economics professor Pami Dua. Recession is characterized by a domino effect—when a dip in sales causes a drop in production, it triggers a decline in employment and income. This decline, in turn, results in a further fall in sales as consumer confidence dips and people are reluctant to make purchases—resulting in a vicious cycle and, ultimately, a recession. This could again lead to capacity and job cuts.

How can a recession be identified?

There is no single marker that can be a barometer for recession. Relevant measures include output, employment, income, and wholesale and retail trade. Because of its simplicity, the most popular definition for determining the onset of recession is two consecutive quarters of negative GDP growth. However, when a decline in GDP does not trigger the characteristic vicious cycle of falling employment, income and sales, it does not constitute recession. The supply of money or credit, government spending and tax policies, and relations among prices, costs and profits help predict downturns and upturns.

What signals point to the end of a recession?

A business cycle recovery starts and recession ends when the vicious cycle is broken and an analogous self-reinforcing virtuous cycle begins—with increases in output, employment, income and sales feeding into each other. However, a rise in GDP that does not initiate such recovery may just be part of a double-dip recession.

(Graphic: Paras Jain/Mint)
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(Graphic: Paras Jain/Mint)

So what is an economic slowdown?

Economic slowdowns begin with reduced but still positive growth rates and can eventually develop into recessions. Some slowdowns, however, continue to exhibit positive growth rates and are followed by upturns in growth, not recessions. Dua’s paper documents two short recessions India experienced, one from March 1991 to September 1991 and the other from May 1996 to November 1996, and a very long expansion from March 1980 to March 1991. It also describes four slowdowns between 1990 and 1998.

Is India facing a recession?

We may be close to a manufacturing recession, as can be seen from the auto sector where negative growth in sales has resulted in reduced production, which is leading to job cuts, with income implications. The income loss may trigger lower sales in other sectors, creating feedback loops. Estimates released Friday show manufacturing GVA growth in Q2 turned negative at -1% from near-stagnant growth of 0.6% in Q1. The weakness comes against real credit that slowed in October to 8.2%.

Puja Mehra is a Delhi-based journalist

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