Recession, slowdown or reform?

Declining growth rates, stagnating automobile industry and mounting non-performing assets in banks leading to loss in consumer confidence have caught the eye of economists, analysts and media in India.

'India entering a recession cycle', 'growth slowdown' are some of the phrases that have been repeatedly caught the common person's attention. It is not clear if it is recession or slowdown or structural reform? Let us understand the dynamics of Indian economy at present.

To start with, what is meant by recession? Recession is downturn in GDP growth rate or negative growth rate for three consecutive quarters.

There may be fall in investment, slowdown in production and falling consumer demand and mounting unemployment. Slowdown, on the other hand, is a situation in which GDP growth slows but does not decline. To be more precise it is the slowing down of economic activity due to fall in productivity of the employees.

In economics, recession is part of business cycle where the growth rate starts to decline and sometimes may be accompanied by rising unemployment.

Prolonged recession leads to depression which will have a greater global impact i.e. to say entire world comes into a depression situation.

Having classified the economic terms, what we see from Indian scenario is that GDP growth rates are falling. According to Reserve Bank of India (RBI), last financial year growth rate closed at 6.8%. And hit an all-time low of 5% in second quarter this FY 2019.

The scenario is similar globally too. Advanced economies like the USA, China, and the UK experienced slowdown in growth from second quarter onwards. Rising oil prices and international political scenarios lead to such global slowdown.

Is it really a recession? From February 2019, Indian economy growth rates have been slowing down, but growth rates have not been in negative values, so we cannot actually term it as recession.

To put it simply, India is not completely in a recession cycle, but in a quasi-recession period. There has been a decline in production due to deficiency in demand. The RBI responded by following a cycle of interest rate cut policy.

The economics behind fall in interest rates at creating investment leading to more production. Higher production leads to employment generation and thus boosting up the demand.

The major reasons for Indian investors, economists and analysts to foresee recession is because of following reasons: fall in consumer demand; the so-called 'ease of doing business' is nowhere to be seen or implemented as firms are facing legal challenges in setting up industries or for say attracting FDI inflows; further, major sectors such as automobile industry has been showing stagnant sales - which could be offshoot of rise in oil prices as well as unemployment.

Other challenges could be traced from the fiscal front. This year, the budget announced bold measures such as Pradhan Mantri Kisan Samman Nidhi (PM KISAN) - providing direct cash transfers to small and marginal farmers, Ayushman Bharath - for health insurance coverage up to Rs 5 lakh per person, Pradhan Mantri Shram Yogi Madhaan Yojana for unorganised pension scheme, Make in India II etc, - all these schemes are sucking out a large amount of revenues from the revenue pool.

Hence making Fiscal Deficit to shoot up, crossing the limits of Fiscal Responsibility and Budget Management act targets of containing fiscal deficit at 3%. Mounting to this, Goods and Services Tax collections have gone down due to non-performance of industrial sector and deficient demand at grass root level.

These challenges present in the economy pushes our mental faculties to think that slowly a recession is ahead of us. But in reality, it is a mere slowdown. For recession to occur in full swing there has to be continuous fall in growth rates and might even being negative at some level.

Mostly recessions set in where there is an adverse demand shock and mounting unemployment. But from Indian perspective, there is deficient demand but not an adverse demand shock. Now the question arises are these changes in GDP growth rate due to reforms in the economy?

Since 2014, India has embarked on a structural reform journey. Reforms such as Demonetisation of 500 and 1000 rupee notes to curb black money, introduction of Goods and Service Tax (GST), merger of Public Sector Banks (PSB's), etc. have been implemented.

This has brought up new challenges to which economy is currently adjusting to. In light of all this, the honourable Finance Minister has announced that India will achieve the target of 5 trillion USD economy by 2024.

It seems bizarre that no matter what, when the economy is on a growth path, it will keep on growing at a pace, but the timeline of growth may differ due to new policies.

Adding to this, data reveals low GST collections, revenue loss for the Centre as well as States, fiscal decentralisation uncertainty still unknown until Fifteenth Finance Commission submits its recommendations. In a way, these reforms are creating growth of slowdown.

The government, along with the RBI, are taking measures to revive the growth rates. Steps such as Asset Quality review of Non-Banking Financial Companies, banks; BASEL norms for maintaining capital adequacy; merger of banks in order to pool risks; interest rate cuts to infuse liquidity; focus on strengthening judiciary to complement ease of doing business; special policies aimed at factors of production in the economy; focus on climate change and creating conducive environment for higher production; and cut in corporate taxes, to make India competitive in global arena to attract Foreign Direct Investment (FDI) are all being implemented to revive the growth rate.

What next is a question that both government and the RBI have to answer in the coming quarters in order to revive the growth rates. To put it simply, 'chot pe marham lagana' has started.

However it's ambiguous to say whether the slowdown in GDP growth rate is due to misconception of recession or slowdown or reform.

Macroeconomic parameters such as inflation, interest rates, current account deficit, fiscal deficit, taxes have to be aimed at in order to boost up the economic growth. Growth is yet to revive but at a slower pace.

(The writer is a development economist and an alumna of London School of Economics)