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How is this recession going to be different from our past downturns

 

Coronavirus outbreak is, without a doubt, the worst health crisis of our times. And this pandemic has affected the society in a way, which has left everyone – people of all age groups on the edge of their seat as the young peeps are more likely to be infected, but the older guys are more liable to die due to the infectious disease. The outbreak has left the world in an economic crisis and India is in the same boat.

World Bank has predicted that 92.9 percent of countries will all report recession in 2020. As per the recent studies, the unemployment rate in India is at 27.11 percent and a 3.2 percent contraction in GDP is expected in FY21. India stares at the 4th recession after independence and this is set to be different from our previous encounters.

 

Why will this Recession be different?

The reasons for this recession being called a unique one are threefold.


 

This recession will have a widespread impact as this is bound to be a global one! This is the first time the world will see such highly synchronized recession.  This would be the largest global recession in history, outdoing the record set by the Great Recession, 2008.

Another distinct feature of this recession is marked by its cause. The past three recessions in India were all due to unfavourable monsoon, which affected the agriculture sector adversely. This is the only one till now that has been triggered exclusively by a pandemic and the actions taken by the country to contain it. All the other global recessions were driven by reasons such as financial crisis, debt crisis, policy change as a response to high inflation, and alarming oil prices.

Lastly, this recession is unique as it has caused a dual supply-demand shock.

 

The outbreak of coronavirus has disrupted the global supply chain. Social distancing and lockdowns have decreased labour supply. Many of the raw materials required for manufacturing are imported from different countries and the finished or the semi-finished goods may be required to be transported to some other country. The reliance on logistics makes import, manufacturing, and export difficult tasks in case of such disruption to the global supply chain.

This outbreak brought urban activities to a sudden halt, primarily causing a sharp plunge in the consumption of non-essential goods. Lockdown led to salary cuts and lost jobs which meant that many families had to rely on their reserves. Household non-essentials purchases meant digging into these precautionary savings, which implied lesser demands.

Firms lack the liquidity to fulfil commitments while facing lower demands. Workers who lose their jobs due to closing businesses do not have a source of income and therefore lower their consumption, eventually depressing aggregate demand. The investment of many firms and the spending of many households depend largely on cash flow. A large drop in demand thus forces these firms to close. This leads to a rise in lay-offs and a further drop in consumption. The economy enters a depressing loop!

 

 

  •                                                                                                      -Ishani Singh



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