Rising inflation rates and negative gross domestic product (GDP) data are leading many Indians to worry about another recession.
This might be a valid concern—since the Indian economy appears to be slowing down after a moderate period of expansion. A full understanding of what a recession is provides some context.
In basic terms, a recession is when the economy’s performance decreases for an extended period of several months, marked by GDP contraction, higher unemployment rates and lower consumer spending.
During a recession, people may experience significant impacts on their daily lives. Everything from groceries to shoes is often more expensive, and workers may have less job security. Here’s what you should know to weather the storm.
Recession Definition
Economists have varying opinions about how to define a recession. The Reserve Bank of India (RBI) defines recession as a period of prolonged decline in output experienced across much of the economy. To be more concrete, commentators often consider a recession to be in progress when total output (real gross domestic product) has declined for at least two consecutive quarters.
Recessions are also defined as the period between the peak of economic activity and the economy’s lowest point. They’re usually relatively brief. Since World War II ended, the average recession has lasted 10 months.
The RBI doesn’t usually call an economic decline an actual recession until six to 18 months after the recession’s beginning. That means consumers could be experiencing its effects long before it becomes official.
What Happens During a Recession: 5 Indicators
There is no one definitive sign that a recession is occurring, but NBER’s Business Cycle Dating Committee looks at the following indicators when deciding to declare a recession:
Personal Income Minus Government Transfers
When the economy is in a recession, incomes stagnate or drop due to employers slashing hours or reducing their workforce. Income inequality may also worsen, as the wealthy are often less impacted by a recession than the middle or lower classes.
Employment
In a recession, the unemployment rate—the percentage of the total labor force that is unemployed but actively seeking work—tends to increase as companies cut back on staff to reduce their expenses.
For example, the Centre for Monitoring Indian Economy (CMIE) reported that unemployment reached a high of 15.53% in April 2020, the peak of the recession during the Covid-19 pandemic.
Industrial Production/Manufacturing
In response to the rising cost of raw materials, businesses usually cut back on production during a recession, and manufacturing activity declines. This change can lead to a decrease in exports and an overall decrease in economic activity.
For example, India faced a recession post-China and Pakistan war in 1962 and 1965 respectively. The country later faced two terrible droughts that affected food grain production, which dropped by around 20%. The GDP growth was negative 3.66%.
Consumer Spending
One aspect of consumer spending—retail sales—is the total amount of money consumers spend on goods and services. During a recession, retail sales generally decrease as people have less money to spend. As retail sales decline, the impact on the economy can be substantial. Businesses may have to lay off workers to reduce costs, and some businesses may close.
How a Recession May Affect You
Whether an economic downtown has officially been declared a recession or not, the impacts of an impending recession can affect your daily life. Some common ways people are impacted include:
- Cost of living increases. When inflation contributes to a recession, you may find that household essentials like groceries, gasoline and clothes are more expensive than they used to be. Higher prices make it harder to make ends meet, so individuals often turn to strict budgets and cuts in discretionary spending.
- Job loss or reduction in hours. In a recession, companies often reduce their staffing levels to save money. You may risk losing your job or experiencing a reduction in hours.
- Difficulty finding employment. For a while now, workers have controlled the employment market. They could secure new roles with higher salaries and more perks as employers competed for a limited pool of workers. During a recession, that’s likely to change, with competition for the few opening roles tougher and the ability to find a new job taking significantly longer.
Recessions are common—they happen every few years after the economy reaches its peak. Although it can be scary if you haven’t experienced one before, you can get through most economic changes by taking steps like planning, saving and reducing your spending.
