“What we have in India is not a double-dip recession. It is a cyclical slowdown, though we may not see a V-shaped recovery”. If pronouncements such as this on television would have foxed a layman a few years ago, they no longer do.

Thanks to the much-analysed global credit and debt crisis, terms such as recession, slowdown and business cycle are today thrown around even in casual conversation. But is their meaning truly understood? What is the real definition of a recession? How is it different from a slowdown? And how many of each phenomenon has India experienced?

These distinctions are the subject of the paper — Business and growth rate cycles in India (Working paper No. 210) from the Centre for Development Economics, Delhi School of Economics. In it, authors Pami Dua and Anirvan Banerji start by noting that business cycles are a standard feature of every market economy. A business cycle essentially consists of a sequence of changes with expansion at about the same time in many economic activities, followed by contraction and revival once again.

Domino effect

What the authors stress throughout the paper is that, to describe a downturn as a ‘recession', you need more than the simple yardstick of declining GDP or output commonly used by market commentators.

Instead, an economy can be said to be in a recession only if several economic indicators pertaining to output, employment, income and trade decline in a sort of domino effect.

In a typical downturn, a dip in sales may force a decline in output, with this snowballing into rising unemployment and lower income levels. All this feeds a vicious cycle that can be termed as a recession.

This more rigorous definition of recession, also used by the National Bureau of Economic Research, rubbishes the simplistic notion that a country is in ‘recession' if it experiences two consecutive quarters of falling GDP. Thus, television anchors need not anxiously scan the quarterly GDP release each quarter to find out if the US economy is still in ‘recession' or has made a miraculous overnight recovery.

Once recession is defined in this more broad-based way, it also automatically eliminates phenomena such as ‘jobless recovery' and ‘double-dip'.

After all, if the very definition of recovery incorporates an improvement not just in GDP, but also in employment, income and trade indicators, where is the question of ‘jobless' recovery?

Further, in every market economy, a few quarters of strong GDP growth may be followed by periods with marginally lower or flat output due to the base effect. These blips should not immediately lead to the panic buttons being pressed on ‘double-dip' or recession.

Another argument that the authors make in favour of using many economic indicators and not just a single one to diagnose a recession, is that current economic data is often provisional.

What if, after revision, the final GDP number shows a marginal growth instead of a decline? Then, one may well have to re-label a recession as a recovery!

Growth cycle

In the Indian context, it is also necessary to understand the distinction between economic cycles and growth cycles. Some economies, such as Japan and Germany in the post-war period, can experience prolonged periods of growth, where the classical recessionary scenario never seems to materialise.

Therefore you have several years of growth, with a few ups and downs in the rate of expansion within this ‘growth cycle'. The slowdowns and speed-ups that punctuate such growth cycles, the paper states, should not be measured on the basis of point-to-point changes. Instead, it suggests using a smoothed growth rate — the ratio of the latest month's output relative to the preceding 12-month average.

Did India suffer?

So, if you apply these more rigorous measures, how often did the Indian economy experience a slowdown and when did it actually slip into recession? Well, analysis by the authors shows that we haven't had a real recession since 1996. In fact, the Indian economy witnessed just two recessionary phases in the nineties — in early 1991 and late 1996. Both were short-lived, lasting only for seven months at a time. Data since the 1960s also shows that the expansionary phases in the economy lasted much longer than the recessionary ones. An average contraction lasted 10.4 months, but an expansion ran on for a good 51.8 months.

But growth rate cycles — speed-ups and slowdowns in the rate of growth — have been all too common since India became a full-fledged market economy in the early nineties.

Post 1991, data compiled by the paper shows, a slowdown has hit the economy once in every 2-3 years. The slowdown precipitated by the global credit crisis of 2008 was the longest since the mid-eighties, lasting a full 24 months from its peak in January 2009 to its trough in July 2010.

Business as usual

In fact, India's slowdown phases, on an average (17 months), have lasted slightly longer than the speed-up phases (14.5 months) in recent years.

The point that the paper drives home actually is that all the excitement, worry and fear surrounding economic cycles may be a bit overdone. If you have a market economy, you are going to have phases of more rapid growth followed by those of sluggish growth.

Businesses have to factor this into their calculations as they plan their investments and capacity additions.

And investors have to factor them in when they invest in equities or bonds. Business cycles are actually just business as usual.

Related Topics