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Recession Reality Check: Not recession yet but Indian economy isn't far from it either

All the key economic indicators have been on a downward swing for quite some time. If this slide is not checked India may slip into recession sooner than later. In this first part of a two-part series, the article looks at what the major economic indicators are telling about the state of Indian economy

twitter-logo Prasanna Mohanty   New Delhi     Last Updated: December 4, 2019  | 20:34 IST
Recession Reality Check: Not recession yet but Indian economy isn't far from it either
Union Finance Minister Nirmala Sitharaman

Finance Minister Nirmala Sitharaman made a dramatic statement at the Rajya Sabha on November 27: If you are looking at the economy with a discerning view, you see that growth may have come down but it is not a recession yet, it will not be a recession ever.

Two days later, the National Statistical Office (NSO) released the GDP estimates for the Q2 of FY20 showing a sixth straight fall in the quarterly GDP growth - from 8.1% in Q4 of FY18 to 4.5% for Q2 FY20 - as shown in the graph below.

How the world measures recession

India does not have its own norms or standards for identifying and declaring recession, says Pronab Sen, economist and statistician who supervised the finalisation of the 2011-12 GDP series as chairman of the National Statistical Commission (NSC).

The globally accepted definition of recession comes from the US' National Bureau of Economic Research (NBER) which says, "A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales."

The UK and the European Union accept the following definition: The commonly accepted definition of a recession in the UK is two or more consecutive quarters (a period of three months) of contraction in national GDP.

Also read: Reality Check: Poor governance makes co-operative banks vulnerable to NPAs

The International Monetary Fund (IMF) evolved its own measure during 2008-09 global financial melt-down in its World Economic Outlook - April 2009: Crisis and Recovery the approach of which is to look at decline indicators such as "real GDP per capita, industrial production, trade, capital flows, oil consumption and unemployment".

Sen says the words 'decline' or 'contraction' used in the above definitions stand for "negative" growth rate. Since India's quarterly growth is a "plus" 4.5%, the Indian economy is not in a recession, he declares.

How does the Indian economy look if all the economic indicators mentioned in connection with recession are examined?

Here is a reality check:

(a) Growth in per capita income and product

What does growth in per capita GDP and per capita gross and net national income (GNI & NNI) look like? India does not publish quarterly but annual growth rates for these indicators and here is what those data show.

All three indicators have steadily fallen since FY16 for which data is readily available, except for the per capita GNI which went up in FY18 before going down again.

(b) Growth in private consumption

Consumption has been the mainstay of India's GDP growth for decades. The RBI's 2018-19 annual report shows the share of consumption was 71.5% of the GDP during FY12-FY14, which fell to 69.8% during FY15-FY19.

Its main component, private final consumption expenditure (PFCE) fell significantly from 66.2% of the GDP during FY12-FY14 to 57.5% in FY15-FY19, indicating a slowdown in demand. The other component, government final consumption expenditure (GFCE) contributed 5.3% and 12.3% of the GDP during the corresponding periods.

The latest data show the quarterly growth in PFCE coming down from 9.8% in Q2 FY19 to 5.1% in Q2 (contributing 56.3% to the GDP in Q2 of FY20).

This is a marked decline from 9.8% in Q2 of FY19 and 13.4% in Q3 of FY17.

The GFCE, on the other hand, shows improvement from 8.8% in Q1 FY20 to 15.6% in Q2 (contributing 13.1% to the GDP in Q2 FY20).

Also read: Reality Check: Stress in NBFCs shows no sign of abating

(b1) Growth in oil consumption

Consumption of petroleum products - a high-frequency data released on a monthly basis by the Ministry of Petroleum and Natural Gas - is a good measure of economy too. Here is what the quarterly growth in volume (taking average of three months of a quarter as the quarterly value and then calculating growth rate from the corresponding quarter of the previous year) looks.

As the graph below shows the growth rate has fallen to 2.2% in Q2 of FY20.

(c) Growth in bank credit to non-food sector

The RBI provides monthly and annual bank credit to non-food sector, which includes monthly and annual credit outstanding to all sectors - agriculture and allied, small, medium and large industries and services and personal loans.

Using monthly data for measuring quarterly growth (using the method mentioned earlier) shows a declining trend since Q3 of FY19.

The annual growth rate, however, shows a starker reality - credit outstanding falling from a high of 20.7% in FY11 to 8.4% in FY18 and then improving to 12.3% in FY19.

(c1) Growth in capital formation (GFCF)

Gross fixed capital formation (GFCF) shows investment in an economy. The NSO data shows the quarterly growth in GFCF tapering off in recent quarters.

Also read: Reality Check: RBI acts penny-wise-pound-foolish in dealing with NPA crisis

(d) Growth in industrial production (IIP)

The Index of Industrial Production (IIP), which measures industrial production - mining and quarrying having a weightage of 14.4%, manufacturing 77.6% and electricity 7.9% in the IIP under 2011-12 series - is another high frequency data available on a monthly basis.

The following graph shows quarterly growth rate in the IIP General Index (which includes all the components of industry) but using a simple moving average method in which the average of three months in a quarter is taken as the quarterly value and mapping growth in each quarter without year-on-year calculation.

The growth rate has fallen for several quarters, but showed signs of improvement in Q2 of FY20.

The monthly growth rate, however, presents a starker picture.

Business Today had earlier shown that the manufacturing IIP, which contributes 77.6% to the IIP, was growing at a much higher rate earlier - at a simple annual average of 10% between FY05 and FY11 (base 2004-05) - but had fallen to just 4% of simple annual average growth rate between FY12 and FY19 (base 2011-12).

(e) Growth in Electricity IIP

Electricity generation (weightage of 7.99% in IIP in 2011-12 series) is taken as a good indicator of the economic performance. This is also high-frequency data, available on a monthly basis.

This is what the latest Department for Promotion of Industry & Internal Trade (DPIIT)'s October 2019 statement shows. It has gone down to (minus) 12.4% in October 2019 - steadily falling since June 2019 when it registered a high growth of 8.6%. This is an alarming situation, reflecting poor economic activities.

Also read: Reality check: Corporate tax cut unlikely to increase investment or employment

(f) Growth in unemployment

The only significant macroeconomic indicator showing a positive trend is unemployment.

The Mumbai-based business information company CMIE carries out monthly survey of the state of employment (with a sample size of over 1.5 lakh households - bigger than the NSSO sample size) which shows, when plotted for quarterly movement (simple moving average for a quarter), the unemployment rate is growing since Q2 of FY18, reaching 7.6% in Q2 of FY20.

Latest monthly data of the CMIE shows an unemployment rate of 7.48% in November - down from 8.45% in October 2019. But the labour force participation rate (LFPR) - which reflects how many of the labour force (those either working or looking for work) are employed - fell to a new low of just 42.37%.

It may be pointed out that the Periodic Labour Force Survey (PLFS) of 2017-18 - which was withheld for six months until the 2019 general elections were over - showed a 45-year high unemployment rate of 6.1% and the LFPR falling from 55.9% in 2011-12 to 49.8% in 2017-18. This means, for the first time in India's history, more than 50% of the working age population was out of the job market because there were not enough jobs to look for.

Also read: Unemployment rate falls to 7.48% in November; labour participation rate lowest since 2016: CMIE

Not far from recession

Growth in all the major economic indicators shown in the earlier paragraphs clearly indicates that India is not yet in a recession but the rapid downwards movement is a warning for the policy makers: If the decline continues at this rate the days of recession are not far away - when the quarterly GDP growth actually hits the negative zone.

But this is only a part of the story of India's economy.

(Part II of this article would look at how truly the quarterly GDP and other economic indicators are capturing the real state of Indian economy)

Also read: GDP growth at 4.5%: No, Indian economy is still not in recession, but these countries are

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