Vijay Kumar Gaba

The undeniable fact is that FY21 could see most pervasive contraction in global economy in post war era. The economic impact of novel coronavirus led lockdown is deep and wide, engulfing most economies, most sectors and most people. The impact may not be evenly spread as services sector have suffered more due to restrictions on mobility; and consequently the developed economies with larger share of services in their economy have also suffered more. The economies based on commodity exports have also suffered extensive damage due to lower demand and logistic challenges. The economies based on agriculture may be the least impacted as demand and supply chain for food have been least impacted due to pandemic.

If we consider the impact of pandemic from socio-economic distress view point, the poorest countries perhaps would end up suffering the most. Poor health infrastructure, cut in global development aid, sharp cut in remittances, fall in exports, etc have hit the poorest the most.

The economists world over are intensely debating whether the economic recession of FY21 would eventually evolve into a global economic depression, a phenomenon not experienced in post war era; or it will remain a deep recession.

It may be pertinent to note that -

"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. A recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough. Between trough and peak, the economy is in an expansion. Expansion is the normal state of the economy; most recessions are brief and they have been rare in recent decades." In US, the official definition of US is decline in real GDP for two consecutive quarters.

The term depression has not been defined clearly in economics literature. In the common parlance the term is used to describe a period of prolonged and severe economic recession. As per famous economics writer Gregory Mankiw, "the most famous economic downturn in the U.S.’s (as well as the world’s) economic history was the Great Depression, often described as starting in 1929 and lasting at least through the 1930s and into the early 1940s, a period that actually includes two severe economic downturns. Using the NBER business cycle dates, the first downturn of the Great Depression started in August 1929 and lasted 43 months, until March 1933, far longer than any other twentieth century contraction. The economy then expanded for 21 months, from March 1933 until May 1937, before suffering another downturn: from May 1937 until June 1938, a period of 13 months, the economy again contracted."

Obviously, there may be no active expert in the world, who has firsthand experience of handling an economic depression. If the current downturn does evolve into a global depression, it may be as chaotic as it was in the 1930s, simply because it will be a new phenomenon for everyone.

In Indian context, FY21 would likely be the first year of negative GDP growth in past 40 years. In fact since independence, there have only been four instances of negative GDP growth in India - FY58 (-1.2%); FY66 (-3.7%); FY74 (-0.3%) and FY80 (-5.2%). Most experts who have any firsthand experience of handling a recession either as a policy maker, regulator, banker, bureaucrat or politician may have retired or expired. Very few like Dr. Manmohan Singh, who have firsthand experience of handling multiple economic recessions are presently available in the country. Their views, suggestion and advice must be taken seriously by the government of the day.

I am a total novice insofar as the macroeconomics principles are concerned. Nonetheless, I will be happy to share my thoughts on this issue in later posts; particularly as I see them impacting my investment strategy.