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What’s a recession
Recession can be loosely defined as a slowing down of the activity in an economy or when the economy enters a phase of negative growth. Since the GDP is a measure of the economic growth of the economy, a technical definition of recession would be a decline in the GDP growth of a country over two or more consecutive quarters of a year. This is very often accompanied by a fall in the stock markets.
Many experts feel that a recession is a part of a normal business cycle after a period of growth and feel that it could last anywhere between 6-18 months. During a recession, there is generally a lowering of interest rates in order to pump liquidity back into the economy.
The line between where recession ends and depression begins is often debated. However, most experts feel that when the GDP has fallen by over 10%, then it can be defined as an economic depression.
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There are, however, many who feel that GDP is not the only indicator and hence they look upon employment, industrial production, real income and wholesale-retail sales as key indicators. According to the definition of the National Bureau of Economic Research in the US, recession is the period between when business activity after reaching a peak, starts to fall and when it ultimately bottoms out.
What causes a recession?
According to most experts, a recession is linked to a decrease in spending by consumers owing to a lack of faith in the economy. Less spending would mean a decline in the demand for products, which further leads the manufacturers to cut down on production. Lower production levels would lead to job-cuts and to a high level of unemployment, which then perpetuates the cycle owing to limited spending capacity.
Sometimes specific incidents can spark off this chain reaction. For instance, the current crisis is the US is seen to be the fall-out of the sub-prime crisis. After years of euphoria surrounding the rise in property prices, the housing bubble in the US burst in 2006 and the value of property began to decline. People found themselves unable to repay their loans, and banks were left reeling under the shock of huge defaults, foreclosures and write-offs.
Is India going through a recession?
There is no doubt that India has been affected by the recession that has beset the US economy, especially in sectors which are export-oriented or are dependent on outsourcing. However, the RBI governor last week assured that India would not see recession even if uncertainty continued globally. He stated that growth would be moderate and pegged GDP growth for 2008-2009 at 7.5-8%.