What is a recession?
A recession occurs when there is a decline in economic activities. It is a state when there is a decline in income (leakage) 1LEAKAGE: The process of income propagation slows down and ultimately comes to a halt. In other words, leakages are the causes responsible for the decline in income., accordingly to fill in the gap the government increases its expenditure (injection) 2INJECTION: the additional amount or demand into the economy in case of recession from the government sector, in terms of circular flow, or reduces taxes or adopts a combination of both so that aggregate demand is boosted with money put into the hands of the people.
Moreover, the long-running recession is termed as depression. Depression is highly unfavourable as a slowdown in economic activity becomes normal.
Under prevailing conditions, the governments’ main focus is to reduce human casualties. Saving lives is the priority at hand. And of course, this should be the priority. But what will happen to post this crisis? An exigent question here is – Will we be able to get back to being as normal as we were before with respect to earnings and spending?
The answer to this vital question is no or maybe not.
Ideally, many of us will avoid large gathering such as going to theatres to watch a movie, live stand-ups and shows, etc. We all will be more inclined towards the digital form of entertainment. The impact doesn’t end there, many white-collar jobs will collapse and we will see a rise in freelancers in the market. There is an impending need for all of us to be digital-ready.
A chunk of the population today is idle. Consequently, there is a big leakage of income in the economy. This results in the decline of the country’s GDP. Even when an individual cuts down their consumption level by 5 per cent, it will effectuate recession. For example: assuming 100 calculators serve the entire Indian market and this contributes to about 10 per cent to the GDP. Now, if only 95 per cent calculator sells in the market remaining 5 per cent don’t. Then the GDP contribution falls down to 9.5 per cent. Now imagine by just 5 units remaining unsold there is a drop in the level by 0.5 per cent, there are millions of products contributing to the GDP. Currently, there is reduced consumption of non-essential items and along with items whose purchase is subject to deferment for now. But such deferment will lead to a huge drop in the level of GDP of the country.
However, India might not experience such a catastrophic recession. The main reason being, the habit of constant saving; apart from income, majority of the individuals whose be denied their pay cheque or; will have to rely on their savings. Will these saving sustain them for long?
Mahesh Vyas, CEO and director of CMIE reports 3Yogendra Yadav, 8/4/2020,ThePrint – “an unemployment rate of 23.4 per cent during the week, an LPR (labor participation rate) of 36 per cent and employment of 27.7 per cent”. The data contained in the CMIE reports, also show that – ‘before the lock-down i.e., February 2020 about 40.4 crore Indians were employed and at that point 3.4 crores were unemployed.’
The above data implies that – India consists of a population of 137 crores, out of which 103 crores belong to working age. 4Working-age: according to the constitution of India, working-age is 15 Years, that is, the minimum age for employment. On analysis, it can be inferred that there is a drop in the unemployment rate by 29.45 per cent (from 40.4 crores to 28.5 crores, a drop of 11.9 crores). Moreover, about 12 crore Indians have lost their jobs, as in most cases they are the only bread winners of their family, the nation is going to suffer considerably from a livelihood crisis.
Looking back to 2008
On analysis, it can also be found that India lost more jobs due to coronavirus than the US did during the depression in 2008. To form a comparison let us go back to the times when the great depression hit the US economy. The key advantage than for the US was that the country wasn’t suffering from any health crisis which forced them to sit at home. People did in fact, continue to go out and to work like usual days, even though many were unemployed. Whereas, the situation we are facing today is completely different.
The primary situation today is to stay at home. This hinders us to help ourselves, as only a handful of us can work from home. The number of people unemployed can be compared in both time frames. But the truth of the matter is that the situation at hand is unlike that of 2008 and has no common grounds for differentiation, it doesn’t leave much room for learning from the past.
The above statistics addresses the impact on individual life. The health crisis is going to leave the economy in a deplorable state. It is going to be worse than ever before.
Impact on different industries
Various sectors of the industries will face any adverse effect from this ongoing pandemic. Mentioned below is an attempt to analyse the adverse effect –
The tourism and travel industry are suffered the hardest hit by the coronavirus lockdown. According to government data, Foreign Tourist Arrivals (FTAs), dropped by 9.3% in a month, there were 10.15 lakhs FTAs in February 2020, as against 11.18 lakh in January 2020 5Forum Gandhi, 25/3/2020, business line. Moreover, as per global aviation consultancy CAPA, the private domestic carriers are expected to post consolidated losses of up to $600 million (Rs. 4,500 crores) in just one-quarter exclusive of the losses expected from Air India. 6Manu Kaushik, 19/3/2020, business today
Currently, the government has banned all international and domestic travel. Moreover, the officials have decided that the air crafts will fly on 50% occupancy for the foreseeable future, this will definitely result in higher flying cost. Nevertheless, the fear of the virus will, either way, result in the downfall. As a whole, ‘this industry is expected to incur losses in the range of $5 trillion (Rs 5 lakh crore), covering all aspects of the business, reports travel, hospitality organisation of India, FAITH’. 7Live mint, 4/4/2020
Financially, this sector has and will suffer a huge decline in its revenue base.
Fast food industry:
The fast-food industry is one of the most lucrative and profitable sectors, but currently, this sector too has been hit hard. This industry was the first to cease its operations and will be the last to commence its operations, economically at scale. Nevertheless, online food websites and cloud kitchens are still operating with an untypical revenue.
The question remains – will there be any social dining with family and friends anymore? Food fests and other experiences for which people gather, will that be seen in future? Many companies are coming out with new ways of dining like contactless dining by Zomato 8Contactless dining: it eliminates the need for the consumers to touch the menu or bills at dine-in and offers to place tables at least one meter apart from each other. might witness a huge success.
Therefore, it is time for innovation, dependence on traditional methods will lead to a huge downfall in the revenue of this industry.
Currently, e-commerce is selling only essential items which means that non-essential items are suffering due to paused operation. Sales of large e-commerce platform have come down by almost 90% as a large part of their gross merchandise value (GMV)9Gross merchandise value(GMV): GMV is the total value of merchandise sold over a given period of time through e-commerce platforms.. Regardless, with the rise in the sale of essential items these business houses have started selling essential items now. But this industry will not suffer much as the other industries. At this point, the e-commerce industry is one of the most profitable business.
Conspicuously, as all of us will move towards digitized, this will definitely help in a boost of this sector involving low travel cost and time.
At present, the financial downfall is evident but slowly this industry will pick up its sales and revenue. Despite this downfall, after the lockdown, this industry will experience a sudden increase in sales. But the governments’ imposition of safety measures which will forbid the people from moving around freely, and they will have to stay at home and continue to practice social distancing. This pandemic will bring in a huge opportunity for these already existing e-commerce sites, their biggest advantage of being the web-based platforms.
A new academic year is almost about to start, for many, it has already started. Fees of these institutions also include the cost of all the amenities such as computer lab, canteen, sports equipment, etc. Next few years are definitely critical, as even in future social distancing is paramount and digitization is the way to go.
Will educational institutions work in the same manner as they used to before? Will these institutions still continue to charge for all these amenities left unused?
Students flying overseas for education might wait for a year in the very least. There is a high probability that Digitalized way of lecturing will be implemented.
What can we do and What will the government do about it?
Firstly, it’s our prime responsibility to follow the orders of the government that is to practice social distancing, quoting our Honourable PM,” Jaan hai toh, jahaan hai“.
To combat such a slump in overall economic activity, the government will implement the expansionary fiscal policy. It will have to increase its spending to infuse the demand in the market to stabilize the situation and break this flux.
Expansionary fiscal policy addresses recession and the problem of unemployment on account of business cycles. Technically, this is a policy measure to close down the “recessionary gap”. This gap exists if the existing levels of aggregate production are less than what would be produced with full employment of resources. How does the government fill in this gap using this policy?
When the aggregate demand falls short of the aggregate supply (capacity), it results in unemployment, as is the case right now. Therefore, the government increases its spending. The spending here depends upon the gap created by the recession and on the size of the multiplier. 10Size of the multiplier: multiplier explains how many times the aggregate income increases as a result of an increase in investment. In this case, multiplier refers to the ratio of the change in income pattern to the change in government spending-investment.
Also, if the interest rate rises with increased demand but the money supply does not rise simultaneously, then private investment will be adversely affected. If this does not happen, then the rise in government spending will have a positive effect, thereby leading to the success of the expansionary fiscal policy.
Honourable PM Narendra Modi has requested all of us to come out of our comfort zone and help the nation. He urges all the Indians to help others, be job givers than job seekers. This will help the nation uplift itself from this outbreak
With context to the economic crisis, currently, there is no way out as such. On analysis, it can be inferred that many industries providing jobs to people is also adversely effected which has led to a rise in the probability of these people losing their jobs. Thereby, it is important for all of us to upskill ourselves digitally and conceptually so that we have a fairly unfair advantage over the others.