The COVID-19 Recession

Evenings were always peaceful in this part of the country. After a long and tiring day, Sundar always spent this time in his front porch with a cup of tea watching life around him retire for the day. Sundar was a daily wage laborer, one of 250 million in our country whose survival depends on whether they find work during the day. No work would imply there would not be enough food to feed the family tonight. The last few months have been especially difficult with him losing his job and almost no new work to do in the market. Sundar used to work at a small factory that produced bags for well to do city folks. But the factory decided to close down and everyone lost their jobs. And just today he heard some talk in the market that a new disease is spreading in the country and the government wants everyone to compulsorily stay at home. How is he supposed to feed his kids if he stays at home? The sun had already set by then and everything suddenly seemed so much darker.

This is pretty much what every person working in the unorganized sector is going through. Be it your housemaids and cooks or people like Sundar, all of them depend on regular wages just to make it enough for their survival. We are staring at an unprecedented phenomenon that will prove to be a pivotal point in 21st-century history. IMF just announced that we are staring at the worst recession since the Great Depression of 1929. But what exactly is a recession and why should I be worried about it? Well, that’s what we are going to demystify this time.

Let’s just start with the absolute basics.

We are in this state called recession when our country’s GDP starts falling for 6 months straight.  A recession is characterized by a widespread negative economic outlook amongst the people. People are more cautious while spending their money because they expect some bad times. This negativity is not restricted to just people but large corporations and industries fall prey to this fear as well. It is a time when everyone irrespective of if you are a person or a company, tries to save themselves and keep their expenses to a bare minimum. But not everyone makes it through this storm and a lot of companies simply go bust. People lose their livelihoods, companies lose their revenues and the country loses its growth, stability, and dynamism that it tries to achieve so painstakingly.

Okay so a recession is something bad and to be wary of but why should we be concerned about it now? On what basis are people saying that a recession is on its way? Well, there are certain numbers that are very central to the economy. These numbers or indicators as we call them, act as the pulse of the economy. We can be sure that something is wrong if this pulse does not feel right. So are some of these indicators flagging red? Well, almost all of them are. The most significant ones being:-

1. Bond Yield Curve Inversion:- This is one of the most reliable indicators of a recession that we have. This indicator has flagged red before every recession in the US baring just one for the last 50 years (see the figure below). It flags red when a large number of people begin to perceive a problem in the economy in the short term, say the next couple of years. (Technically it means 10-year bond yield falling below 2-year ones). This follows a drastic fall in the economic health of the country.  And this has been flagging red from the last 6 months, the most recent one being in February 2020.

2. Number of people searching about “recession”:- This one relies on the fact that If enough people start thinking that a recession is on its way, they end up making decisions that inevitably lead to a recession. Let’s take a step back and demystify this. What is the first thing that you would do if I tell you that a recession is on its way? You would probably check your finances, put them in place, and save some money. In such a scenario, you would most likely not buy that car that you were planning to buy for some time now. This would mean less money for its manufactures and no jobs for people working in its entire production process. Because of job losses, people will end up having even lesser money than before. And the lesser money people have, the lesser they spend it. And if this happens on a larger scale for a prolonged time period, you get a recession. The more people talk about and fear recession, the lesser confidence they have in the economy. The lesser is the confidence, the lesser is the chance of people spending their money. So in a way, the more the people talk about recession, the more likely is the recession. And a good measure of this is the number of times people mentioning the word ‘recession’ in their search keywords. Have a look at the live google analytics recession keyword tracker once. Yes, the search queries for the word “recession” are at an all-time high in 2020.



Okay so yeah we have a recession looming over our heads but how is it going to affect us? To answer this we need to first understand the economic scenario that we have been living in. The last few years have been a bumpy ride for the economy with a multitude of problems that the economy was facing. Our automobile was in bad shape, banking was in terrible shape and our GDP had fallen below 5% for the first time in 11 years. Now what happens due to these shocks is that people become uncertain about the future. This makes them more and more money conscious and cut down on their expenses. This affects the manufacturers adversely because more and more people are buying less. At one point, the profits dip down to such a level that the manufacturers can no longer sustain the salaries of their employees and people like Sundar are let go. This would obviously make them consume less and less stuff and this vicious cycle continues. This cycle had already started way back during sometime last September and India was already facing an economic slowdown. (Check out this post  on India Economic Slowdown). So speaking on purely economic terms, India was not in a very sweet spot even before the entire COVID-19 situation.

COVID-19 is bad, its really bad because it restricts the very thing that led humans to achieve what they have, cooperation. The reason why COVID-19 has been so damaging to the economy is the lockdowns. This is the first time ever in history that the entire world is closed off. Economic activity flourishes when people do the work. Without work, people will neither produce anything nor have the money to consume things leading to a total freeze of economic activity. Irrespective of what companies are promising, they just cannot sustain themselves for extended periods of time. And since there’s almost no new work coming up, they will start letting go of their excess talent. More and more people, even the ones working in the organized sector like us are staring at potential layoffs if the situation continues. Don’t believe the situation can get this bad? Well, here’s the look at the US unemployment figures from the last week. See what happens at the start of 2020 to these figures.

The only way to stop this cycle that would obliterate our complete economic structure is to put money back into the hands of poor folks. Governments around the world have been announcing relief packages worth billions and trillions of dollars to lift the economy from a potential disaster. US government with its $2 trillion package (almost equal to our GDP) and ours $23 billion package are just to name a few. How would this help revive the economy you would ask? Well, if you are able to provide for about a billion out of our 1.3 billion population (250 million*4, considering an average family of 4 with 1 income source) then the economy with automatically lift itself out of this tough spot.

How can I prepare myself for the recession?

Ok agreed, there’s definitely gonna be some tough days ahead but what should I do about it? Well, there are a couple of things that we can do to at least mitigate the impacts. First things first, stick to your job, no matter how bad it is. In fact, I think its a really good time to up our game in our jobs. Even if you don’t end up losing it, this would still help you in your career path. This is also a time to delete all the food ordering and online shopping apps from your phone and start saving. How much should you save? Well enough to build what is known as an emergency fund. Take a pen, calculate the bare minimum monthly expense that you need to survive. This should include your rent, groceries, electricity, LPG, mobile recharges, etc (Netflix is not a necessity). Multiply this number by around 6-8 and this is how much you should ideally save. You need to have enough money to survive for at least 8 months if you end up losing your job. And try to park this money is any liquid fund (a debt fund with no locking period) because it provides slightly higher returns than parking it in the bank. And if after doing all this you are lucky enough to have some money left, I would suggest you guys to buy a couple of SGB (Sovereign Gold Bonds). Gold is considered a hedge against recession (something that becomes more valuable during bad times). This is because, in a recession, everyone’s belief in the economy and the banking system tends to collapse. So people switch to invest in things whose value remains irrespective of the economy, I.e gold. Gold will always have value even if the Rupee doesn’t. And buying SGB is equivalent to buying physical gold, with a couple of extra treats of course (SGB features). This might also be a good time to start that side hustle of yours that you always wanted to give a try. Everyone’s gonna go broke so there’s no shame in trying out anyways.

I tried really hard not to sound too dystopian but truth be told, the situation is bad. All I hope is that people who read this post are at least a little prepared for what’s coming and I hope we all come out of it, a little bit wiser, a little bit stronger. This is just one of those “big problems” that we as humans must solve in order to evolve to the next level. At this point, I cannot help myself remember Carl Sagan and a beautiful thing that he has to say about humanity and our pale blue dot. This will definitely cheer you up and get you out of the gloomy mood that I inadvertently put you in.

Pale Blue Dot-Carl Sagan-Voyager 1

This quarantine has given me a little extra time on my hands so if you want me to write about anything in particular, do let me know :)
Until then, Take care and be safe. May the force be with all of us!

- Nikhil Mudholkar