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I recently received an email from a student inquiring as to whether or not the Indian economy may fall into a recession.  While the stock market has been in a bearish mode, let’s examine it and the economy for signs of a true recession.

The Nifty reached a high of 6338 in November 2010.  For an official bear market to be declared, we need a price drop of at least 20% or 1267 points from that high.  So when the Nifty broke 5071 in August 2011, we were in a bear market.  Oddly enough we broke that level on my birthday!

Oddly enough, there doesn’t seem to be a clear definition of a bull market in most financial writings.  But if we use the same rationale we used for the bears, it should be a rise of 20% from the lows.  The December low of 4544 is the benchmark.  To declare a bull market, the Nifty would have to climb 909 points to about 5452 to break the bear and resume the bull.  It did that in February of this year.

Before you get too excited and run out to buy stock, look at the chart again.  While we did break from the bear market and the trend line, we failed to make new highs.   The broken trend line which was resistance became demand…until we broke it again. This may have been a false bullish signal!  We did not drop the required 20% from the February 2012 high of 5628, but if we do reach 4503, it will be confirmed.

So back to the economy, a recession is defined as two consecutive quarters (6 months) of negative GDP growth.  India’s GDP growth is steadily declining from a high well over 9 to the current 6.1%.  However, this is still positive growth albeit slower growth.

So what is happening in the economy does not qualify for a recession but it does seem to fit into a modified definition of stagflation.  I had warned about this occurring in an article I wrote for the Financial Express in August 2010.

Stagflation is a period of slow economic growth, relatively high unemployment, and inflation.  I could not find statistics before 2010 for unemployment but it last stood at 9.4% which is very high.  You can see from the following chart that inflation is still a problem although not as bad as it had been.  And of course the economic growth as measured by the GDP is dropping.

The answer to the email is no, we are not seeing a recession in India by the definition, but with stagflation, we may see yet another bear market for equities.

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