Crisis 2008 - History, Psychology and Future


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The present crisis which broke out in September with the failure of investment bank Lehman Brothers in the US actually has its roots in the era of cheap money starting in the 2000s. The rapid economic growth seen globally was fed by low cost of capital and was boosted by all round optimism, the euphoria of the positives of globalization and confidence of policy makers that markets would lead a sustainable growth path.
Yes no one can be in complete control of the situation. Neither can the Indian government. As Lorenzo Bini Smaghi said, ‘ Restoring confidence in markets is the biggest contribution that the state can make to get the economy back on track.’ Clearly, even if outcomes are uncertain, our confidence in our abilities should not be inhibited. And for that the government needs to be seen taking credible, and domestic economy oriented, action.

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Crisis 2008 - History, Psychology and Future

  1. 1. Crisis 2008 - History, Psychology and Future Laveesh Bhandari, Indicus Analytics All India Partners Conference KPMG November 25, 2008
  2. 2. Crisis of 2008 <ul><li>What is this animal </li></ul><ul><ul><li>How will it play out </li></ul></ul><ul><li>How is it affecting us </li></ul><ul><ul><li>How it affects our behavior </li></ul></ul><ul><li>How to deal with it </li></ul>
  3. 3. The beginning <ul><li>Extremely rapid economic growth </li></ul><ul><ul><li>Fed by low cost of capital </li></ul></ul><ul><ul><li>Supported by large investment growth </li></ul></ul><ul><ul><li>Pushed by all round optimism </li></ul></ul><ul><ul><li>Spread by globalization </li></ul></ul><ul><li>Confidence in central banks and regulators </li></ul><ul><li>A correction had to come </li></ul><ul><li>The larger the bubble, the steeper or longer the correction </li></ul>
  4. 4. The expansion <ul><li>Everyone loves a bubble </li></ul><ul><li>US sub-prime housing credit </li></ul><ul><li>Indian real-estate and construction boom </li></ul><ul><li>Ponzi and Pyramid schemes everywhere </li></ul><ul><li>Europe, Asia, America </li></ul><ul><li>No one wants to break a bubble </li></ul><ul><li>70% of US consumers felt Housing market will crash – WSJ, April 10, 2006 </li></ul><ul><li>Most rapid increase in money supply in India for so long - ever </li></ul>
  5. 5. The correction and recession <ul><li>The US sub-prime crisis </li></ul><ul><ul><li>only one symptom of all round correction </li></ul></ul><ul><li>Each had its own little bubble </li></ul><ul><li>World economic growth to slow down from 5 to 2% </li></ul>2.2% (3.0%) World 6.3% (6.9%) India 8.5% (9.3%) China 3.5% (5.5%) Russia -0.7% US -0.8% Germany -1.3% UK IMF Growth Forecasts 2009
  6. 6. The scenario in India <ul><li>International recessionary conditions </li></ul><ul><ul><li>International trade taking a big hit </li></ul></ul><ul><ul><li>US, China, Europe . </li></ul></ul><ul><ul><li>No other big enough buyers </li></ul></ul><ul><li>Asset market bust/correction </li></ul><ul><ul><li>Financial </li></ul></ul><ul><ul><li>Real Estate </li></ul></ul><ul><li>Liquidity crunch </li></ul><ul><ul><li>Banks holding liquidity </li></ul></ul>
  7. 7. India next 6 months <ul><li>Pessimism </li></ul><ul><ul><li>Investment Plans </li></ul></ul><ul><ul><li>Hiring </li></ul></ul><ul><ul><li>Inventories </li></ul></ul><ul><ul><li>Orders </li></ul></ul><ul><li>“Lets wait till January” </li></ul><ul><li>Can nothing stop this fall? </li></ul>
  8. 8. Economic Activity Falling - Prices 3 Month Moving Average
  9. 9. The good news <ul><li>Agriculture growth up </li></ul><ul><ul><li>Two years of good monsoons </li></ul></ul><ul><li>Rural growth to pick up </li></ul><ul><li>Government wages and salaries increase </li></ul><ul><li>Demographic dividend continues </li></ul><ul><li>Basics unaffected </li></ul><ul><ul><li>Food, FMCG, Education, Health </li></ul></ul><ul><li>Prices under control ! </li></ul>
  10. 10. Sectoral hit <ul><li>Most affected </li></ul><ul><li>Garments, Gems & J. </li></ul><ul><li>IT and ITES </li></ul><ul><li>Capital Goods Engg. </li></ul><ul><li>Basic manufacturing </li></ul><ul><li>Organized real estate </li></ul><ul><li>Higher end </li></ul><ul><ul><li>Auto, Electronics, Durables </li></ul></ul><ul><li>Least Affected </li></ul><ul><li>Foods </li></ul><ul><li>FMCG </li></ul><ul><li>Health </li></ul><ul><li>Education </li></ul><ul><li>Unorganized real est. </li></ul><ul><li>Lower end </li></ul><ul><ul><li>Auto, Electronics, Durables </li></ul></ul>
  11. 11. Parts of India most affected
  12. 12. The future (consensus) <ul><li>Long term (> 24 months) – Very Good </li></ul><ul><li>Medium term (6 - 24 months) – ? Key </li></ul><ul><li>Short term (< 6 months) – Very Poor </li></ul><ul><li>No quantitative models are working </li></ul><ul><li>Short term pessimism - long term optimism </li></ul>
  13. 13. Yes there is a crisis <ul><li>Government wanting to spend more </li></ul><ul><li>But that is not the solution to pessimism </li></ul><ul><li>Waiting ‘till January’ would not help </li></ul><ul><li>Post-Christmas outlook poor internationally </li></ul><ul><li>China suffering badly – but no hard evidence </li></ul><ul><li>US will be firefighting for many quarters to come </li></ul><ul><li>Europe in a recession as well </li></ul>
  14. 14. The Psychology of Crisis Acknowledgement: Department of Health and Human Services, US Government
  15. 15. What is a crisis <ul><li>“ Common human emotions </li></ul><ul><li>— left without mitigating response </li></ul><ul><li>— may lead to negative behaviors </li></ul><ul><li>that hamper recovery or cause more harm.” </li></ul>
  16. 16. Dealing with a crisis <ul><li>Communication </li></ul><ul><ul><li>Simply </li></ul></ul><ul><ul><li>Timely </li></ul></ul><ul><ul><li>Accurately </li></ul></ul><ul><ul><li>Repeatedly and Consistently </li></ul></ul><ul><ul><li>Credibly </li></ul></ul>
  17. 17. Communicating & Action <ul><li>Acknowledge the problem </li></ul><ul><ul><li>It wont go away easily and will require effort </li></ul></ul><ul><li>Assure but state continued concern </li></ul><ul><ul><li>“ Although we’re not out of the woods yet….” </li></ul></ul><ul><li>Confidence vs. uncertainty </li></ul><ul><ul><li>Confidence in ability but uncertainty of outcomes </li></ul></ul><ul><li>Action for self-protection </li></ul><ul><ul><li>You must do X </li></ul></ul><ul><ul><li>You should do Y </li></ul></ul><ul><ul><li>You can do Z </li></ul></ul>
  18. 18. The Future
  19. 19. The next few quarters <ul><li>Q3 and Q4 2008-09: </li></ul><ul><ul><li>India and World well into the downward phase </li></ul></ul><ul><ul><li>Probable worsening </li></ul></ul><ul><li>Q1 and Q2 2009-10: </li></ul><ul><ul><li>Some improvement in India on account of rural demand multipliers </li></ul></ul><ul><ul><li>Recessionary conditions internationally </li></ul></ul><ul><li>Q3 2009-10 and beyond </li></ul><ul><ul><li>India in the 6.5% growth range </li></ul></ul><ul><ul><li>World should start to emerge again from lowpoints </li></ul></ul>
  20. 20. Government – current stance <ul><li>Will be unable to do much </li></ul><ul><li>Some reforms </li></ul><ul><li>Some announcements </li></ul><ul><li>Some increases in infrastructure allocations </li></ul><ul><li>Will try for international funding </li></ul><ul><li>Fiscal deficit will be about 10-12% </li></ul><ul><li>Don’t depend upon it for much </li></ul>
  21. 21. What the government should do <ul><li>Fight pessimism </li></ul><ul><li>Many reforms have political consensus </li></ul><ul><ul><li>Financial inclusion </li></ul></ul><ul><ul><li>Domestic transport </li></ul></ul><ul><ul><li>Laws affecting internal trade </li></ul></ul><ul><li>Ramp up IT spending within the government </li></ul><ul><li>Get the banks working again </li></ul><ul><ul><li>Manufacturing sector credit </li></ul></ul><ul><li>Trade with neighbors (Balance argument) </li></ul><ul><li>Political consensus </li></ul>
  22. 22. Thank You