Crisis 2008

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Extremely rapid economic growth
Fed by low cost of capital
Supported by large investment growth
Pushed by all round optimism
Spread by globalization
Confidence in central banks and regulators

A correction had to come
The larger the bubble, the steeper or longer the correction

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Crisis 2008

  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>IMF Growth Forecasts 2009 UK -1.3% Germany -0.8% US -0.7% Russia 3.5% (5.5%) China 8.5% (9.3%) India 6.3% (6.9%) World 2.2% (3.0%)
  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

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