Crisis 2008 - History, Psychology and Future

Indicus Analytics Laveesh Bhandariwww.indicus.net

Crisis 2008 - History, Psychology Crisis 2008 - History, Psychology and Futureand Future

Laveesh Bhandari, Laveesh Bhandari, IndicusIndicus Analytics Analytics

All India Partners ConferenceAll India Partners ConferenceKPMGKPMG

November 25, 2008November 25, 2008


Crisis of 2008Crisis of 2008

What is this animalWhat is this animal• How will it play outHow will it play out

How is it affecting usHow is it affecting us• How it affects our behaviorHow it affects our behavior

How to deal with itHow to deal with it


The beginningThe beginning

Extremely rapid economic growthExtremely rapid economic growth• Fed by low cost of capitalFed by low cost of capital• Supported by large investment growthSupported by large investment growth• Pushed by all round optimismPushed by all round optimism• Spread by globalization Spread by globalization

Confidence in central banks and regulatorsConfidence in central banks and regulators

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

longer the correctionlonger the correction


The expansionThe expansion

Everyone loves a bubbleEveryone loves a bubble US sub-prime housing creditUS sub-prime housing credit Indian real-estate and construction boomIndian real-estate and construction boom Ponzi and Pyramid schemes everywherePonzi and Pyramid schemes everywhere Europe, Asia, AmericaEurope, Asia, America

No one wants to break a bubbleNo one wants to break a bubble 70% of US consumers felt Housing market will 70% of US consumers felt Housing market will

crash – WSJ, April 10, 2006crash – WSJ, April 10, 2006 Most rapid increase in money supply in India for Most rapid increase in money supply in India for

so long - everso long - ever


The correction and recessionThe correction and recession

The US sub-prime The US sub-prime crisis crisis • only one symptom of all only one symptom of all

round correctionround correction

Each had its own little Each had its own little bubblebubble

World economic World economic growth to slow down growth to slow down from 5 to 2%from 5 to 2%

IMF Growth Forecasts IMF Growth Forecasts 20092009

UKUK -1.3%-1.3%

GermanyGermany -0.8% -0.8%

USUS -0.7%-0.7%

RussiaRussia 3.5% (5.5%)3.5% (5.5%)

ChinaChina 8.5% (9.3%)8.5% (9.3%)

IndiaIndia 6.3% (6.9%)6.3% (6.9%)

WorldWorld 2.2% (3.0%)2.2% (3.0%)


The scenario in IndiaThe scenario in India

International recessionary conditionsInternational recessionary conditions• International trade taking a big hitInternational trade taking a big hit• US, China, Europe . US, China, Europe . • No other big enough buyersNo other big enough buyers

Asset market bust/correctionAsset market bust/correction• FinancialFinancial• Real EstateReal Estate

Liquidity crunchLiquidity crunch• Banks holding liquidityBanks holding liquidity


India next 6 monthsIndia next 6 months

PessimismPessimism• Investment PlansInvestment Plans• HiringHiring• InventoriesInventories• OrdersOrders

““Lets wait till January”Lets wait till January”

Can nothing stop this fall?Can nothing stop this fall?


Economic Activity Falling - PricesEconomic Activity Falling - Prices

3 Month Moving Average


The good newsThe good news

Agriculture growth upAgriculture growth up• Two years of good monsoonsTwo years of good monsoons

Rural growth to pick upRural growth to pick up Government wages and salaries increaseGovernment wages and salaries increase Demographic dividend continuesDemographic dividend continues Basics unaffectedBasics unaffected

• Food, FMCG, Education, HealthFood, FMCG, Education, Health Prices under control !Prices under control !


Sectoral hitSectoral hit

Most affectedMost affected Garments, Gems & J.Garments, Gems & J. IT and ITESIT and ITES Capital Goods Engg.Capital Goods Engg. Basic manufacturingBasic manufacturing Organized real estateOrganized real estate Higher endHigher end

• Auto, Electronics, Auto, Electronics, DurablesDurables

Least AffectedLeast Affected FoodsFoods FMCGFMCG HealthHealth EducationEducation Unorganized real est.Unorganized real est. Lower end Lower end

• Auto, Electronics, Auto, Electronics, DurablesDurables


Parts of India most affectedParts of India most affected


The future (consensus)The future (consensus)

Long term (> 24 months) – Very GoodLong term (> 24 months) – Very Good

Medium term (6 - 24 months) – ? KeyMedium term (6 - 24 months) – ? Key

Short term (< 6 months) – Very PoorShort term (< 6 months) – Very Poor

No quantitative models are workingNo quantitative models are working Short term pessimism - long term Short term pessimism - long term

optimismoptimism


Yes there is a crisisYes there is a crisis

Government wanting to spend moreGovernment wanting to spend more But that is not the solution to pessimismBut that is not the solution to pessimism Waiting ‘till January’ would not helpWaiting ‘till January’ would not help Post-Christmas outlook poor internationallyPost-Christmas outlook poor internationally China suffering badly – but no hard evidenceChina suffering badly – but no hard evidence US will be firefighting for many quarters to comeUS will be firefighting for many quarters to come Europe in a recession as wellEurope in a recession as well


The Psychology of CrisisThe Psychology of Crisis

Acknowledgement: Department of Health and Human Services, US Government


What is a crisisWhat is a crisis

““Common human emotions Common human emotions — — left without mitigating response left without mitigating response — — may lead to negative behaviors may lead to negative behaviors that hamper recovery or cause more harm.”that hamper recovery or cause more harm.”


Dealing with a crisisDealing with a crisis

CommunicationCommunication• SimplySimply• TimelyTimely• AccuratelyAccurately• Repeatedly and ConsistentlyRepeatedly and Consistently• CrediblyCredibly


Communicating & ActionCommunicating & Action

Acknowledge the problemAcknowledge the problem• It wont go away easily and will require effortIt wont go away easily and will require effort

Assure but state continued concernAssure but state continued concern• ““Although we’re not out of the woods yet….”Although we’re not out of the woods yet….”

Confidence vs. uncertaintyConfidence vs. uncertainty• Confidence in ability but uncertainty of outcomesConfidence in ability but uncertainty of outcomes

Action for self-protectionAction for self-protection• You must do XYou must do X• You should do YYou should do Y• You can do ZYou can do Z


The FutureThe Future


The next few quartersThe next few quarters

Q3 and Q4 2008-09: Q3 and Q4 2008-09: • India and World well into the downward phaseIndia and World well into the downward phase• Probable worseningProbable worsening

Q1 and Q2 2009-10:Q1 and Q2 2009-10:• Some improvement in India on account of rural demand Some improvement in India on account of rural demand

multipliersmultipliers• Recessionary conditions internationallyRecessionary conditions internationally

Q3 2009-10 and beyondQ3 2009-10 and beyond• India in the 6.5% growth rangeIndia in the 6.5% growth range• World should start to emerge again from lowpointsWorld should start to emerge again from lowpoints


Government – current stanceGovernment – current stance

Will be unable to do muchWill be unable to do much Some reforms Some reforms Some announcementsSome announcements Some increases in infrastructure Some increases in infrastructure

allocationsallocations Will try for international funding Will try for international funding Fiscal deficit will be about 10-12%Fiscal deficit will be about 10-12%

Don’t depend upon it for muchDon’t depend upon it for much


What the government should doWhat the government should do

Fight pessimismFight pessimism

Many reforms have political consensusMany reforms have political consensus• Financial inclusionFinancial inclusion• Domestic transportDomestic transport• Laws affecting internal tradeLaws affecting internal trade

Ramp up IT spending within the governmentRamp up IT spending within the government Get the banks working againGet the banks working again

• Manufacturing sector creditManufacturing sector credit Trade with neighbors (Balance argument)Trade with neighbors (Balance argument) Political consensusPolitical consensus


Thank YouThank You

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Crisis 2008 - History, Psychology and Future