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Crisis 2008 - History, Psychology

and Future

Laveesh Bhandari, Indicus Analytics

All India Partners Conference


KPMG

November 25, 2008

Indicus Analytics www.indicus.net Laveesh Bhandari


Crisis of 2008

 What is this animal


• How will it play out

 How is it affecting us
• How it affects our behavior

 How to deal with it

Indicus Analytics www.indicus.net Laveesh Bhandari


The beginning

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

Indicus Analytics www.indicus.net Laveesh Bhandari


The expansion
Everyone loves a bubble
 US sub-prime housing credit

 Indian real-estate and construction boom

 Ponzi and Pyramid schemes everywhere

 Europe, Asia, America

No one wants to break a bubble


 70% of US consumers felt Housing market will

crash – WSJ, April 10, 2006


 Most rapid increase in money supply in India for

so long - ever

Indicus Analytics www.indicus.net Laveesh Bhandari


The correction and recession

 The US sub-prime IMF Growth Forecasts


crisis 2009
UK -1.3%
• only one symptom of all
round correction Germany -0.8%

US -0.7%
 Each had its own little
bubble Russia 3.5% (5.5%)

China 8.5% (9.3%)


 World economic
India 6.3% (6.9%)
growth to slow down
from 5 to 2% World 2.2% (3.0%)

Indicus Analytics www.indicus.net Laveesh Bhandari


The scenario in India
International recessionary conditions
• International trade taking a big hit
• US, China, Europe .
• No other big enough buyers

 Asset market bust/correction


• Financial
• Real Estate

 Liquidity crunch
• Banks holding liquidity

Indicus Analytics www.indicus.net Laveesh Bhandari


India next 6 months

 Pessimism
• Investment Plans
• Hiring
• Inventories
• Orders
 “Lets wait till January”

 Can nothing stop this fall?

Indicus Analytics www.indicus.net Laveesh Bhandari


Economic Activity Falling - Prices
3 Month Moving Average

Indicus Analytics www.indicus.net Laveesh Bhandari


The good news

 Agriculture growth up
• Two years of good monsoons
 Rural growth to pick up
 Government wages and salaries increase
 Demographic dividend continues
 Basics unaffected
• Food, FMCG, Education, Health
 Prices under control !

Indicus Analytics www.indicus.net Laveesh Bhandari


Sectoral hit

Most affected Least Affected


 Garments, Gems & J.  Foods

 IT and ITES  FMCG

 Capital Goods Engg.  Health

 Basic manufacturing  Education

 Organized real estate  Unorganized real est.

 Higher end  Lower end

• Auto, Electronics, • Auto, Electronics,


Durables Durables

Indicus Analytics www.indicus.net Laveesh Bhandari


Parts of India most affected

Indicus Analytics www.indicus.net Laveesh Bhandari


The future (consensus)

 Long term (> 24 months) – Very Good

 Medium term (6 - 24 months) – ? Key

 Short term (< 6 months) – Very Poor

 No quantitative models are working


 Short term pessimism - long term
optimism

Indicus Analytics www.indicus.net Laveesh Bhandari


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

Indicus Analytics www.indicus.net Laveesh Bhandari


The Psychology of Crisis

Acknowledgement: Department of Health and Human Services, US Government


Indicus Analytics www.indicus.net Laveesh Bhandari
What is a crisis

“Common human emotions


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

Indicus Analytics www.indicus.net Laveesh Bhandari


Dealing with a crisis

 Communication
• Simply
• Timely
• Accurately
• Repeatedly and Consistently
• Credibly

Indicus Analytics www.indicus.net Laveesh Bhandari


Communicating & Action
 Acknowledge the problem
• It wont go away easily and will require effort

 Assure but state continued concern


• “Although we’re not out of the woods yet….”

 Confidence vs. uncertainty


• Confidence in ability but uncertainty of outcomes

 Action for self-protection


• You must do X
• You should do Y
• You can do Z

Indicus Analytics www.indicus.net Laveesh Bhandari


The Future

Indicus Analytics www.indicus.net Laveesh Bhandari


The next few quarters
 Q3 and Q4 2008-09:
• India and World well into the downward phase
• Probable worsening

 Q1 and Q2 2009-10:
• Some improvement in India on account of rural demand
multipliers
• Recessionary conditions internationally

 Q3 2009-10 and beyond


• India in the 6.5% growth range
• World should start to emerge again from lowpoints

Indicus Analytics www.indicus.net Laveesh Bhandari


Government – current stance
 Will be unable to do much
 Some reforms
 Some announcements
 Some increases in infrastructure
allocations
 Will try for international funding
 Fiscal deficit will be about 10-12%

 Don’t depend upon it for much

Indicus Analytics www.indicus.net Laveesh Bhandari


What the government should do
 Fight pessimism

 Many reforms have political consensus


• Financial inclusion
• Domestic transport
• Laws affecting internal trade
 Ramp up IT spending within the
government
 Get the banks working again
• Manufacturing sector credit
 Trade with neighbors (Balance argument)
 Political consensus
Indicus Analytics www.indicus.net Laveesh Bhandari
Thank You

Indicus Analytics www.indicus.net Laveesh Bhandari

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