of 30
7/31/2019 2. Global Financial Crisis
1/30
Global Financial Crisis
7/31/2019 2. Global Financial Crisis
2/30
Why Study the Global Financial Crisis?
Big impact on world economy including India
Improve Understanding of:
Fiscal Policy
Government Revenue & Expenditure
Monetary Policy
Money Supply
Credit Crunch - Role of Credit in Economy
Characteristics of an Ideal Financial System
7/31/2019 2. Global Financial Crisis
3/30
Reinventing Capitalism
Nouriel Roubini
Laissez Faire (USA / UK)
Socialism (Euro-zone)
State Capitalism (China)
7/31/2019 2. Global Financial Crisis
4/30
Terminology
Balance of Payment is an accounting record of all monetarytransactions between a country and the rest of the world Current Account (Imports and Exports)
Balance of Trade
Capital Account (Financial Flows Investments, Forex Borrowing (ECB/FCCB),Remittances
Shortfall met through: Borrowing
Forex Reserves
BoP Deficit Decrease in Forex Reserves / Increase in Debt (USA)
BoP Surplus Increase in Forex Reserves / Decrease in Debt (China)
Exchange Rate Mechanism Fixed
Free Float
Managed Float
7/31/2019 2. Global Financial Crisis
5/30
Balance of Payment
India 2008-09 (Rs. in Cr.) A.1) Merchandise -542113
A.2) Invisibles 409842
A.2.a) Services 228778
A.2.b) Transfers 202180
A.2.c) Income -21116
A) Current Account -132271
B.1) Foreign Investment 11760
B.1.a) Foreign Direct Investment 76822
B.1.b) Foreign Portfolio Investment -65062
B.2) Loans 19284
B.2.a) External Assistance 12435
B.2.b) Commercial Borrowings 38009
B.2.c) Short Term Credit to India -31160
B.3) Banking Capital -19868
B.4) Rupee Debt Service -476
B.5) Other Capital 21681
B) Capital Account 32381
C) Errors and Omissions 2775
D) Overall Balance -97115
E) Monetary Movements 97115
E.1) I.M.F 0
E.2) Foreign Exchange Reserves (Increase - / Decrease +) 97115
7/31/2019 2. Global Financial Crisis
6/30
USA (The Ticking Time Bomb)
Loose Monetary Policy Excess Money Supply
Borrowing Binge Poor Credit Policy
Asset Bubbles Property Market Sub-Prime Lending
Excessive Leverage Remember! Leverage Equity (Owners Skin in the Game)
Failure of Fiscal Policy
The Welfare State in tatters! Failure of Monetary Policy
Zero Interest Rate; Not a Panacea anymore!
7/31/2019 2. Global Financial Crisis
7/30
USA (The Big Bang)
Securitization Derivatives Financial Weapons of Mass Destruction!Warren Buffet
Crude Shock! $40 to $140
Financial Failures Bear Sterns, Lehman Brothers, AIG, Citi
Contagion
Too Big to Fail!
&
Too Big to Bail!!!
7/31/2019 2. Global Financial Crisis
8/30
George Soros on Global Financial Crisis
http://www.youtube.com/watch?v=Ngbj_vjqd
us&feature=related
7/31/2019 2. Global Financial Crisis
9/30
USA (The Aftermath)
Crisis of Confidence Credit Freeze
Credit is the life-blood of economy. Economy had a massive heart attack!
Debt Overhang
Increase in NPAs
Quantitative Easing Inflation? Where did the money go?
Chasing Neverland!
Job-less Recovery
Ben Bernankes Speech
http://www.usatoday.com/video/bernanke-recovery-frustratingly-slow/1429735951001
7/31/2019 2. Global Financial Crisis
10/30
Europe
Only Monetary Union
Not Fiscal Union
PIGS The Ring of Fire!
Currency devaluation NOT possible
Specter Sovereign Debt Default Breakup of the monetary union
Way-out Austerity! + Hair-Cut!
Tighter Integration
7/31/2019 2. Global Financial Crisis
11/30
China
China is hooked on credit, but deriving ever less punch from eachdose. An extra dollar in loans increased GDP by $0.77 in 2007. It is$0.44 in 2011. China's economy today requires significantly morefinancing to achieve the same level of growth as in the past.
There had been a massive build-up in leverage and fears afundamental structural erosion in the banking system that differsfrom past downturns. For the first time, a large number of Chinesebanks are beginning to face cash pressures. The forthcoming waveof asset quality issues has the potential to become uglier than inprevious episodes.
Fitch Ratings
7/31/2019 2. Global Financial Crisis
12/30
China
Growth Fatigue Export Driven Growth
Forex Reserves
A Vicious Cycle
Renminbi Undervalued Currency
Ponzy Credit
BRICs or BRICkbats!
7/31/2019 2. Global Financial Crisis
13/30
Moral of the Story!
Do NOT allow people to play with other peoplesmoney Why should governments manage peoples money?
Why should a select few manage money for all the rest?
A team is only as strong as its weakest member! Say NO to common currency!
No Monetary Union without Fiscal Union
You either save or consume, so what is the balance? It is not how much you spend or save; it is what you spend
on or what you save for
7/31/2019 2. Global Financial Crisis
14/30
Indian Scenario: Before 1991
Average GDP Growth Rate
3.5% per year
Population Growth Rate
2.2% per year
Per Capita GDP Growth Rate
1.3% per year
7/31/2019 2. Global Financial Crisis
15/30
Indian Scenario: After 1991
Average GDP Growth Rate
6.5% per year
Population Growth Rate
1.5% per year
Per Capita GDP Growth Rate
5.0% per year
7/31/2019 2. Global Financial Crisis
16/30
Indias Political Regimes
7/31/2019 2. Global Financial Crisis
17/30
Indian GDP Growth Rate
7/31/2019 2. Global Financial Crisis
18/30
Indian GDP Composition
7/31/2019 2. Global Financial Crisis
19/30
An Expert Viewpoint
The weakest link in the Indian growth story is the State.Indian economic growth is greatly constrained by aninadequate quantity and quality of public services such aslaw and order, the judiciary, infrastructure, etc. Thefunctioning of the State is bedevilled by
(a) a lack of focus upon these critical services as the taskworth accomplishing
and
(b) poor productivity and efficiency in the production of
these services.
Indias Financial Markets
Ajay Shah, Susan Thomas, Michael Gorham
7/31/2019 2. Global Financial Crisis
20/30
Risks to the Indian Economy
Global Business Cycle Downturn
Misguided Monetary Policy
Fiscal Stress
Populism
7/31/2019 2. Global Financial Crisis
21/30
Loopholes!
Demographic Dividend or Disaster The issue of Employability
Manufacturing Gap
Credit Gap
Investment Gap
Brain Drain
Policy Paralysis
7/31/2019 2. Global Financial Crisis
22/30
The Present Indian Scenario
(Im)Balance of Payment
Depletion of Forex Reserves BoP Gap Financing
Defense of the INR
Currency Devaluation Self-correcting mechanism
But how do we pay for imports (Oil, High-tech etc.)?
Capital Flows Role of Remittance
7/31/2019 2. Global Financial Crisis
23/30
7/31/2019 2. Global Financial Crisis
24/30
The Present Indian Scenario
0.001.00
2.003.004.005.006.007.008.009.00
1970-71
1971-72
1972-73
1973-74
1974-75
1975-76
1976-77
1977-78
1978-79
1979-80
1980-81
1981-82
1982-83
1983-84
1984-85
1985-86
1986-87
1987-88
1988-89
1989-90
1990-91
1991-92
1992-93
1993-94
1994-95
1995-96
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
Central Gross Fiscal Deficit (% of GDP)
0.0010.0020.0030.0040.0050.00
60.0070.00
1980-81
1981-82
1982-83
1983-84
1984-85
1985-86
1986-87
1987-88
1988-89
1989-90
1990-91
1991-92
1992-93
1993-94
1994-95
1995-96
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
Central Debt (% of gdp)
7/31/2019 2. Global Financial Crisis
25/30
Hindrances to Credit Growth in India
Lack of the Rule of Law Private Property
Enforcement of Contract
Government Interference
Regulatory Vacuum
Lack of Secondary Debt Markets
Lack of robust Bankruptcy processes
7/31/2019 2. Global Financial Crisis
26/30
The Present Indian Scenario
India stands at the edge of a precipice!
Will it fall & shatter into a thousand pieces?
-OR-
Will it rise like a phoenix and soar high riding on
the dreams of a billion people?
7/31/2019 2. Global Financial Crisis
27/30
Utopia!
Minimalist Government
That government is the best, which governs the least! Henry
David Thoreau (http://www.youtube.com/watch?v=JhP7PKoRmmY)
But a government which abstains from governance is the worst!
Minimalist Social Welfare
Minimalist Progressive Taxation
Laissez Faire
Free-floating Currency
Free-flow of Capital Full Current & Capital Account Convertibility
7/31/2019 2. Global Financial Crisis
28/30
Utopia!
Robust Investment Climate
Robust Legal and Regulatory mechanisms Consistency of Rules and Regulations
Robust Judiciary Enforcement of Private Property
Enforcement of Legal Contract
Dismantling of the License Raj Single Window Clearance
7/31/2019 2. Global Financial Crisis
29/30
Utopia!
Ease of Doing Business http://www.doingbusiness.org
Free & Efficient Market for Corporate Control
Corporate Governance
Free Market Economy
Prudential Credit Management
http://www.doingbusiness.org/http://www.doingbusiness.org/7/31/2019 2. Global Financial Crisis
30/30