Good Years and Bad

Business Standard     26th October 2020     Save    
QEP Pocket Notes

Context:   A comparison between the 2008 and the 2020 crisis provides lessons for post-pandemic recovery of India.

Analyzing the 2008 Global Financial Crisis V/S 2020 COVID Crisis

  • Cause: While the 2008 crisis was due to a breakdown in finance, the current crisis is due to temporary demand destruction  leading to long-term scarring
  • State of the real economy: In 2008, the real economy was sound, but in 2020, the real economy is under stress.
  • Fiscal situation: The fiscal deficit more than doubled from 3.1 % to 6.5 % of Gross Domestic Product (GDP) in the year 2008-09 as compared to 9% of GDP currently (CARE Ratings).
  • Inflation: Inflation is favourable today (7%) when compared to 2008 levels (7-9%).

Lessons for India from the comparison of the two crisis

  • Reduce the fiscal deficit targets: Fiscal deficit target was already too high at 3.8% of the GDP, which was subsequently breached after the lockdown to reach 4.6% of the GDP.
  • Use the benign inflation: More benign inflation than in 2008 has allowed developing-world central banks to conduct more aggressive counter-cyclical monetary policy, including deploying unconventional instruments 
      • For, E.g. Reserve Bank of India can support the market for G-Secs as well as for high-grade corporate debt.
  • Position of the People’s Republic of China: A mixed blessing for India
    • Advantage to India: The global demand remains weak, and there is no commodity price spiral since China refrained from launching any giant stimulus as it did post-2008.
    • Challenges to India:
    • China remains relatively insulated from the economic effects of the pandemic, while India is one of the most damaged economies.
      • Capital flows to China remains strong during the pandemic while it remains low in other emerging economies.
      • India’s claim to be a shining investment destination has largely failed to match China as providing the necessary combination of depth, stability, and returns. 

    Conclusion: The lack of hard work on the fiscal front, the unwillingness to make hard decisions in the good years, means there is no firepower when things turn bad.

    QEP Pocket Notes