Good Years and Bad

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.