“Corona Financial Crisis – Is This Time Different?” by Dr. Duvvuri Subbarao

Speaker- Dr. Duvvuri Subbarao, Hon. Ex- RBI Governor 

Moderator- Dr. Samiran Chakraborty, Managing Director and Chief Economist, India- Citigroup

Contributed by : CA Mansi Soman, Equity Research Analyst at Alpha Invesco Research

Recently, the CFA Society India organised a webinar wherein they invited Hon. Ex- RBI Governor Dr. Duvvuri Subbarao, to share his views on the coronavirus financial crisis. In this webinar, Dr. Subbarao compared the coronavirus financial crisis with the global financial crisis of 2008-09 and highlighted his views on the impact and response to COVID-19 at the India level.

The key points highlighted by Dr. Subbarao in the video were:

Part A:

Comparison between the Coronavirus Financial Crisis and the Global Financial Crisis

• The origin of the global financial crisis was a consequence of excessive risk taking in the financial sector i.e. reckless financial engineering that transmitted into the real sector whereas, the Coronavirus financial crisis originated as a consequence of reticence about the pandemic in the real sector which then transmitted to the financial sector.
• During the global financial crisis, there were financial constraints to work, whereas under the coronavirus financial crisis, the confidence is broken in the real sector thereby, creating constraints to work.
• Under the global financial crisis, the demand collapsed and eventually dragged down supply whereas in the coronavirus financial crisis, supply chains collapsed and subsequently, independently the demand collapsed.
• During the global financial crisis, trust of the solution was to inspire confidence in the financial sector whereas in the coronavirus financial crisis, the trust of the solution must be in the real sector that the pandemic will break, subsequent to which the demand will revive.
• During the global financial crisis, it was very important that financial stability was first restored in the systematically important countries such as US and Europe, which would then transmit to the rest of the world. However, for the coronavirus financial crisis, each country has to deal with the crisis on its own within its borders. However, having said that, no country in the world is safe until every country in the world is.
• During the global financial crisis, there was a lot of uncertainty about the risk in the financial sector whereas, in the coronavirus financial crisis, there is lot of uncertainty in the real sector. The quantum and level of uncertainty is much deeper and there are too many known unknowns.
• During the global financial crisis, solution for real and financial sector were in tandem and reinforced each other whereas, the solutions to the coronavirus financial crisis, may have conflicting results in the real and financial sector. For instance, lockdowns may help contain the pandemic but negatively affects the financial sector.
• During the global financial crisis, the hallmark was the cooperation among the countries and their unity in fighting the crisis. Whereas, today, there is a lot of bitterness amongst countries. In fact, there was some bitterness even prior to the crisis as a result of trade war. However, even though there is probably no global cooperation at the political level, there is significant cooperation between scientific institutions for research in order to find a cure for the pandemic.
• The recovery from the crisis could be V-shaped or U-shaped, as was the case with other crisis in the past 25 years. However, he also highlighted that the recovery could be W-shaped, if the pandemic spreads further.

Part B:

India level comparison between the Coronavirus Financial Crisis and the Global Financial Crisis

• Dr. Subbarao highlighted that India entered the coronavirus financial crisis with weaker macroeconomic variables as compared to the global financial crisis considering that there was an economic slowdown. The financial sector was stressed. However, before the global financial crisis, the macroeconomic factors were stronger with India growing at 8-9% before the crisis and the financial sector was safe and sound.
• During the global financial crisis, there was enough fiscal room for stimulus whereas, today, during the coronavirus financial crisis, the fiscal deficit is already stretched.
• The only advantage in the current crisis vis-à-vis the coronavirus financial crisis, is that the external sector is better and robust.

Part C:

Response and Lessons from the crisis

• There has been a lot of debate lately on whether the economy stimulus package announced by the government is enough or not. Today, all governments are facing the conflict of choosing between lives and livelihood. In any case, whatever the decision is, the governments would have to spend more on medical infrastructure, livelihood support and stimulating the economy. As much as we learn from other countries, every country would have to tailor its own response as per their circumstances and strike their own balance between lives and livelihood.
• The exit from the crisis has to be carefully planned.
• Communication is of utmost importance. It is important that the governments are transparent while reporting about the situation and at the same time, convey reassurance and confidence.
• Even as there is restructuring for recovery after the crisis, only the illiquid institutions must be supported and insolvent institutions should be allowed to die so that stronger institutions emerge out of this crisis.

Subsequently, Dr. Subbarao answered some questions about the presentation on various issues such as de-globalisation, chances of inflation or deflation, sovereign ratings etc. On the subject of de-globalisation, he said that while cross-border events and movement would be checked as was the case post the 9/11 attacks, a complete reversal of the globalisation trend is highly improbable.

He mentioned that it is unlikely that a situation of stagflation or deflation would arise. However, inflation is always a concern. He mentioned that even during 2008-09, there was disinflation for sometime but it wasn’t prolonged. His thoughts on the current crisis were that we might most probably encounter an inflation situation.

On the question of sovereign ratings, he said that sovereign debt countries running huge fiscal deficit, must be very careful since investment houses might pull out their investments and create an exodus of capital.

Watch video at – https://www.youtube.com/watch?v=B7RXHxJk0PI

About the author: Mansi Soman is an Equity Research Analyst at Alpha Invesco Research, Pune. She is a Chartered Accountant and a CFA- Level II Candidate. Prior to working with Alpha Invesco, she was a tax intern with Ernst and Young LLP, Pune. The summary was originally published at https://www.alphainvesco.com/blog/coronavirus-financial-crisis/