Published on February 28, 2009
THE FINANCIAL CRISIS IN INDIA REDUX BarCamp Delhi 28th Feb., 2009 P. Jain and D. Shenoy Saturday, February 28, 2009
INTRODUCTION TO THE FINANCIAL CRISIS • The worst crisis since the Great Depression • Sub-Prime Mortgages • Loans extended to people and business with less than stellar credit worthiness • Value of assets dropping quickly leaving negative equity • Credit • Scare of loan losses spreads beyond sub-prime mortgages Saturday, February 28, 2009
FAMOUS LAST WORDS • Bernanke says the housing sector quot;is a concern, but at this point we don't see it as being a broad ﬁnancial concern or a major factor in assessing the course of the economy.quot; - Feb. 2007 Saturday, February 28, 2009
OCT 2008 - TODAY • President Obama Elected and Sworn In • Oil and commodities spin into freefall • Indian inﬂation drops to under 4% • Indian GDP growth slowing rapidly • Over 500,000 Indians lose jobs • US Unemployment at an all time high • US New Home sales at an all time low • UK, Europe, US all in a deep recession Saturday, February 28, 2009
US STATS • 14 banks have failed in the US in 2009 alone. Not counting last Friday (Bank failure day) • Real estate ventures have declared bankruptcy, including a Donald Trump Casino ﬁrm (so don’t bother buying his book) • US home prices down 25-45% with no buying is in sight • And this is at mortgage rates of 4.5% • Sales were at all time low (since 1960s) in Jan 09 • Home inventory = 24 months of supply • Measured by current sales volume • Not counting some withheld foreclosures etc. Saturday, February 28, 2009
SOME INDIAN STATS • $16 Billion outﬂow from India in 2008 • Inﬂation at almost 13%, now at below 4% - WHY???? • Indian Deﬁcit grows to 6% • Nearly 75% of all Indian Gov’t borrowing is used to pay for expenses • Sensex down ~50% in 2008 • Sensex up ~50% from 2004 Saturday, February 28, 2009
MORE STATS • GDP growth slowing – 5.3% in the quarter ending Dec. 2008 • Manufacturing dropping dramatically • Job losses are serious • 1.5 million jobs to be lost just in the export sector from October 08- March 09 • 200,000 jobs lost in Surat, 500,000 in the diamond industry in the Q3 • 93% of our workforce has no social security coverage • 75K jobs at risk in the auto ancillary units • And the loads of downward salary revisions, “variable” pay etc. Saturday, February 28, 2009
WHY SHOULD I CARE? • SENSEX goes from under 5,000 in early 2004 to a peak just above 21,000 in Jan. 2008 to 8,441 on Nov. 20th, 2008 and 88432 on Feb. 20th, 2009 • Large ﬁrms are laying people off, slowing hiring, and decreasing spending • Many expats are being recalled home • INR hits an all time low against the US Dollar • Gold is skyrocketing Saturday, February 28, 2009
INDIA • At least one bank or real estate player likely to fail, a big one • Credit card defaults, Home loan defaults and other commercial NPAs are just getting started • Fiscal situation is tight • While there are good solutions, political bias will be towards populist measures, no reward • Like DA raise by 22% for govt. employees • We have no data collection standards, lack of transparency delays recovery Saturday, February 28, 2009
DEFLATION Chart by @deepakshenoy Saturday, February 28, 2009
WHY IS DEFLATION A PROBLEM? • We’ve never dealt with it since the 1930s and we don’t know how to handle it • Interest rate cuts don’t work very well in the absence of a robust bond market • You can’t cut interest rates below zero (See the US and Japan) • USD/INR + Crude/Other prices not controllable • Price drops take MUCH longer to reﬂect effectively than rises Saturday, February 28, 2009
IIP STATISTICS Chart by @deepakshenoy Saturday, February 28, 2009
INDIAN REAL ESTATE • Flippingis dead (or it should be)! • Affordability for the average person? • Affordability for the more privileged person? • Standard Charter and Citibank Refuse Loans to RE Developers – 09 Oct. 2008 • Real Estate oversupply is obvious in Gurgaon, but quite as bad in Bangalore, Hyderabad, Mumbai, Chennai • South Delhi is still relatively more expensive than London, Tokyo, Hong Kong, and Manhattan – WHY?!??!?!?!?!? Saturday, February 28, 2009
RETAIL SLUMP Saturday, February 28, 2009
STARTUP FUNDING - FUHGEDDABOUDIT • Indian Investors are getting even more skittish • VC game is a long-term play • Can VCs continue to provide returns attractive to their investors • Can investors wait for the next exit window? • Indian VCs never looked at early stage cos. in good times. • VCs are advising portfolio companies to come up with revenues quickly and be prepared for a major dry spell • Many VCs will quit and move to “angel” funding – realistically, they will try to fund growth only Saturday, February 28, 2009
STARTUP FUNDING • Callyour parents, siblings, cousins, uncles, aunts, friends, enemies! • Get a tin cup and hit the most lucrative corner before someone else does • Bootstrap if you have the ability to get a client Saturday, February 28, 2009
WHAT’S NEXT • We’re not even close to the end of the meltdown • We’re not even in the middle of it • There is tremendous amount of denial on the street • Saal-tak aa jaayega wapas • Our banks are safe • We don’t have subprime lending • Real estate prices always go up, Stock market is great in the long term • This is all a load of bull (and far from a Bull Run) Saturday, February 28, 2009
BRACING FOR IMPACT • Bailouts cause moral hazard. • Government revenues dwindle, tax rates will increase • Expect a black-money-amnesty scheme • Keep that job, look for one, or Start a business and create jobs. • Accept that with deﬂation your salary will not increase, or you revenues will not increase – it may even decrease! • Stay away from get-rich-quick schemes, as frauds roam the streets in a recession • Stay safe. Umemployment breeds violence, hatred, and “moral police”. Learn to defend yourself. Saturday, February 28, 2009
LIGHT AT THE END OF THE TUNNEL • There is always some opportunity • There is always some money to be made, even in a downturn • Ex. Short selling stocks, Food, Essentials, Alcohol, Entertainment • There is no money in the Internet in India. Give it up! There is money ofﬂine, though, lots of it. • Some of the rural public didn’t know there was a boom on. For them it’s always a recession. • Some of the urban public don’t know there’s a recession. For them it’s always a boom – wake up and smell the coffee! Saturday, February 28, 2009
DISCUSSION Saturday, February 28, 2009
(RE)SOURCES • BusinessWeek, What will the crisis mean for venture capital?, Sarah Lacy, 09 Oct. 2008 http://bit.ly/3A43xX • Yahoo Finance Charts and Historical data • Meltdown 2008, TerranceDC, Oct. 2008, http://bit.ly/4gRiwh • Sequoia Capital Presentation to Portfolio Companies - http://bit.ly/ 16F8WK • Google • RBI Website • Teknatus Blog http://www.teknatus.com/blog/pjain Saturday, February 28, 2009
(RE)SOURCES CONT’D • http://bit.ly/5IkPt - Duvvuri Subbarao, RBI Governor • Title Picture Under CC License by Wen-Yan King - http:// www.ﬂickr.com/photos/medapt/407745883/ Saturday, February 28, 2009
THANKS! Deepak Shenoy http://blog.investraction.com Email: deepakshenoy at g mail dot com Twitter: @deepakshenoy Pankaj Jain http://blog.linosx.com Email: pjain at teknatus dot com Twitter: @pjain Saturday, February 28, 2009
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