the financial crisis in india redux

THE FINANCIAL CRISIS IN INDIA REDUXBarCamp 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


FAMOUS LAST WORDS

•Bernanke says the housing sector "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." - Feb. 2007


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


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.


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


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.


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


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


DEFLATION

Chart by @deepakshenoy


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


IIP STATISTICS

Chart by @deepakshenoy


INDIAN REAL ESTATE

•Flipping is 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?!??!?!?!?!?


RETAIL SLUMP


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


STARTUP FUNDING

•Call your 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


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)


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.


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!


DISCUSSION


•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

(RE)SOURCES


http://bit.ly/3A43xX

http://bit.ly/3A43xX

http://bit.ly/4gRiwh

http://bit.ly/4gRiwh

http://www.teknatus.com/blog/pjain

http://www.teknatus.com/blog/pjain

(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/


http://bit.ly/5IkPt

http://bit.ly/5IkPt

http://www.flickr.com/photos/medapt/407745883/




THANKS!

Deepak Shenoyhttp://blog.investraction.comEmail: deepakshenoy at g mail dot comTwitter : @deepakshenoy

Pankaj Jainhttp://blog.linosx.comEmail: pjain at teknatus dot comTwitter : @pjain


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mailto:[email protected]