Summarising former RBI Governor, Dr Duvvuri Subbarao’s presentation

It was insightful to watch and listen to Dr Subbarao’s presentation on “Corona Financial Crisis – Is this time different ?” The webinar’s recording, conducted by CFA Society India, is available in their YouTube channel. The session was moderated by Dr. Samiran Chakraborty, Managing Director and Chief Economist, India- Citigroup

I have attempted to summarise the talk which has lots of insights. There was a Q&A session too, which I have excluded from the summary. Interested ones can visit this link

The talk was structured in the following way :
a) What is similar between Global Financial Crisis (GFC) of 2008 and Corona Financial Crisis (CFC) of 2020,
b) India’s response to Covid-19 and
c) Lessons of the crisis

“What started as a regional epidemic in China has snowballed the world over. There is fear and uncertainty everywhere. Every crisis in history has brought about fundamental shifts in societal attitudes, community patters, households, lifestyles & individual values”. The speaker requested to conduct a thought experiment on “3 ways in which life will change after the corona crisis”. This was an interesting thought and my earlier post titled “Questions need not always be answered was a vague attempt at this. Here is the link to that post…

What is similar and What is different at the global level ?
“GFC originated in the financial sector & transmitted to the real economy, whereas the CFC originated in the real economy and transmitted to the financial sector”. This is a striking difference and has its implications.
“During the GFC, faith in the financial system was broken, Demand got destroyed and affected supply as a consequence. Whereas during the CFC, confidence in the real economy is broken. Supply channel was broken which affected demand independently”, he said.

“What does this mean for the solution ? During GFC, trust had to be restored in the financial system which was expected to boost demand and supply. During CFC, trust has to be restored in the real economy”.

“During GFC, restoring financial stability in the US and Europe was necessary to inspire confidence across the world, as these were the epicentres of crisis. During CFC, every country will fight the pandemic within its borders but that is not sufficient. No country in the world is safe until every country in the world is safe”.

Nature & depth of uncertainty :
“Uncertainty is a defined future of every crisis”.
During GFC, Financial institutions were falling and it became imperative for Govt. and Central banks to restore faith in the financial system.
“During 2008, in India too, it was important for RBI to restore faith in the financial system. How far and how long markets would trust us was uncertain. This was being communicated, repeatedly”, he said
“Now, during CFC, there are many unknowns. Known unknowns and unknown unknowns”. To highlight a few, “How effective are the lock downs ? What is the age and gender profile of the susceptibility ? What is the process of recovery ? Will the disease come back ?”. Addressing the uncertainty was relatively simpler during GFC but a bit complex now with many unknowns.

Tensions & Trade off –
“During GFC, solutions to the financial crisis and real economy were working in tandem (reinforced each other). Whereas during CFC, solutions to the crisis, like lock down, impact the economy negatively (working against each other)”.

Global cooperation – “Global leaders showed extraordinary leadership by coming together, during 2008. G20 leaders met and agreed on various stimulus efforts. Global Co-operation is not evident during CFC, which was quite remarkable during GFC. Lot of bitterness found between countries during CFC. There is considerable co-operation though, in scientific research across borders”.

Shape of recovery – V, U or W ?
“Every recession, over the last 25 years, had a V shaped recovery, the sole exception was the GFC where U shaped recovery was observed especially in rich economies. Originally it was thought that recovery would be V shaped during CFC. But this evaporated soon. Because of too many unknowns, the recovery could be V shaped or U shaped or W shaped (if there is another round of infection spread)”, he said.

He briefly touched on the subject of India’s macro in 2020 – “We are weaker than 2008. Growth was around 9% then, but not so now. Financial sector was safe and sound earlier but today the sector is stressed. We are not sure whether the financial sector is resilient enough to withstand the crisis now. There was enough fiscal room for stimulus during 2008 but today we are stressed. Monetary headroom arguably was much more in 2008. The only dimension where we are better is external sector due to the USD reserves”.

India’s response to Covid-19 :

  • Lock down at an earlier point on the curve, which is a relative advantage in reducing the pandemic
  • Govt. came out with a fiscal package to provide livelihood support to the urban informal sector and to the rural sector of about 0.8% of GDP. This was criticised heavily as inadequate
  • RBI came out with its monetary package. 1) A moratorium for 3 months was announced. 2) As the banks would be stressed because of this, liquidity available to banks was improved by cutting CRR. Encouraged lending by cutting repo and reverse repot. 3) TLTRO was announced for banks to buy commercial bonds.

Looking ahead –
“Lives Vs Livelihood dilemma is the one which Governments have to manage”. The speaker quoted a film ‘Sophie’s choice’ in which the character had to choose between sending one of the two children to labour camp and the other one to the gas chamber. The speaker highlighted that Government is in a similar dilemma. “Government is expected to manage the dilemma of saving lives & saving livelihoods”, he said. “Govt. has to spend more on a) improving and expanding medical infra , b) spend more on supporting livelihoods, c) spend more on stimulating economy after some normalcy”

Lessons of the Crisis :
“Learn from others but tailor your own solutions. We cannot just copy what other countries are doing. We have to strike a balance between lives and livelihoods. There are lot of comparisons with what the US, Britain, Malaysia are providing as stimulus but we should arrive at our own figures based solely on our situation.”

While talking of stimulus, he emphasised on carefully planning the exit. “Exit has to be carefully planned, mistakes can be costly” – While talking of exit of the stimulus, he quoted Abhimanyu’s parallel. Like how he suffered, he highlighted that mistakes could prove to be costly.

“Communication (choice of words, repetition) is key during such crisis times… Reassurance is more important” he said. He recalled how RBI was communicating during the GFC emphasising the stability of our financial system. It is worthwhile to recall the present RBI Governor’s concluding statement in his recent address where he said our banks are safe and healthy.

“Even as the short term is compelling, do not ignore the long term”. This was a crucial message even to equity investors during this bad phase, isn’t it ? “Allow creative destruction. Economy will recover supply chain wise, not sector wise”

Conclusion : Though the two crises are strikingly different, it was good to see him talk of recovery. There are lot of other risks like inflation, stagflation and a rating downgrade. A lock down is a new experience for me and believe it is so for many of you too. We need to learn a lot from history during such tough times. It is common practice for many of us to ignore history be it during school days or working days. His insights on analysing the crisis and his learnings from past crises are filled with knowledge for us to acquire.

Disclaimer : As I picked up notes while watching, I may have missed a few points which is not intentional. I tried to capture his words exactly but I am sure, there would be areas where my own words would have creeped in. This is not a verbatim transcript of the talk.

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