Global Economic Out Look No V 2008

Krisani Global Economic Outlook: A Kaleidoscope for the Next Six Months November 2008.

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S. Ananth Head, Research, Krisani Knowledge Resources, Hyderabad. 14th November 2008.

Krisani Knowledge Resources 8-2-293/82/A/321-H, Plot No.321-H, Road No 25A Adjacent Lane to Obul Reddy Public School Jubilee Hills, Hyderabad - 500 033. Andhra Pradesh. INDIA. Phone: + 91-40-23543131. www.krisaniknowledge.com

Krisani Global Economic Outlook: A Kaleidoscope for the Next Six Months November 2008

"The truth is nobody knows the full impact on trade flows that will come from companies that are global businesses that are under stress and consumer spending which has dropped precipitately" Ron Widdows, the chief executive of Singapore's Neptune Orient Lines1 "We produce nothing but superfluous things. That is very rewarding because superfluous things cannot be replaced by even more superfluous things."

Krisani Global Economic Outlook 2008. A Kaleidoscope for the Next Six Months “The truth is nobody knows the full impact on trade flows that will come from companies that are global businesses that are under stress and consumer spending which has dropped precipitately” Ron Widdows, the chief executive of Singapore’s Neptune Orient Lines1 “We produce nothing but superfluous things. That is very rewarding because superfluous things cannot be replaced by even more superfluous things.” The above mentioned words could easily be mistaken for rhetoric that may be the forte of a Marxist politician. But unfortunately, they are the words of the Wendelin Wiederking, the CEO of Porche in 2003. It encapsulates the state of the world’s economy that gave a pride of place to the financial sector for the past four years. Whether the fancy cars or the nearly US$2 billion residence that Mukesh Ambani wanted to build, it was clear that capital found it more profitable to speculate rather than invest in the creation of productive assets. A minor statistic may validate our argument about the increased centrality of the financial sector to the US economy2. This Financialisation was thought to be a panacea that would cure the ills by various wise men of the bygone era – most notable cheerleader of course was Alan Greenspan (once thought to be the greatest central banker – again an ironic symbol of the eulogizing that is the norm of raging bull- run). The last issue of Global Economic Outlook in May 2008 had clearly indicated that the present state of the economy was a foregone conclusion. However, it did not anticipate the speed with which events struck the world. This issue would like to provide an overview (or more like a status report) of events since then. In fact the present scenario seems to be Déjà vu (all over again) – which any policy maker would deny and would instead try to claim that these are events that strike once in a hundred years. Unfortunately, while no two crises are identical, the fact that policy makers have not learned anything from the past crises of the past 33 years is in itself indicative of the state of mind of our policy makers. Winston Churchill’s words ‘the ability to foretell what is going to happen tomorrow, next week, next month, and the next year. And to have the ability afterwards to explain why it did not happen’ aptly reflects the state of present day policy makers, economist and analysts. Optimism is never in short supply. An IMF research paper has identified 124 systemic banking crises since 1970. In total the researchers have identified 124 banking cirises, 208 currency crises and 63 sovereign debt crises over the period 1970-20073. Socrates once observed that I know that I know nothing – probably hoping that our policy makers would follow suit and keep learning. Apparently, mediocrity is the new consensus among our entire breed of policy making class. Probably the single biggest problem we face is that everyday our policy makers come to office with a clean slate. In the retrospect, it seems that to have expected anything different may have been overly ambitious. Considering the fact that the most powerful country in the world is led by a person (George Bush) who probably has the lowest IQ (who makes Adam Smith turn in his grave) we probably were indeed ambitious. This paper attempts to trace the events since May 2008. It sets itself a gargantuan task as the paper title ‘A Kaleidoscope for the next six months’ suggests and would like to build various scenarios that are likely to occur over the next one to three years. The reason why this task is thought to be very challenging is for the simple reason that trying to visualize what the economy would look like after one year is difficult, when forecasting for the next one month itself seems to be unreliable at best. Nevertheless, this ambitious attempt may be long over due. I am fully aware of the fact that the results of this could be diametrically opposite. The results are likely to be (1) Either they would be considered brilliant or (2) would be considered to be extremely stupid to say the least. I will try to draw on the past and the present to try and gauge what the future may look like. In fact, Thomas Nagel’s articulation of the problem may hold good in the present scenario. He says, the complex problem that we face consists of difficulty that would in non-boom circumstances have gone insolvent much earlier. This is reflected in the low bankruptcies of the past few years. Bain & Company, a consultancy has forecast that 4.8-5.9% of American high-yield bond issuers would default this year. This is an increase from 0.9% last year. The number of bankruptcies (companies with assets of over US$100 million) will similarly rise to 50-75 from 13 in 20076. The chickens are now coming home to the roost. It is the first time since late 2002, the average spread between high yield corporate bonds and Treasuries now exceeds 1000 basis points (or 10%). Such a spread would normally earn an issuer the dubious distinction of falling into the ‘distressed’ category. This implies a probability of nearly 25% default within the following 12 months. The face value of distressed American Corporate high-yield debt is now US$328 billion up from US$59 billion in January 2008. It is pertinent to note that once a bond become distressed it has nearly 20 times more chance of defaulting in the following 12 months than a non-distressed highyield bond. Some believe that based on past trends, current pricing reflects the probability of a default rate of 12.4% over the next 12 months. This contrasts with a default rate of 3.4% in the past 12 months (preceding September 2008). Interestingly, the past two recessions witnessed actual defaults peak at 11.59% in January 2002 and 13% in June 1991. Thus the default rates over the next 12 months could vary from 8-11 percent, depending on the severity of the recession. The following chart provides a graphic overview of the corporate defaults in USA. The situation is not expected to be very different in different parts of the world.

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Krisani Global Economic Outlook 2008.

On the contrary, bankruptcies and the attendant write offs the world over may just be the next shoe to drop, but the world economy has so many more shoes to drop, it becomes hard to believe that the World Economy is a simple creature rather than a multi-headed hydra that never ceases to surprise. One of the reasons why we continue to remain pessimistic is because of the increase leverage and the time it takes to deleverage in an era of debt deflation – like the one that we are witnessing over the past few months. The following chart clearly indicates the nature of the problem due to the high proportion of debt and its impact on business. The chart provides a snapshot of the situation in 2007. Since the credit market froze (especially after Bear Stearns and Lehman fiasco), the consequences have only grown exponentially – to the downside. Share of Corporate debt accounted for by Businesses with Interest payments Greater than Profits

Source: Bank of England, Financial Stability Report, October 2008, p.11. The statistics in the above chart may not have factored the collapse in demand in the aftermath of the collapse of Lehman. This would imply that while profits collapsed due to the lack of demand, the cost of debt has risen due to freezing up of the credit markets and growing risk aversion. The fact that banks stopped lending and are still quite hesitant is a matter for concern. The following charts provide a graphical illustration of banks’ willingness to lend to each other and the higher cost of credit as reflected by LIBOR-OIS spreads. This has vastly increased the cost of capital (to the fortunate who can still access it) while denying it to most of the businesses. The cost of capital for even the basic (or most acceptable segments) has doubled7. LIBOROIS is considered a good graphical measure that indicates cash scarcity. It is the difference between the three months London Interbank Rate for dollars and the overnight indexed swap rate. As nearly US$360 trillion worth of financial products worldwide are linked to LIBOR, its movement becomes critical to the cost of capital for businesses.

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Krisani Global Economic Outlook 2008.

The following chart clearly shows that it froze the markets and banks refused to lend to each other. It clearly indicates that at the height of the boom, banks were not only comfortable (indicated by a low reading that varied from 0.2 to 0.5). This shot up mostly due to two reasons (a) banks were not sure as to the solvency of the counter party, and (b) they were losing so much that they preferred to hoard cash in order to write off substantial losses. This still seems to be the major problem facing the world economy. This has led to difficulties in securing trade credit, which in turn affects the world trade. Around 90 percent of the US$14 trillion in world merchandise trade is funded by trade finance8.

Source: Bloomberg Banking Sector Crisis & its Ramifications The present system has decimated the banking system of the western countries. One would be tempted to believe that it has permanently altered the nature of banking system. It has wiped out the investment banking companies as they existed. They have been forced to shut shop or simply convert themselves into banks. Hopefully, unbridled speculation will be kept on a short leash. The most glaring aspect of the crisis has been the total ineptitude with which policy makers have handled the crisis. The regulatory system of the 20th Century was built on the Weberian model, which for a long time was seen as a counter poise to the Marxist views. Karl Marx was strongly against speculation and believed that it should be suppressed and should be supplanted a system that would enable the state to appropriate the fruits of economic activity. Max Weber on the hand believed that it would be impossible to suppress speculation and energies would be better spent if they could regulate speculation in such a manner that would avoid a situation wherein a speculator would endanger the whole system. Hence, he believed that only those who have the means to speculate should be allowed to speculate, while the institutions of the state would strictly enforce compliance. Unfortunately, George Bush and his brand of crony capitalism have created a system wherein it became fashionable for the regulators to sleep at the wheel – their stress on ‘self-regulation’. The paper will not repeat the problems in the global banking system as it has received widespread coverage in the media over the past two months. Suffice, to say that the cost of the crisis has been exponential to say the least. Bank of England has pointed out that the mark-to-market losses of nearly US$1.8 trillion. The total bailout packages (including guarantee to debt, etc) is expected to reach US$7 trillion9. The US

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Krisani Global Economic Outlook 2008. Federal Reserve has already lent nearly US$2 trillion to various companies directly10. Till the bankruptcy of Lehman Brothers, the US Federal Reserve lent only against US Treasury bonds, now this has been expanded to include any collateral. The single biggest unknown for the world economy is the derivative market. The case of AIG underscores the instability that it may cause. AIG had bet on more than US$446 trillion worth of derivatives of various genres. As the values started falling, the company was forced to put up more collateral and when it could not, its ratings were cut and it had to be bailed out by the US Government. Its problems do not end there. It was thought that it need about US$40 billion of emergency funding. It has now transpired that this has now reached US$150 billion. The problem with the banking sector is that even the most knowledgeable management members do not know the magnitude of problem. A recent DTCC report showed that a total of US$33.6 trillion of derivatives transactions on governments, companies and asset backed securities worldwide (based on gross numbers). However, industry estimates claim that the report may not have accounted for nearly 40 percent of the trades outstanding in the market11. Sliding Commodity Prices To claim that commodity prices are sliding would probably be an understatement. Sliding aluminium prices have led to about 1.6 million metric tons of global smelting capacity being idled, and another 700,000 tons may follow12. UBS-Bloomberg 26 Commodity Index (chart below) clearly shows the problem that the commodity market is grappling with. The index was about 505 in June 2003 and shot up to 1723 in July 2008. It is pertinent to note that the intensity of the fall may have (at least to an extent) been buffered by commodities such as Gold and Silver which have not collapsed to the extent that others like oil or copper may have fallen. This collapse of commodity prices could have devastating impact on commodity exporters, especially countries like Russia. The last time commodity prices collapsed (in 1998), Russia defaulted on about US$40 billion of its external debt and the currency was devalued by about 40 percent, leading to a collapse in international markets. This time could be no different – if the commodity prices continue to collapse.

Source: Bloomberg (as on 4 November 2008) Copper is a commodity that better reflects the industrial environment due to its widespread applicability. Inventories of Copper at the London Metal Exchange have increased from about 109625 tonnes in May 2008 to 237,925 tonnes (as on 4 November 2008) and to 270,100 tonnes on 12 November 2008 – the highest since at least March 2004. Crashing Baltic Exchange Dry Index A more frightening problem is the collapse in the Baltic Exchange Dry Index commonly referred to as the Baltic Freight Index (or BFI), an excellent indicator of the state of world trade. The index measures the price of voyages and the cost of chartering vessels. It is pertinent to note that nearly 90 percent of the world’s trade is carried out over sea. The Baltic Exchange has a history that dates back nearly 250 years. The exchange introduced freight futures in 1985. The index (Chart Below) has dropped precipitously by more than 90 percent since it peaked on 11771 on 21 May 2008 and now (12 November 2008) stands at 824.

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Krisani Global Economic Outlook 2008.

Source: Bloomberg It has been pointed out that the fall is causing huge losses to not only hedge funds which had entered the Freight Futures markets in the past three years but also to large companies. The freight rates for the largest transporters (commonly referred to as Capesize) quoted at more than US$233,988 on June 5, 2008 but by the early November but by early November had collapsed to US$52,616 a day. Citigroup has estimated that Suezmax vessels (the biggest tankers that can navigate Egypt’s Suez Canal while full) are losing more than US$10,000 a day. Owners of aframaxes (that can carry 600,000 barrels of crude) are stated to be losing about US$13,000 a day13. These capsized vehicles carry most of the bulk cargo including coal and iron ore. It has been pointed out that the daily cost of running these ships cost nearly US$15,000 a day (including depreciation) but the present rates now are earn US$5,982 a day. Interestingly the Bloomberg Tanker Index does not seem to indicate the distress levels (chart given below). Whether the fall in the BFI is largely due to the deleveraging by hedge funds or due to a genuine collapse in freight rates need to be seen. Greater clarity should emerge after Friday (7th November 2008) when the futures in Freight expire. Bloomberg Dirty Tanker Index

Source: Bloomberg The collapse of the credit markets is creating problems far beyond the financial sector (as only to be expected under the modern era where finance occupied the pride of place). It has been pointed out that the shipping industry needs about US$300 billion over the next three to four years to fund the construction of vessels that are already under order14. Inability to fund these semi-complete work has the potential to create more problems for the banks as insolvency of shipping companies not only has the potential to create great disruption over the next seven years but also create additional losses for the banking sector as half-complete ships compound losses for the builders, shipping companies (as well as creditors). Apart from this, the lack of ships (most of which on order would have entered service after 2010) has the potential to create disruption of world trade

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Krisani Global Economic Outlook 2008. beyond 2010. It is pertinent to note that in 2010, the UN Shipping agency’s (International Maritime Organisation) ban on singlehull tankers comes into force as they are at greatest risk of spilling oil in the event of an accident. PART II Where is the World Economy heading: It is now commonly accepted wisdom (though belated) that this is the worst crisis since 1929 – though not formally a depression. The expectation is that the recession would be global in nature and would probably be as severe as the recessions of the 1980s. Europe is already in recession. The EU economics commissioner has stated that “The economic horizon has significantly darkened”. He further added that “The situation in the markets remains precarious and the crisis is not yet over. It is very hard to estimate how deep the financial crisis will be, how long it will last, and what negative effects it will ultimately have on the real economy”15. The growth rate in Europe next year is expected to be just 0.1 percent and 0.9 percent in 2010. Such an official forecast would most likely result in a negative surprise rather than the other way round. The IMF has cut is overall 2009 growth forecast to 2.2 percent from 3 percent – an estimate that it issued last month.16. Since this is more of a global recession, it would be inconceivable that one country may be insulated. At best there is only a case for relativity. This is because exports (most emerging markets depend on it) account for nearly one-fifth of world growth and are going to be severely affected by the problems in the developed markets. The impact of this would be more pronounced in the case of China, Brazil and Russia. It would also drastically impact commodity producers such as South Africa (among the Emerging markets) and also negatively impact countries such as Canada, Australia and New Zealand. The problems plaguing the banking system continue unabated. Banks are unwilling to lend even among themselves as they have very little clue about how deep the problems could be and more importantly they are also suspicious about the solvency of their counterparty. In the Euro-area, banks deposited a record 297.4 billion Euros with ECB rather than lend it elsewhere (on 6 November 2008)17. Such an attitude invariably signals that trust has eroded and despite innumerable government diktats, it will take a long-time for trust to return. The longer it takes for trust to return, the longer the recession will last. Bankers and policy makers in turn seem to be making the same mistake – over and over again. By cutting real interest rates they hope to induce people to spend rather than save money (that is declining in value). Policy makers prefer investors to make higher yielding risky long-term bets. Unfortunately, in the present environment it is more likely that people would cut down on consumption, repay debt or simply hoard cash. Anecdotal evidence seems to suggest that this is happening. October retail statistics in USA shows a collapse in spending across different segments, including the luxury segment18. Looking through the Kaleidoscope for the elusive recovery: An important question that has frequently been asked is which country, or which group of countries can act as an effective counter balance to the present problems. There are two broad zones from which we could witness a recovery, as and when it does start. The first is the USA itself and second are two important economies of Asia – Japan and China. However, both seem unlikely in the near term. The IMF estimated that China accounted for nearly 27 percent of the global economic growth in 2007. But its rapid slowdown has caused concern that it may not be able to weather the storm. It has one of the largest reserves in the world – nearly US$1.9 trillion at the end of August 200819. On 9 November 2008 China announced a stimulus package worth US$586 billion that would be spread over two years. This is nearly a fifth of China’s GDP. This spending is expected to boost China’s economic growth by two percent in 2009. Before the present stimulus package was announced, it was widely believed that China’s growth would be the slowest in nearly two decades20. The severity of the crisis is so intense in China that more than half of the toy makers have been forced to close down. The other geography, where a recovery is theoretically possible is the USA. This may sound oxymoronic but the next phase of growth may be geography specific rather than more broad-based as in the past five years. This geography specific growth would in my analysis be devastating to various other countries, especially the emerging economies. Why is this so? Once the recovery starts in USA, it is likely that capital will flow out of emerging economies and flow back to USA. A recovery in the USA (and other parts of the world) would be possible only if various government’s undertake massive stimulus programmes, the more co-ordinated the better. However, any recovery would be possible after this phase of deleveraging concludes. How long that takes would border more on the realm of speculation rather than any scientific analysis. It would be a mistake to think that Europe could assist in a recovery. Europe is equally badly over-leveraged and in many cases worse than the USA. The U.K.’s gross external liabilities are nearly five times as large as the nation’s gross domestic product according to Citibank21. The chart below indicates the magnitude of the problems in European banking sector, a sector that is of vital importance:

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Krisani Global Economic Outlook 2008.

Source: www.nytimes.com A recovery in the USA would need large scale investments by the US government in public spending. The American Society of Civil Engineers’ pointed out that US would about US$1.6 trillion over a five-year period. The US Department of Transportation estimated that the investment required eliminating the project backlog for bridges, and highway improvement would be approximately US$131.7 billion per year for the next twenty years. This excludes the cost of maintenance22. Such large-scale spending is required as the USA has not seen large investments in infrastructure since the 1980s. In normal circumstances, such high levels of opportunity, especially in a country like USA (where the institutional protection for capital is highest in the form of laws, etc) should be a ground for elation. However, in times of scarcity of capital and when risk aversion has become central in investment strategy, it would mean a further drain of capital from emerging markets (and probably even from Europe) back into USA. The Democrats have announced that they would like to pass a US$150 billion of stimulus through the retiring congress. Apart from this they would like to provide a special grant to the Detroit centered auto industry. The US auto industry is deemed to be ‘too large to fail’. It has been pointed out that if the ‘Big three’ auto companies were to fail then it would deprive about 3 million people of employment and would wipe out about US$150 billion of discretionary incomes in 2009. But all these will not be without severe consequences (though they will be felt only in the long-term). While this may double the US budget deficit to nearly US$1 trillion next year23, there may be no other alternative for the US and world economy24. There is one important aspect that governments the world over need to keep in mind. They should not be carried away with the supposedly huge reserves that some of the governments have at their disposal. China, Japan, Russia and India fall into this category. Asian nations have seven of the 10 biggest pools of foreign-exchange reserves, according to data compiled by Bloomberg. China’s $1.9 trillion holdings account for 28 percent of the worldwide total. Japan has the second-highest tally at $969 billion. India, Taiwan, South Korea, Singapore, Hong Kong and Malaysia each have more than $100 billion. However, most of these reserves are invested in US Treasuries and debt instruments like those issued by Fannie and Freddie – which have an implicit US government guarantee. Should the push come to the shove and the government(s) need(s) these reserves, they may turn out into an illusion wherein the governments may be forced to dump these in the market, thereby driving down their market value and with it the money realizable – at a time when government’s need hard cash the most. The Case of India: Winston Churchill once said that the most exhilarating feeling in life is to be shot at – and missed. An inversion of this quote and looking at it from the shooter’s point of view would probably sum up the efforts of our policy makers. They have continue to shoot (since August 2007, when they were living in denial) and – invariably miss. Till about three months ago, anybody who thought India was heading for a slowdown was considered to be senile. Now, anybody who thinks India COULD enter a recession is considered to be in a poor state of mind, if not mad. Ironically, these are signs that we are far from the bottom. It is pertinent to note that markets have never bottomed out when a large section of the people think that stocks (or other assets) are available at bargain prices (like the present scenario). We will first enumerate the problems that the Indian economy faces then try to elucidate why we think things are far worse than we are made to believe. A couple of factors have been overlooked (or have not been given much importance). Only belatedly are we waking up to the view that in an era of global capital flows (and a system where credit lubricates that economic engine), it is impossible to conceive of growth during a period when liquidity will continue to be drained from the world economy. The India Story (boom) since 2002 has one that has largely been possible due to credit financed construction and consumption25 that has largely been urban centric. This is obvious because the past five years have seen only nominal growth in the agricultural sector. This consumption story seems to have reached its logical end with the increase in interest rates and the RBI’s tightening of the monetary policy in order to fight inflation.

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Krisani Global Economic Outlook 2008. It would be a mistake to think that certain countries will emerge from the crisis unscathed or even escape with little damage. A predominant view has been that countries like India and China (which have a large domestic sector) could emerge from the present crisis with relatively little damage. That would be a fallacy on the lines of the de-coupling argument put forward a few months ago. A statistical overview of the nature of Indian economic scenario clearly proves otherwise. India has a population of more than 1.1 billion. The number of people who live on less than US$2 per day is nearly 60 percent of the population (according to World Bank estimate). A 2005 World Bank study pointed out that the number of people living on US$2.5 or less than that a day was 938 million26. This sixty percent are stated to account for about 30 percent of the consumption, while the rich 10 percent are stated to account for 30 percent of the consumption. The problem for the Indian comes from two fronts (1) problems related to increased consumption ability of the middle classes during times of economic slowdown or even outright recession, (2) the increased cost of capital to the corporate sector and the government. The government of India has announced that India would need about US$500 billion of investments in the infrastructure in the Twelfth Plan – nearly US$100 billion per year. The above situation would have hardly been a cause for concern if the boom had continued. The Institute for International Finance (IIF) estimated in September 2008, that net private flows to all the emerging markets in 2007 reached a record of almost US$900 billion. By 2009, this expected to come down to US$135 billion. This could be reduced further due to the conditions in the credit markets after the collapse of Lehman Brothers in September 200827. India received about US$108 billion of capital inflows in 2008, of which FII flows were about US$29 billion, US$42 billion was debt, and FDI was US$15.5 billion. Remittances were a more than US$27 billion. In such circumstances, it would be a miracle if the Indian economy is able to grow at 6% in FY 2008-09 and more than 4 percent in FY2009-10. NBFC problems The problems that the Indian economy faces include those that are more domestic driven rather than merely the reduction of inflows of foreign money. A large part of the lending business is carried out by banks and the non-banking finance companies (NBFCs). The high interest costs have created trouble for the NBFC sector as they normally cater to clients who are not exactly the most credit worthy. The NBFC sector (non-deposit taking) is estimated to be about Rs.380,000 crores28. A large part of the lending is towards, automobiles, consumer durables, housing, trade and stocks (as well as other forms of speculation). A collapse in this segment could bring the whole system down. The fact that they are not allowed to access deposits from the general public only aggravates the situation. They either borrow money from banks and other formal players or in the case of the smaller towns and cities the directors of NBFCs borrow money in their individual capacity using promissory note system. A deterioration in the economic environment means that they not only can they not repay the bank loans but cannot repay the principle or interest to the creditors (who had lent through promissory notes) thereby setting off a cascading negative effect through out the smaller towns. We may already be witnessing this in the smaller towns, where consumption has been badly affected. Problems for the banking system: A banker has cited the finance minister’s claim that banks should lend to NBFCs simply because they have about Rs.350,000 crores of assets29. Apparently, there is one important aspect that the Finance Minister seems to have overlooked. As a generalization, NBFCs have large lending to automobiles, consumer goods, stocks, and only later to trade, etc. As the economy’s woes worsen, it is bound to have a domino effect on all these assets. Stocks, real estate and automobiles are already feeling the heat. Apart from the fact that there is a problem of objectively assessing the quality of assets, valuation will continue to remain a grey area. A loan for a 10 tonne lorry (which could be as high as 8-10 lakhs) could become an investment that is worth little more than a few thousands (that too for the RC book, etc). If the dues go beyond five months then it is certain that the owner will not undertake any maintenance and the condition of the vehicle will be worth something only to the scrap dealer rather than the banker. The default may not be wilful but more do with a collapse in the freight rates. It is pertinent to note that the railways have become very efficient and with every percentage point increase in the freight traffic carried by the railways, the effect on the automobile sector (to which NBFCs have maximum exposure) will find it disastrous. Unfortunately, a slowdown in the boom sectors of the past four years (Real Estate, Retail, BFSI and IT) means that fewer professionals in that segment will be willing to risk spending money on new vehicles. A more peculiar problem that Indian banking has to face is the question of valuation of assets. Failure of valuation models practiced presently has been exposed as being woefully short (to be polite). VaR, the dominant system practiced by banks and others leads to an illusion that one can quantify all risks and therefore regulate them. Most of the banks have little local knowledge due the present system that they have created (a ‘systems based’ one) that ignores local conditions. More importantly, quantitative techniques have increasingly replaced qualitative aspects (even among the NBFCs). Only the small town NBFCs continue to use qualitative methods and hence have been able to survive. Banks have a system wherein they emphasise on meeting targets. This is useful for the banks with a short-term orientation (that are oriented to the stock markets as they can provide excellent figures on a quarterly basis) but bad for the long-term. This is useful in the short-term simply because pushing credit to those with doubtful track record will enable the bank to expand business and advances which in turn enable them to show a temporary decline in non-performing assets (henceforth NPAs). NPAs are calculated as percent of the advances.

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Krisani Global Economic Outlook 2008. More importantly, re-financing a loan is easy during times of plenty. Interestingly, the SBI chief is reported to have stated that realty price will fall by about 50 percent30. The problem of Jobs: Is India going to achieve its target of 7 percent growth rate in the worst case scenario? This question assumes significance when it is apparent that the worst case scenarios for the world economy are actually turning out to be best case scenarios. The short answer would be no. Why? Some of these issues are highlighted below. One reason for our extreme bearishness is because of the speed with which business conditions are deteriorating as the chart provided below indicates31. It shows the rapid deterioration of the services business from April to October 2008. It is clear that India is one of the few countries among the emerging economies to see such a rapid deterioration. This is bound to have an impact on the segments of the Indian population that have the maximum spending ability. The negative repercussions of this will be felt more intensely over the next one year or more as the cut back reverberates through the system. It is pertinent to note that every rupee spent on housing is shared by multiple businesses.

The list will be exhaustive and hence has been cut short only to validate arguments made in this paper. 1. There has been a near collapse of the real estate sector. While the problems of the builders (mostly larger ones) have gained widespread publicity over the past few months, an area that has often been overlooked is the impact of the lack of availability of credit in small cities and towns of India. The case of Vijayawada is instructive as the Builders Association is more candid than elsewhere. The city of about 1.5 million has about 7000 apartments (of various categories) under construction. Only about 50 percent of them have completed sales. Each apartment costs between Rs.25 lakhs and Rs.75 lakhs. The builders thus unsold inventory of Rs.750 crores to Rs.1000 crores32. The problem with construction sector is that it is unlikely that the client will pay upfront. As the payments are staggered well into the future, builders will have a substantial requirement of working capital – a scare commodity in the present circumstances. 2. Job losses have only gained momentum that may be very difficult to halt. Carpet industry33, diamond industry and the textile industry34 are reportedly in trouble. Airline industry has decided to stop paying commission to airline ticketing agents. It has been estimated that nearly 300,000 travel agents may lose their jobs35. 3. BSNL has announced that it would reduce the GSM Line capex due to market conditions. It would be smaller than the previously announced Rs.40,000 crores (though the company did not announce the quantum of reduction).36 4. SAIL may cut down steel production due to a fall in demand37. Steel prices in India have already fallen by 50 percent in two months. 5. Companies have decided to defer tax payments, though it may cost them a penal interest of 12 percent per annum due to tight liquidity conditions and because it is less expensive for them to pay the penal interest than to borrow money from banks38. 6. Aviation sector is expected to lose about Rs.10,000 crores this fiscal. Air traffic is expected to fall by about 15%39.

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Krisani Global Economic Outlook 2008. 7.

Ratan Tata has asked his companies to be cautious40.

The list goes on.... Industries to be affected the most - In order of Impact: a) Airlines b) Automobile & associated sectors. c) Retail (especially luxury retail) d) Real estate & Infrastructure (especially BOT) e) Hospitality f)

Metals & Commodities

g) Ports h) Housing i)

Banking

j)

FMCG

Déjà vu All Over Again? A worrisome feature of the present crisis is that it appears (though difficult to validate at the present scenario) to combine the most damaging elements of the 1907 Crisis and the 1929. Unfortunately policy makers seem to be stuck with solutions that they would like to borrow from one their experience of the 1929 crisis. Importantly, the passage of a generation seems to have erased the collective institutional memory that they policy makers had built because of their experiences between 1914 and 1945. The collapse in shipping freight rates has ominous portent for the well being of the world economy. The consequences of this will be felt over the next few years and could make it felt over the next one decade (in the worst case scenario). Greater losses would invariably lead to closure of shipping companies as they may not have the wherewithal to absorb greater losses. This would in turn probably lead to shortage of carriers in the next few years. This would create conditions wherein even a minor pickup in demand (may be even due to seasonal factors) would lead to a sharp jump in the cost of transportation which in turn would lead to a large rise in foodgrains (with disastrous consequences) for the middle and poorer classes. This is largely because of the cyclical nature of shipping industry but also because of the fact that it takes a long time to build a ship. Any shortage would lead to shortages that would be felt over at least 1-3 years. Ships cannot be built over a day or a month. We could go back to a situation where the world (which is now being pump-primed) by huge doses of cash could lead to a sharp spurt in prices (and with it inflation) IF the experiment succeeds. This could be because of the lack of transportation and any spare capacity to meet even a slight growth in demand. The charts in this report seem to have a story that may make worst case scenarios look like best case scenarios. The collapse in different markets (classes of assets) seems to be testing the very foundations of modern day capitalism, which rest on two cardinal principles – Trust and sanctity of the contract. As markets collapse (if they continue to do so in the next six months) it may become increasingly tempting and it may become increasingly economically profitable to dishonour a contract or default on their commitment. Derivatives could be one such area. This would not be difficult as a large part of the derivatives contract is mostly unregulated and outside the formal system of exchanges, etc. Most of it is part of the ‘shadow banking’ system that is not regulated. There is nothing much most of the government’s can do at the present juncture - expect hope for the best while increasing spending on public works. It is hoped that this will lead to a cushioning of job losses over a period of time. Spending has already collapsed. The collapse in orders of Volvo reflects the poor state of affairs. The firm announced that it had received a mere 115 orders for heavy trucks in Europe in the third quarter, down by 99.7% on the 41,970 order bookings during the same period of 200741. The problem for emerging market companies is bound to be compounded over the next one year when they will have to refinancing US$450-billion in notes, bonds and loans. According to Dealogic, the debts come due next year, with another $487billion maturing in 2010. Between bonds and syndicated loans, emerging market companies have borrowed roughly $1.3trillion in the last three years or so, according to various industry estimates. All these loans come due by 2014. These bonds and loans carry $60-billion of interest payments through the end of 2009. The collapse in commodity prices is restricting

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Krisani Global Economic Outlook 2008. earnings and cash flow also, reinforcing the risks these companies face gaining access to financing. JPMorgan estimates an emerging market corporate bond default rate of 1 per cent, up from 0.7 per cent this year, on $518-billion worth of bonds outstanding42. 3 Scenarios for the World Economy It is imperative to qualify these scenarios with a disclosure: The ideas elucidated below seem improbable but plausible. Our ideas in May 2008 seemed improbable. After all, this crisis (which seems to have combined the worst of 1907 and 1929) has been to anticipate the unanticipated and prepare for the improbable but plausible. Scenario I This is also the best case scenario. The present day synchronised cut to near zero percent interest rates may just about create another era of easy money in the next year or two. This would gradually again endear people to take bigger risks – after all enlightened self interest (or more like unchecked greed) may yet make a come back. As monetary policy takes about 6-8 months to work its way through to the system, this scenario envisages a recovery to start sometime around March-June2009. However, this best case scenario is subject to a number of important pre-conditions being satisfied. This best case scenario is based on the following assumptions, which include: 1. No further deterioration in the credit markets; 2. Reduced Volatility in the currency markets; 3. De-leveraging is at the end of the cycle; 4. That monetary policy is still the most effective tool; 5. Analysts’ estimates about earnings are correct. 6. An ineffective president of USA (George Bush) does not get adventurous and does not attack Iran. 7.

Housing prices stop falling in USA and Europe.

While theoretically possible, most of the assumptions are unlikely to take place in the next three to six months. While the money markets have calmed down to an extent, some important indicators seem to indicate that there is a lull rather than a recovery. The readings in some of the important charts cited above over the past ten days (since November 1, 2008), indicates that the markets are far from normal. At best, some of them have stabilised to pre-Lehman bankruptcy levels. An indicative chart is that of cited in page 7, banks are still not lending to each other. The reading continues to be above one. Three years ago, it was hovering around 0.2-0.4. Baltic Freight Index’s downward hurtle has come down relatively: instead of falling 10 to 12 percent a day, it now falls by around one percent or less a day with the occasional rise (since November 1, 2008). The only positive reading has been in the form of HIBOR and US-TED spread which are more or less back in the territory of the pre-Lehman collapse era. This could well be the case of bears pausing for breadth rather than the other way round. The black swan that could upset this best case scenario is Assumption 6: George Bush, member of the born-again Christian extreme right may decide that he has had enough of the Ayotollah’s of Iran and decide that he could send a couple of missiles into Iran. That could unleash a disaster on the world economy that would have unforeseen negative consequences. What is the probability of that happening? 50:50. He and his Republican adjuncts have nothing to lose and a world to gain (especially among their far-right followers in the long-term). Why? Consider the following: 1. In case Obama is not able to deliver then after four years, George Bush and his brand of Republicanism could just make a comeback. His brother Jeb Bush (the guy who rigged the elections in Florida in 2000) could be back in the reckoning as a candidate, while rallying the republican faithful. 2. It could be best way to get back at the Democrats and the American voters, who have rejected his politics. He is not answerable to anybody at present. 3. Russia is at its weakest point in the past seven years. They themselves are on the verge of an economic collapse (if oil comes back to US$40 and other commodities collapse due to a long-recession in the world), one should not be surprised to see a repeat of 1998, when Russia defaulted on its foreign debt. Moreover, it is not in a position to take a strong stance like it did in the case of Georgia recently. 4. Iran itself has a problem of balancing its budget and its economy is not in a good shape due to the collapse in oil prices.

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Krisani Global Economic Outlook 2008. Scenario II This is the median scenario that we provide. The stimulus along with various other measures by the US Government agencies and the international agencies do work over the medium term (say one year) then we may have a recover by OctoberDecember 2009. This recovery hope rests largely on the fact that various governments are pumping in huge sums of money. However, it would be a mistake to think that a recovery would mean the start of a roaring bull run. That roaring bull-run could be at least 4-5 years away. It is pertinent to note that in normal circumstances, it would take at least about 1-2 years before risk aversion is overcome. Even if risk-aversion were to be overcome, then it would still take a long-time before money flows back into India, considering that there will be better opportunities in the developed world. As and when economies do come of out of recession, the opportunities are bound to abound in USA and Europe and there would be no need for money to chase higher returns the world over. However, Scenario I & II would have to have to take into account that investors will have to discount the huge fiscal deficit and the competition for capital among the developed world and China. As countries are forced to spend money, it would invariably lead to these countries borrowing money from the markets. It would also lead to a situation where debt investors have greater opportunities as they can lend to countries (in order to take an exposure that is relatively safe vis-a-vis the corporate sector) instead of buying corporate bonds. Corporate bonds may look attractive over the medium term due to the high yields at present due to falling prices that which in turn is due to deleveraging that is taking place. This crowding out of the resources will invariably lead to companies having to borrow at a higher cost, a fact that would lead to lower corporate profits. A consequence of this recovery (due to pump priming) by various governments would be that there is a high chance of inflation rearing its head again. As the part on shipping in this report has highlighted, any recovery in the world economy would invariably catch most of the sectors short of capacity (due to the closures taking place). This would lead to prices (and inflation) shooting up all round the world. This scenario is also subject to important assumptions that have been made in Scenario I. Scenario III This is our worst case scenario. This would lead to disastrous consequences for the world economy. The fact that most of the banks have ‘liquidity black hole’43 would mean that they would not increase their lending over the next two or three quarters. This would lead to a semi-paralytic stage in the world economy as companies go insolvent due to the lack of credit. As deleveraging gathers momentum, the next shoe to drop will be hedge funds, which in turn will only make players in the derivative markets more nervous, thereby expanding the need to be ahead of the curve – in selling. Uncertainty will (as it already is) be compounded by the fact that nobody knows how bad the problem is. Investors hate uncertainty and hence would prefer to go back into US Treasury bonds rather than risk losses. Since inflation is collapsing with the collapse in demand and prices, negative yield is no more an issue. Joseph Stiglitz has opined that even if Obama does everything right then it would take about 18 months before the US economy can be turned around44. It is difficult for the markets to rise but very easy to fall – they can fall under their own weight. If any two assumptions for Scenario I are violated then we are looking at this (scenario III, worst case scenario) – a likely event. We would believe that we have just crossed the mid-point in the crisis. We have to grow through an interregnum of a long-sideways movement before confidence recovers into the system. One need not be surprised if it turns out to be a lost decade for the USA, and the world economy with it. What would happen during the course of this worst case scenario? The multitude of packages would not work. The cost to the world economy would far exceed US$15 trillion. The trigger for yet another collapse could come with either the Big Three auto majors going bankrupt and in the panic that follows we would probably have a large number of highly indebted global majors from different industries going bankrupt. It has been pointed out that a bankruptcy filing by a single Detroit car company could cost the US economy nearly US$175 billion in the first year45 (when there will be legal cases and bankruptcy proceedings) of which personal income losses could be in range of US$125 billion while it could increase to more than US$275 billion. Job losses could total nearly 2.5 million (including about 1.4 million in industries not directly tied to manufacturing46. The second phase of the crisis need not start in USA. It could well be some countries or hedge funds going insolvent. As currencies become more volatile combining with collapsing commodity prices would be the next area to keep an eye on. We would have a scenario where very few people, companies and countries eking out sufficient amounts to balance their budgets. That in turn would reverberate through out the world economy. Russia is stated to be nearing a crisis point, which would probably be trigged once oil falls below US$40. Smaller countries in emerging Eastern Europe would then collapse like nine pins. Most of Africa, is anyway too poor to make much of a difference to the world economy. However, South Africa is already facing pressure due to the collapse in the commodity prices and the pressure on currency. A collapse in emerging economies of Eastern Europe would lead to even greater problems for the European banks. S&P in its report titled “Gaping Refunding Pipeline in Europe” has pointed out that Europe could face a credit crunch that could make things worse. It warns that nearly US$2.1 trillion of debt is coming due in Western Europe and Britain over the next three years.

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Krisani Global Economic Outlook 2008. Banks and financial institutions account for nearly 72 percent. More problematically, companies have about US$586 billion of debts. This excludes the more than US$160 billion dollars of GE debt due before the end of 200947.This excludes emerging market debt which exceeds US$800 billion. Any hint of trouble will spark another round of panic selling. Importantly, European banks in countries such as Sweden, Netherlands, Belgium and others have banking sector leverage that is very large in proportion to the relative size of their economies. UK household debt was 165 percent of personal income in 2007 – about 50 percent higher than the burden before the onset of the recession of the early 1990s48. There are two way be which these countries (along with help from USA) could attempt to overcome the forthcoming crisis: (1) print more money, and (2) default or violate the sanctity of the contract. The first will postpone the crisis and would lead to changed perceptions about the nature of the crisis: it would lead to hyper inflation. Any attempt at the second solution would be disastrous for the world economy. Thus the next two years are going to see two diametrically opposite concerns – first deflation, then inflation. Among the nations (emerging markets) countries like India, that are largely in denial, about the state of their economy would be severely hit as they are least prepared (due to their blissful ignorance). If the global crisis were to continue for more than two years then the case for India would be a 1991 re-dux. A number of companies are overleveraged (almost all the real estate players) and a number of large companies have announced huge expansion plans, most of which are half way through. A prolonged crisis would not only reduce their profits and make capital scarce, but would also lead to a situation of very expensive cost of capital. India is a country that is largely dependent on imports and its few exports are dominated by services. The case of Russia (whose reserves have reduced by 25% since August) shows how quickly these ‘reserves’ can dissolve. The problem for India is compounded by the fact that India is a country of extremes. There are 27 Indians with a net worth of US$1 billion or more, while 456 million Indians live on less than US$1.25 a day (World Bank estimates)49. India is one of the few countries which had a huge deficit at the top of the economic cycle. It is definitely the poorest among those that could afford to have a deficit that when combined was more than or nearly 9 percent of the GDP when it was growing at 9 percent. Unlike in the past, consumer debt is at a record, and at a time when they can least afford it. All the large business groups in India are highly leveraged. Ratan Tata has been the most candid. This is not to claim that all or most of the largest business groups will become insolvent. The larger players (especially those who have traditionally been diversified will be able to raise capital, albeit at a higher cost). If there is one house that will survive it will be the House of Tata (as they have a very strong institutional memory) and more importantly they were there (at the brink) in the late 1990s. But they too have been late, very late, in realising the nature of this crisis. Other second rung groups in India may not be so fortunate, especially those who are in services, realty and infrastructure. This is because a large number of them had moved aggressively into those sectors from late 2007 and early 2008 – again due to their intellectual deficiencies as they were convinced about the possibility of ‘decoupling theory’, that too in the era of globalisation. A problem that is generally not factored in is that at each point of the progression of the crisis we tend to see huge losses for hedge funds, pension funds and other large institutional players. Another issue that most companies and countries would have to deal with (if the crisis extends more than another year) is that a deterioration of the macro-economic environment would invariably lead to cut in ratings of various companies in the financial as well as other sectors. Each time ratings are cut it would reverberate in other sectors as companies would have to come up with additional collateral or would have to shrink their books – both difficult propositions in the present scenario. Importantly, as the leverage ratio needs to drop drastically from the present levels (though it has come down from all time high) it would lead to further debt deflation and further write offs. The illustration of Goldman Sachs’ is instructive. Its leverage ratio has come down from 26 to 1 to the mid-October level of 19 to 1 is still on the higher side. Before the boom began, it was more like 10 to 1. It has been pointed out that a 4 percent decline in the value of the firm’s assets would wipe out shareholder equity50. It not unlikely, that a large number of players are increasing their short-side hedges to counter the move downward. Just as the down move caught them unawares, it is likely that a majority of the players would be caught off guard when the recovery starts. That would lead to another round of losses on their wrongly hedged positions, thereby prolonging the pain. The recent volatility in the commodity and the currency markets could come back to haunt traders. It would not be off the mark to suggest that by the end of this bear market at least about 60 percent of the highly leveraged players would be wiped out. The majority of the players are in the banking, financial, real estate, oil and gas, and shipping players. These were the segments which were carried away by their own thinking: that trees will grow to the sky. A pertinent question that we would have to ask, is what happens if our arguments in Scenario III are wrong? The short answer is nothing much, one loses about 3-6 months of time in a business environment that is competitive. But, what if we are right? It could be the difference between life and death. We believe that the changes introduced by information technology would invariably lead to a situation where the fall has been quickened to the nature of capital and information flows. A similar situation is bound to exist when a rebound starts when the up-move would be quicker that in the past. What would actually make the difference would be the analytic framework of companies that have been able to prepare themselves through various scenarios. It has been pointed out facts are free, opinion is sacred. This we believe is the underlying principle and utility of our bi-annual Global Economic Outlook.

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Krisani Global Economic Outlook 2008. We provide some general observations about what companies could do to overcome the present recessionary (or even deflationary environment). What Companies need to do to overcome the Recession: 1. Conserve Cash cut debt (Zero debt is the safest) 2. Keep Cash (in deflation, cash graduates to the King of Kings) 3. Cut costs: Slash all wasteful expenditure 4. Freeze hiring, etc. Streamline functioning. Implement solutions that would be difficult to plate at other times using the poor conditions as the trigger. 5. Plan for the worst but hope for the best 6. Realistic Expectations 7.

Continue to Invest in R&D and give priority to innovation

8. Go to the drawing board and start preparations for the coming boom – but without any financial commitment at present. 9. Keep your flock together – continue to keep morale high among employees. 10. Don’t give up hope: we all live on that (unless we enter deflation, when you should abandon all hope and start shorting any or all assets)

Post Script: World Economy at the Present Juncture Source: http://www.economist.com/finance/displaystory.cfm?story_id=12552204 (Footnotes) 1

Cited in The Financial Times.

http://www.ft.com/cms/s/0/e1eb0f60-a5a7-11dd-9d26-000077b07658.html In the USA, in 1980 the domestic financial sector profits accounted for approximately 13 percent of the pre-tax profits. By 2007, this had increased to about 27% of the domestic pre-tax profits - Federal Reserve data cited in Justin Lahart, “Has the Financial Industry’s Heyday come and Gone?, The Wall Street Journal, 28 April 2008, p.A2. 2

3

http://www.imf.org/external/pubs/ft/wp/2008/wp08224.pdf

4

Thomas Nagel (1986), The View From Nowhere, Oxford University Press, New York, p.1.

5

This was implied by Rajeev Chandrasekhar who was particularly incensed that the RBI governor was sending

‘wrong signals’ by his candid admission that he did not know what the next year would look like. It is pertinent to note that short-term measures undermine the very basis on which markets function – the legitimizing role of institutions of the state. There is a limit to attempting to expand the liminal point. Recessions or crisis periods are not the time to test the liminal points. That should be taken up in a bull market – which the Indian state clearly missed. 6

://www.economist.com/business/displaystory.cfm?story_id=12380997

7

http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article5069065.ece

8

http://www.reuters.com/article/GCA-CreditCrisis/idUSTRE4A62D920081107

9

http://www.bankofengland.co.uk/publications/fsr/2008/fsrfull0810.pdf http://www.bloomberg.com/apps/news?pid=20601087&sid=aOngFPgq7r3M&refer=home

10

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Krisani Global Economic Outlook 2008.

11

http://www.bloomberg.com/apps/news?pid=20601109&sid=a0CcmxJQnS7A&refer=home

http://www.bloomberg.com/apps/news?pid=20601087&sid=aUFuddxXkw8k&refer=home

12

http://www.bloomberg.com/apps/news?pid=20601109&sid=aACeVPlPw2mM&refer=home

13

http://www.bloomberg.com/apps/news?pid=20601087&sid=ahkq91XcsKnY&refer=home

14

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/3374228/Recession-hits-Europe-as-Club-Med-debtworries-grow.html 15

16

http://www.bloomberg.com/apps/news?pid=20601087&sid=agGBpPduI3E4&refer=home

17

http://www.bloomberg.com/apps/news?pid=20601087&sid=agGBpPduI3E4&refer=home

18

http://www.nytimes.com/2008/11/07/business/07retail.html?

19

://www.ft.com/cms/s/0/7cc47dfe-aa95-11dd-897c-000077b07658.html

20

http://www.bloomberg.com/apps/news?pid=20601087&sid=augL9_cumtA4&refer=home

21

http://www.bloomberg.com/apps/news?pid=20601083&sid=aiU5uYzjzFq8&refer=currency.

22

http://www.iht.com/articles/2007/08/14/news/14oxan-unitedstates.php

(Website last visited 10 November 2008). 23

http://www.bloomberg.com/apps/news?pid=20601087&sid=aKX9lmEoZkTI&refer=home

24

http://www.ft.com/cms/s/0/3496c848-ae91-11dd-b621-000077b07658.html

25

For an interesting analysis see “Prospects of an industrial recession”, Businessline, 4 November 2008, p.9.

26

Cited in “Swelling ranks – of the poor”, The Businessline, 23 September 2008, p.9.

27

http://www.iif.com/press/press+81.php

28

A figure provided by KV Kamath , the President of CII. “Save financial sector to save the economy: Kamath”,

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Krisani Global Economic Outlook 2008. The Financial Express, 3 November 2008, p.4. 29

“Lenders wary of loans to NBFCs”, Business Standard, Section II, p.4.

30

“Realty prices to fall 50%, says SBI chief”, The Financial Express, 9 November 2008, p.1.

31

http://www.ft.com/cms/s/0/9e246116-ae83-11dd-b621-000077b07658.html

(website last visited 10 November 2008) 32

“Now, builders are feeling the pinch!”, The Hindu, Vijayawada Edition, 9 November 2008, p.2.

33

“Thousands lose jobs in carpet export hub”, Business Standard, 10 November 2008, p.1.

“Looming Trouble”, Businessline, 4 November 2008, p.8. The textile sector accounts for about 11 percent of India’s exports and 4 percent of GDP. Half of the produce is exported to USA and Europe. The sector provides livelihood to nearly 35 million people in India.

34

35

“3 lakh travel agents may lose job”, Business Standard, 10 November 2008, p.4.

36

“BSNL GSM Line capex may come down”, Business Standard, 10 November 2008, p.4

37

“SAIL may cut down steel production”, Business Standard, 10 November 2008, p.4.

38

“Firms defer tax payments”, Business Standard, 10 November 2008, p.1.

39

“Aviation files into negative growth zone”, The Economic Times, 10 November 2008, p.1.

40

“ Ratan Tat to Group Cos: Freeze acquisitions, capex plans”, The Businessline, 13 November 2008, p.1.

41

http://www.economist.com/finance/displaystory.cfm?story_id=12523906

42

http://www.globeinvestor.com/servlet/story/RTGAM.20081031.wemerging1102/GIStory/

43

http://www.economist.com/finance/displaystory.cfm?story_id=12552204

44

http://www.bloomberg.com/apps/news?pid=20601213&sid=aKmxK0Dtpv4I&refer=home

45

http://www.nytimes.com/2008/11/13/business/economy/13bankruptcy.html?

46

Center for Automotive Research cited in Bloomberg.

http://www.bloomberg.com/apps/news?pid=20601087&sid=a8oQkqyRcU6Y&refer=home 47

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a4JmrNtu4Fpw

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/3448664/Abandon-all-hope-once-you-enterdeflation.html 48

49

http://www.bloomberg.com/apps/news?pid=20601110&sid=aRwDkZL1YIYo

50

http://www.bloomberg.com/news/marketsmag/mm_1208_story1.html

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Krisani Global Economic Outlook 2008.

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