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The Slowdown Story
The Great Indian Slowdown is here!
This story was supposed to be published 8 months back, at the time of the Budget and has been sitting on my to-do for all these days, so decided to let it have its well deserved limelight. This is kinda a long story, but, hey, we’re talking about the Indian Economic Slowdown, not about cats and dogs, so, it is supposed to be long! Feb 17 - 2019 With over 70% of the globe set to face an economic slowdown this year, the outlook is gloom, though there are slight gleams of hope. The IMF downgraded the global growth outlook for the fourth time in the last 9 months. It started with the USA, and accelerated with the Eurozone crisis, into Europe and into Asia. The fastest growing continent of Asia is now facing severe challenges to growth with the downgrades, and lack of investor participation in their markets. China has been battling currency stability woes with its Yuan since 2015, when, surprising everyone, it devalued its Yuan three consecutive times. When people thougt it stopped with that, it rather was the start of a rather disturbing trend across the asian continent. India was rather immune to all the slowdowns throughout 2017, but, the Turkish Crisis hit the Indian Rupee very hard and the economy crumbled under the weight of the extremely high valuations and rather high leverage for a developing economy. China historically had never tried to devalue its own currency, and when it did so, it became clear that all was not well with the Dragon. Thanks to excessive growth in a very short time, demand had steadily started to decrease, and a fear set in that China might become the Japan of 1990s. But, what was more important was that, there were less and less demand of chinese products all over the world, and imports into china had begun to go up. The government was forced to devalue its own currency to counter the dangerous trend of falling exports and rising imports, that could as well end the economy's success in the previous decade. This however didn’t stop investors from hurrying out of the Dragon, and investments into China had witnessed a lull. Though the FDI inflows into China put it at the Second place globally, the growth in FDI inflows has taken a serious beating. The domestic investors had put in all their funds into venture capital funds, and there, just as we have had the Dot-Com bust, or the Housing bubble, too much of money is chasing too little of value, and is heading to a crash. That might put an end to about 40% of the total investments by Chinese individuals, That’s what happens when greed comes into any investing, as more and more money is invested by more and more people expecting multibagger returns.
It took capitalism half a century to come back from the Great Depression
The economic slowdown is widespread both geographically and in terms of causes. US-China trade tensions, credit tightening in China, economic turmoil in Argentina and Turkey, weakness in Germany’s auto sector, and higher interest rates have all contributed to reduced growth forecasts and lesser investor interest. The Slowdown has caused stunted growth for the FY 19 in over 70% of economies of the world by GDP. The Europe Growth engine has stalled for the last 6 months completely and it is not a good sign for the global economy, Growth forecasts fell short from 1.5% to a mere 1.2% in less than a quarter for the UK. Now, after more than a decade of the last big crisis, there is faint memory of what transpired a decade back. Global unemployment went up to 10.1% , even hitting as high as 60% in certain countries. Global stock markets went into the downward spiral any generation had ever witnessed. In just a span of 6 months, panic struck economies, and countries fell apart like a stack of dominoes.
But, is what is happening right now a repeat of 2008? No, it is worse. We’re staring now at possibly a bigger crisis than the great depression of the 1930s. The prefect recepie for an economic disaster is done this way : First, there is excess moderation and developed economies reduce their interest rates to abysmal levels. This causes borrowing to pickup and inflatory growth to resume, bringing some cheer into the faces of the economists of the developed economies. But, the demon, they think is under their control is now going to make them its slave. Then, there is the stage where non-developed economies, which are supposed to grow, show some signs of slowing down. This has traditionally been represented by the Asian economies of China, Japan and India, and the Middle East. Thirdly, commodity prices, especially that of Crude Oil start to experience a process called the last rise. All of the last 5 recessions have been preceeded by phenomenal rises in the price of Crude Oil, and in the last 2 years, crude has almost doubled from $36 a barrel to $60 at the time of writing this article. It is to be noted that crude oil hit a high of $75 before falling to the present level. Fourthly, governments of the developing economies face pressure from the sanctions of the developed economies who themselves are experiencing effects of slowdown in employment and growth. This is a vicious chain reaction, and growth in developing economies slows down furthermore, slowing the developed economies again. Finally, the recession is always triggered with the governments of the developing economies opting for more foreign debt, as interest rates are very less, to achieve their desired development. There are twin problems with this concept. Not only are we jeopardising our growth by opting for a completely inflationary growth model, but, we’re also skewing the future stability of the currency by basing our development agenda on borrowed funds, requiring repayment in forex. What has been going on in the global economy in the last 2 years is just the perfect buildup to possibly the biggest financial disaster anyone alive could ever see.
The most important point to keep in mind, is that the crisis is not “Coming Soon”, but, has already started affecting scores of economies.