Covid 19 Crisis Tata PDF

The Great Economic crisis of 2020
Objective of this Handbook
Make everyone understand what is happening around them and make financial decisions more meaningful
(like decisions on income, savings, expenditure, buying flats, buy cars, invest in stocks, or buy gold bullion
or jewellery etc.). Another objective is to make every individual protect themselves from the financial chaos
happening at local and global level.
Who can read this?
Policy-makers, bureaucrats, civil service aspirants, banking officials, employees with any income level,
Businessmen, or anyone who is interested in understanding the financial crisis, and protect themselves
Topics covered
1. Understand Credit Boom / Bubble and Sub-Prime lending

2. Understand Housing bubble, Auto boom, Corporate balance sheet crisis
3. Understand sovereign debt crisis
4. Inter-connection of all these bubbles and crisis with the Global economic crisis.
5. The Virus ‘Panic of March 2020’ that lead to the ‘once in a century market crash’
6. Impact of the COVID-19 on the financial crisis what was already built up
7. Possible ways of Economic revival.
Sovereign
Debt Crisi
Inflated Stock
and Bonds
Moral
linked to
Bankrutpcy
Corporate
sector
Economic
Crisis
Housing 2020 Corporate
balance sheet
Bubble
crisis
Banking
sector crisis & Auto boom
Credit bubble
We will come back the above Diagram in the end of this hand book
Appeal to the Readers: I strongly feel, this handbook is to be made available to all at free of cost. Anyone
who is sharing this softcopy to others are requested to do so, without resorting to plagiarism or copyrights
infringement.
Pragnya IAS Academy +91 9880487071 Hyderabad, Pune , Bangalore, Chennai, Tirupati
www.pragnyaias.com
Main Content
Lets try to understand the ‘The Credit boom driven Economic Bubble’. For those who are new to
economics, Don’t panic. I have tried to explain in a very simple approach for everyone to understand. It
might also look awkward to start with Tables and numbers. Ignore as much as possible. Even in the below
tabular column, you can ignore all data except the Column of year, Narrow money and broad money. In
most countries the Narrow money and broad money is what is generally considered as Money. They include
currency notes in circulation and with banks, Demand deposits and Time deposits. No need to remember
any of these data. Just looking at the trends and drawing reasonable inferences is what is required.
Currency
Cash with Currency 'Other' Bankers' Demand Time Reserve Narrow Broad
in
Year Circulation Banks with the Deposits Deposits Deposits Deposits Money Money Money
Public with the with the *crores

RBI RBI
2019-20
2399983 592829 3028987
2018-19
2136770 84561 2052209 31742 601969 1626512 11721603 2770481 3710464 15432067
2017-18
1829348 69635 1759712 23907 565525 1483712 10695255 2418779 3267331 13962587
2016-17
1335266 71142 1264124 21091 544127 1396741 10109983 1900485 2681957 12791940
2015-16
1663463 66209 1597254 15451 501826 989834 9015077 2180740 2602538 11617615
2014-15
1448312 62131 1386182 14590 465561 891632 8257764 1928463 2292404 10550168
2013-14
1301074 55255 1245819 1965 429703 811978 7457624 1732742 2059762 9517386
2012-13
1190975 49914 1141061 3240 320671 753225 6492293 1514886 1897526 8389819
2011-12
1067230 43560 1023670 2822 356291 710902 5647437 1426344 1737394 7384831
2010-11
949659 37823 911836 3653 423509 722856 4865771 1376821 1638345 6504116
2009-10
799549 32056 767492 3806 352299 717970 4113430 1155653 1489268 5602698
2008-09
691153 25703 665450 5533 291275 588688 3535105 987961 1259671 4794775
2007-08
590801 22390 568410 9027 328447 578372 2862046 928275 1155810 4017855
2006-07
504099 21244 482854 7467 197295 477604 2342113 708861 967925 3310038
2005-06
429578 17454 412124 6843 135511 407423 1893104 571932 826389 2719493
2004-05
368661 12347 356314 6454 113996 286998 1595887 489111 649766 2245653
2003-04
327028 12057 314971 5097 104365 258626 1426960 436490 578694 2005654
2002-03
282473 10892 271581 3219 83346 198757 1244379 369038 473558 1717936
2001-02
250974 10179 240794 2831 84147 179199 1075512 337952 422824 1498336
2000-01
218205 8654 209550 3613 81477 166270 933771 303295 379433 1313204
1999-00
197061 7979 189082 3034 80460 149681 782378 280555 341796 1124174
1998-99
175846 6902 168944 3736 79703 136388 671892 259286 309068 980960
1997-98
151056 5477 145579 3541 71806 118725 553488 226402 267844 821332
1996-97
137217 5130 132087 3194 59574 105334 455397 199985 240615 696012
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1995-96
122569 4311 118258 3344 68544 93233 384356 194457 214835 599191
1994-95
104681 4000 100681 3383 61218 88193 335338 169283 192257 527596
1993-94
85396 3095 82301 2525 50751 65952 280306 138672 150778 431084
1992-93
71326 3053 68273 1313 38140 54480 239950 110779 124066 364016
1991-92
63738 2640 61098 885 34882 52423 202643 99505 114406 317049
1990-91
55282 2234 53048 674 31823 39170 172936 87779 92892 265828
1989-90
48286 1986 46300 598 28707 34162 149890 77591 81060 230950
1988-89
40119 1790 38329 694 22145 27763 126707 62958 66786 193493
1987-88
35122 1563 33559 397 17970 24599 105720 53489 58555 164275
1986-87
29913 1531 28382 309 14586 22825 90116 44808 51516 141632
1985-86
26524 1465 25059 289 11352 18747 75299 38165 44095 119394
1984-85
23875 1203 22672 595 10746 16648 63018 35216 39915 102933
1983-84
20643 1040 19603 291 8060 13504 53127 28994 33398 86525
1982-83
17639 980 16659 186 5285 11690 44649 23110 28535 73184
1981-82
15411 937 14474 168 5419 10295 37815 20998 24937 62752
1980-81
14307 881 13426 411 4734 9587 32350 19452 23424 55774
1979-80
12382 728 11654 391 3800 7955 27226 16573 20000 47226
1978-79
10835 604 10231 166 3081 6895 22820 14082 17292 40112
1977-78
9152 521 8631 70 1719 5687 18518 10941 14388 32906
1976-77
8288 415 7873 121 1389 8030 11757 9798 16024 27781
1975-76
7053 348 6705 77 678 6543 9155 7808 13325 22480
1974-75
6701 354 6347 75 828 5553 7574 7604 11975 19549
1973-74
6595 274 6321 53 625 4826 6424 7273 11200 17624
1972-73
5680 242 5438 58 295 4204 5313 6033 9700 15013
1971-72
5006 205 4801 80 296 3442 4370 5382 8323 12693
1970-71
4557 186 4371 60 205 2943 3646 4822 7374 11020
1969-70
4160 165 3995 58 173 2483 3103 4390 6536 9639
1968-69
3794 112 3682 81 194 2016 2527 4069 5779 8306
1967-68
3468 92 3376 56 137 1918 2110 3662 5350 7460
1966-67
3289 90 3199 41 134 1711 1867 3464 4951 6817
1965-66
3112 78 3034 17 104 1478 1605 3233 4529 6134
1964-65
2841 72 2769 22 99 1289 1418 2962 4080 5498
1963-64
2670 64 2606 32 79 1115 1285 2781 3752 5037
1962-63
2439 60 2379 30 77 908 1243 2546 3317 4560
1961-62
2256 54 2202 23 73 824 1198 2352 3049 4247
1960-61
2154 56 2098 13 71 757 1095 2239 2869 3964
1959-60
2001 70 1931 17 93 772 1163 2111 2720 3883
1958-59 1846 54 1792 15 68 719 950 1929 2526 3476
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1957-58
1720 46 1674 16 68 723 750 1804 2413 3164
1956-57
1668 45 1623 8 58 711 527 1734 2342 2869
1955-56
1614 43 1571 9 53 637 466 1676 2217 2683
1954-55
1417 40 1377 7 48 571 424 1472 1955 2379
1953-54
1330 41 1289 12 42 527 372 1385 1828 2200
1952-53
1273 45 1228 14 47 521 357 1334 1764 2121
1951-52
1292 43 1249 18 47 545 325 1357 1812 2137
18000000
16000000
14000000
12000000
10000000
8000000 Narrow Money
6000000 Broad Money
4000000
2000000
0
1981-82
1969-70
1957-58
2017-18
2013-14
2009-10
2005-06
2001-02
1997-98
1993-94
1989-90
1985-86
1977-78
1973-74
1965-66
1961-62
1953-54
Some inferences from the above graph
It took 50 yrs to reach money supply of 10 lakh crores (1950-2000), But then this happened
It took 60 yrs to reach money supply of 50 lakh crores (1950-2010), But then this happened
Broad Money increased by 100lakh crores in a span of just 10 yrs (2009-2019)
Broad Money increased by 50lakh crores in a span of just 5 yrs (2014-2019)
What made govts to increase money supply like this in the last 20 years?
Common answers:
Population increased (No, it din't increase by 1500 %)
GDP Growth (No, the real production did not increase by 1500 %, but in monetary terms Nominal gdp growth might..
Assets increased (No, assets did not increase by 1500 %
Resources Increased (No, Resources did not increase by 1500 %)
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Lets apply some basic economics here: (CREDIT BUBBLE)

Increase in supply of a good (here its currency) leads to decrease in its price / value (of currency)
Decrease in value of currency means increae in the value of goods, services, assets etc.
To sum up - Its Inflation of good, services, real estates, automobiles, stocks and list goes on
By now you should understand that the current price levels are not due to genuine demand driven by
economic growth
Rather it is just Bubbled up the prices, which we call it as Credit bubble (New loans with new money)
In the current economic scenario, this credit bubble lead to everything bubble (drove up prices of most
of the assets)
Like RBI every central bank around the world did the same thing. The below is the FEDERAL RESERVE (of USA) data.
The Fed isn’t even publishing data before 1960s: The below is some data I tried digging out from Fed website.
We can see in the graph, Like rupee, dollar supply also increased exponentially for the last 10 years.
I hope you got the essence. May it be Bank of Japan, or ECB or Chinese central bank etc.. all data trends are similar.
Fed Money supply

4500.0
4000.0
3500.0
3000.0
2500.0
2000.0
Fed Money supply
1500.0
1000.0
500.0
0.0
1974-06-01
1980-08-01
1986-10-01
1992-12-01
1999-02-01
1959-01-01
1962-02-01
1965-03-01
1968-04-01
1971-05-01
1977-07-01
1983-09-01
1989-11-01
1996-01-01
2002-03-01
2005-04-01
2008-05-01
2011-06-01
2014-07-01
2017-08-01
(M1 Money Stock, Billions of Dollars, Monthly, Seasonally Adjusted)
observation_date
1959-01-01 138.9
1960-01-01 140.0
1961-01-01 141.1
1962-01-01 145.2
1963-01-01 148.3
1964-01-01 153.7
1965-01-01 160.7
1966-01-01 169.1
1967-01-01 171.9
1968-01-01 184.3
1969-01-01 198.7
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1970-01-01 206.2
1971-01-01 215.5
1972-01-01 230.1
1973-01-01 251.5
1974-01-01 263.8
1975-01-01 273.9
1976-01-01 288.4
1977-01-01 308.3
1978-01-01 334.4
1979-01-01 358.6
1980-01-01 385.8
1981-01-01 411.3
1982-01-01 442.7
1983-01-01 477.2
1984-01-01 525.1
1985-01-01 557.0
1986-01-01 621.4
1987-01-01 730.2
1988-01-01 756.2
1989-01-01 785.7
1990-01-01 795.4
1991-01-01 827.2
1992-01-01 910.4
1993-01-01 1030.4
1994-01-01 1131.6
1995-01-01 1151.4
1996-01-01 1123.5
1997-01-01 1081.2
1998-01-01 1074.0
1999-01-01 1098.1
2000-01-01 1122.2
2001-01-01 1096.7
2002-01-01 1190.7
2003-01-01 1227.3
2004-01-01 1306.0
2005-01-01 1367.1
2006-01-01 1379.5
2007-01-01 1371.7
2008-01-01 1377.7
2009-01-01 1582.8
2010-01-01 1674.7
2011-01-01 1853.5
2012-01-01 2201.9
2013-01-01 2473.4
2014-01-01 2696.3
2015-01-01 2940.5
2016-01-01 3097.8
2017-01-01 3388.3
2018-01-01 3649.5
2019-01-01 3740.5
2020-01-01 3982.2
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Lets Use concept of Credit Bubble to understand Housing bubble

Now you understand why housing prices are unaffordable to 99% unless they spend their 20yrs of future income
Its not because of employment, & urbanization. Income levels are in noway match for the housing prices
Easy loans are given to this, and therefore demand has gone up more than the income levels.
More money in that particular sector and therefore prices shoot up.
In the process, even the undervalued properties are also rounded to standard value or sometimes overvalued
Thus resulting in loan value > the Property value - This is called Sub-prime / Sub-mortgage lending
This whole process created Housing Bubble.
Auto boom, Industrial boom using the same above logic

In simiar way, in their obsession to lend more and grow big, banks have given excess loans to Automobile sector,
Industrial sector etc. Irrespective of real market variables of genuine demand and supply
What's happening to corporate loans now?

Corporate sector is now plagued with Balance sheet crisis/ insolvency.They were given more loans
Most of the corporate sector loans are also Sub-prime and unsecured loans.
Meaning, they were lended more than their capacity way more than what they really are eligible for.
Obvious result is Default on the loans. Now you call that a Corporate Scam, or Banking Scam or vijay mallaya
scam, or nirav modi scam, or anil ambani bankruptcy or vodafone/ airtel NPAs and debt defaults etc..
Now the number of companies being exposed are very less compared to number of companies in the Queue of
bankruptc. One of the research says, around 15% of corporates doesn’t have annual cash flows that can pay even
the annual interest payments
What will happen to Housing loans and auto loans in future

Until now, Housing sector loans and Auto loans aren't defaulted, while we can see corporate defaulting
But if Unemployment increases, Rents can come down. Difficult for house owners to pay EMIs
Real estate slow down and housing prices falling has also been reality in metros like Bangalore, Delhi etc. In both
of the above cases, the house owners who have taken new loans will start defaulting. They will ask banks to take
back their homes and they will give it very happily. Because they can get new one at much lesser prices
Same is the case with auto loans. When Incomes fall, default of vehicle loans happen. Already, we can see huge
slump in auto-sales esp the high-end ones. The economic slowdown will further affect negatively.
Banking sector is already crumbling with NPAs just from corporate loans. Now imagine its situation if
housing loans & Auto loans also defaults.
Sovereign Debt Crisis
Calculating debt levels as a % of GDP don't really tell us all we want to know about a Govt's ability to manage debt.
GDP = Govt Income + People's Income
If we want to know the extent to which a debt load is concerning, we must look instead at a Govt's revenue, rather than
just its GDP.
Because Debt is paid by Govt's tax and non-tax revenues, and not by all of our income. We use our income for our own
payments
So calculating debt levels as a % of Govt revenues let us know the Govt's ability to manage debt
Managing debt means timely payment of interests and repayment of debt on the maturity date
If we look at debt as % of GDP, it looks like all is well, and constant or even decreasing
But take a look at the absolute quantity of debt. Its increasing exponentially.
Added to this, look at the graph containing debt to Govt revenues. Its worse than Italy or other worse performing
economies. With the Govt's revenues, can it continue to pay interest amounts or loan repayments promptly? Because
with the same amount
Government should manage salaries, various schemes, defence, Welfare programmes etc.. Along with debt
management. But Debt to % of Govt revenues is over and above 300%
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Same is the case with other important countries. You can refer the graphical data. Japan & United States debt are the
worst of all going by the debt to Govt Revenue ratio
Note: Some data mis-match exists among the graph, as the sources vary. The underlying trend and the essence of the
topic is to be noted here
.
Debt in Debt Debt Per

Date
quantity (%GDP) Capita
2018 1,849,402 68.05% 1,367$
2017 1,799,723 67.83% 1,344$
2016 1,549,911 67.67% 1,170$
2015 1,446,597 68.78% 1,104$
2014 1,362,339 66.83% 1,052$
2013 1,251,012 67.38% 1,001$
2012 1,218,429 67.66% 988$
2011 1,245,273 68.29% 1,023$
2010 1,127,258 66.04% 939$
2009 971,764 71.09% 821$
2008 890,581 72.74% 763$
2007 916,873 74.03% 797$
2006 731,811 77.11% 646$
2005 674,463 80.89% 604$
2004 601,273 83.29% 547$
2003 521,082 84.24% 482$
2002 434,267 82.85% 408$
2001 388,857 78.73% 371$
2000 350,878 73.65% 341$
1999 326,651 70.04% 323$
1998 291,947 68.09% 294$
1997 286,998 67.82% 295$
1996 263,769 65.98% 276$
1995 255,351 69.65% 273$
1994 244,647 73.46% 266$
1993 218,767 76.98% 243$
1992 227,001 77.41% 257$
1991 207,045 75.33% 240$
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Debt in quantity
2,000,000
1,800,000
1,600,000
1,400,000
1,200,000
1,000,000
800,000 Debt in quantity
600,000
400,000
200,000
0
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
Debt as % of GDP
100.00%
80.00%
60.00%
40.00% Debt as % of GDP

20.00%
0.00%
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Look at USA debt as % of GDP and as % of Govt revenues. The difference just underlines how
Significant the difference between the two ways of understanding Public debt of a country.
So, What does such high debts imply?
For the last 2/3 decades there has been falling interest rates, and therefore govts, were able to manage debt. Now
interest rates had reached almost 0%. The only way is increase interest rate. This is when Govt's burden will
increase to manage Debt. Either they have to increase taxes or reduce welfare schemes or reduce other expenditure
or they have to default.
If its an internal debt, govts can manage better as it can always borrow from RBI (Print currency) While it cannot do
when it comes to external debt. This is where USA has edge over other countries as it can manage both internal and
external debt as dollar is global reserve currency. So India’s debt is difficult to manage even if its is debt to % of
govt revenue is many times less than that of USA.
So to sum-up, most countries including India have ended up in huge debts which are unmanageable
This is what is referred as Sovereign Debt Crisis. We all are part of this crisis. We happily accepted all the freebies,
welfare schemes when we thought govt is God and it can create the magic of free boons. Not only our future
income, but also our children's income is put at stake to clear all these Debt mess
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Sovereign
Debt Crisi
Inflated Stock
and Bonds
Moral
linked to
Bankrutpcy
Corporate
sector
Economic
Crisis
Housing 2020 Corporate
balance sheet
Bubble
crisis
Banking
sector crisis & Auto boom
Credit bubble
To further sum-up the whole background, the economy was surrounded by multiple bubbles (which I prefer to call it
as everything bubble). That’s what has been slowing down the global economy for last few years
Now, What has Corona Virus Lockdown did to the global economy which already was facing all the
problems we discussed?
The Gradual slowdown (as discussed above) has become Steep Crash with the ‘Panic of March 2020’ caused by
COVID-19. Panic led Stock disinvestments resulting in sharp crash in Stock Market capitalization value. The
below are few charts and snippets from the News.
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Foreign investment outflows causing greater exchange rate depreciation huge currency volatility
Labour force shutdown and inefficient labour force as a result of work from home etc.
No cash flows of almost all businesses except essentials like groceries and medicines. Businesses cannot pay
rents, salaries, EMIs, etc..
Employees will get unpaid or only partial payment which result in their EMI defaults. All these putting banks
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loans at much more risky
House owners may not get rents as most metropolitan IT cities turnout to be ghost cities. The house owners have
to default on house loan EMIs. This is can be the case of all metro cities of all the countries affected by the virus
Domestic and Foreign market shutdown causing completely fractured supply chain. Intra-border and cross border
trade to a complete halt.
The longer the Corona virus problems continue, the deeper the above problems will turnout to be. This might
even result in complete blow-up of all those crisis we discussed, like credit bubble, housing bubble, automobile
boom, Corporate balance sheet crisis, Inflated stocks/ bond market etc
This Market crash has potential to cause more damage than that of The G.E.C - 2008 or tech bubble or other
crashes of last 60/70yrs. because the current debt levels, stock, asset prices etc., are at all time high and therefore
the fall will also be big
Possible scenarios of Revival
1. Recovery from virus, patience and no panic markets. Govts will try to bail-out as much as it can, pay
salaries to all the employees by minting and borrowing from Central banks. This can bring back
economic activity to normaly,and can help to prevent all the bubbles from bursting, for few more years.
(But if virus lasts long, this strategy is like suicide. People stop trusting currency and go for barter
exchange)
2. If virus lasts for longer period, clear picture of a complete halt of economic activity. As discussed earlier,
it can blow-off the bubble in every sector. The recovery will be slow and long-term
Note to the reader: Each of the above topics can be explored in great depth. There are other important economic
fundamentals one need to know. But I strongly feel, this is just a hand-book of basic but necessary understanding
required for every individual irrespective of which country they belong to, irrespective of which sector they work
in and irrespective of their education background.
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The Great Economic crisis of 2020

Objective of this Handbook

Who can read this?

1. Understand Credit Boom / Bubble and Sub-Prime lending

Public with the with the *crores

8000000 Narrow Money

6000000 Broad Money

Some inferences from the above graph

Lets apply some basic economics here: (CREDIT BUBBLE)

Fed Money supply

(M1 Money Stock, Billions of Dollars, Monthly, Seasonally Adjusted)

Lets Use concept of Credit Bubble to understand Housing bubble

Auto boom, Industrial boom using the same above logic

What's happening to corporate loans now?

What will happen to Housing loans and auto loans in future

Sovereign Debt Crisis

Debt in Debt Debt Per

40.00% Debt as % of GDP

So, What does such high debts imply?

loans at much more risky

Possible scenarios of Revival

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