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Coronavirus: Brace for Great Depression-type recession, warns investor Ruchir Sharma

Ruchir Sharma says India does not have fiscal space to come up with the US-type stimulus, which is planning to come up with direct stimulus worth 5 per cent of their GDP

twitter-logoBusinessToday.In | March 22, 2020 | Updated 16:02 IST
Coronavirus: Brace for Great Depression-type recession, warns investor Ruchir Sharma
Ruchir Sharma, the head of Emerging Markets and Chief Global Strategist at Morgan Stanley Investment

Ruchir Sharma, the head of Emerging Markets and Chief Global Strategist at Morgan Stanley Investment, has warned of looming global economic crisis in wake of the coronavirus pandemic. Sharma, who's also bestselling author of books like The Rise and Fall of Nations: Forces of Change in a Post-Crisis World, believes that if the coronavirus outbreak is not controlled by May, it can lead to an economic crisis similar to the Great Depression of 1930.

During an interview with India Today, Sharma talked about the ongoing situation as an unprecedented moment in global history in terms of economic crisis. "The early estimates suggest that the global economy will contract by about 5 per cent. The last time the global economy contracted was in the 2008-09 global recession. There have been about 7 global recessions over the last century. And it is very rare for the global economy to contract as such. Because, countries like China and India always register some positive growth. So this is unprecedented nature of the shock."

He said the world was staring at the worst financial crisis if the virus was not contained by May. "People are expecting around 1 per cent of contraction if the normal activity resumes by May this year and if that does not happen, we are looking at the worst global recession since the Great Depression," he added.

He also maintained that the world was already expecting 2008-type recession. "At the very least, what people are looking for now is that the global economy suffers a similar kind of recession that it suffered in 2008-09. If this rolls on, we are looking at something far greater and the only parallel then will be a great depression," he added.

Calling the current economic scenario a complete shock, Sharma said this (economic impacts due to coronavirus outbreak) is the fastest that has ever happened. "Even during the global financial crisis, the cracks appeared in late 2007 and early 2008, it sort of rolled over and then in September and October it was a complete bloodbath. Till mid-February, hardly anybody was even moving their global growth estimates based on what was happening out here...all of a sudden we have gone, within a month, to now pricing in a recession of that magnitude, and that shows up in the stock market too."

The stock market has fallen so quickly over such a short period, he said. "The typical bear market in the US, where the stock market falls by 30 per cent happens over 15 months. This time, we have seen a 32 per cent decline in 18 days. That's never happened before even during the global financial crisis."

The world should now prepare for the worst while praying for the best, Sharma said, while maintaining that it was getting split between the haves and have nots. "The US is thinking about the stimulus, which is 5 per cent of their GDP and that's the direct stimulus. But countries like India cannot spend anywhere close to that if they are required to," he added.

Maintaining that India does not have the fiscal headroom it had in 2008-09 financial crisis, Sharma said India couldn't do that now. "If the government does that, it'll require some of the deficit to be monetised, which needs the RBI to be able to help you do that. You are looking at a scenario then, where the rupee will take a big hit. We could see a sharp fall in the rupee very quickly," he said.

Talking about the Chinese economy suffering its worst crisis ever, Sharma said it was an unprecedented moment in the history with the Chinese economy too, which has never contracted in the past 40 years. However, now it's expecting to contract by at least 5 per cent. He added the Chinese economy was expected to grow 1 or 1.5 per cent for the entire financial year.

"It's so hard to know as to when the Indian economy is going to grow," he added. Sharma said India would not grow at 6 per cent even under normal circumstances. "After the pandemic, I think that the Indian economy can grow at 3 per cent if China's going to grow at 1.5-2 per cent, it'll be a miracle given what's going on."

On the issue of no direct impact of the pandemic on India and its position among the emerging economies, Sharma said: "Given our limited exposure to trade and China, one can argue that impact is bit less. But, our ability to respond to this crisis is very limited as compared to some other countries given our starting point on the fiscal situation."

Talking about what the developed economies like the US were doing in times of the crisis, Sharma said: "The most important date after Christmas, which doesn't change, is April 15, which is the filing of your tax returns. It is sacrosanct. They have pushed it back. So, what you are seeing is an incredible amount of flexibility on part of governments and a lot of trial and error too, in terms of what works and what doesn't."

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