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May 27, 2007
India's Wonder Years
It appears to me that we are possibly living through what economic historians of future will refer to as India’s wonder years. Indeed, the Indian economy of the present is on the fast track. High GDP growth, rising industrial productivity, increase in per capita income – the growth process is opening up huge opportunities for its billion plus population. Remarkably, a 9 per cent growth is happening in an environment of moderate inflation of about 5 -6 per cent, lower fiscal deficit influenced by tax buoyancy accompanied by fiscal restraint. Key strengths at this point are the unleashing of the growth momentum, conducive policy perspective, educated skilled workforce and the growing investor interest in India. But the most fundamental difference that makes India special is perhaps the fact that all this is taking place in the midst of remarkable financial stability. Capital adequacy of banks are higher that 12 per cent, way above the mandated 9 per cent, the non-performing assets of the financial sector will make any advanced country proud and the regulatory bodies have proactively addressed the vulnerability concerns stemming from high interest rates and rising inflation.
Wonder years, alas, do not last forever. Some danger is always present just round the corner and history is witness to the fact that due to lack of adequate precaution and foresight ; many nations have messed up golden opportunities and much like the Indian cricket team, successfully snatched defeat from the jaws of victory. Despite all the great news, the economy is not free from risks and lack of caution can at any point of time throw the economy out of gear.
Role of Risk Management
The precise role of risk management is to identify and manage these risks that we encounter throughout the journey. While risks were managed one way or the other by individuals, companies and nations, the scientific study of risk management is still in its infancy , a few tiny decades in the long voyage of nation states. In India, risk management in its independent identity is not even in its teens.
Let us look at the risks facing what could possibly turn out to be the wonder years for India and visualize what we need to do to manage the lurking threats.
Key Risks
The biggest risk at the macro level is the economic imbalance that afflicts the economy right now and threatens to tear apart the democratic fabric of the country. While India has come a pretty long way in reducing poverty, every fifth person on the street may not be having enough to eat, let alone take care of her other basic needs. It is not that these basic needs cannot be fulfilled by the State, but the welfare state so far has done a shoddy job of meeting the basic needs of the masses. Poor delivery system, corruption at all third class democracy with a first class Constitution) all contribute to the income and wealth imbalance. The result is in the poor human development ranking of India in a global setting. The risk: social unrest can lead to political instability and can destabilize the growth process. While one hopes that Government initiatives towards inclusive growth will lead to an improved income distribution, it is high time that corporates pitch in and demonstrate social responsibility in the interest of their own survival, because ultimately business is not independent of society .
The second lurking threat is the source of India’s strength, the capital flows into the country. For the central bank, buying foreign exchange and sterilizing the market can be expensive while non-involvement could threaten the balance of trade by making exports uncompetitive. Sudden reversals in capital flows can have a potentially disastrous impact on the economy. Sustaining investor interest and keeping the growth story intact, therefore, assumes great significance.
A third challenge arises in the services sector , the ‘engine’ behind India’s growth story. The services sector is about to open up to the world as the WTO negotiation on services progresses. The services sector is about to open up to the world as the WTO negotiations on services progresses. In some sectors such as banking, India is globalizing faster than mandated by the WTO. The services sector will face competition from outside world, and it may not be easy to fight giants even on the home turf. Strategy, innovation and a keen eye on risks are the mantras for survival in tough times.
Finally, like a typical growing economy, the real estate sector is seen hectic activity and upward spirals in prices and the asset price bubble in the stock market calls for a close watch.
Better Risk Management Practices
In such a milieu, solid risk management practices make immense business sense. It not only enhances images of companies and attracts investors, it also insulates organizations from internal and external threats. No longer risk management is part of regulatory compliance, it is more about enterprise risk management. Risk management thus is likely to become a necessity of the future, not an imposed burden. A good risk management system will build trust within the organization promoting efficiency and externally, enhance investor confidence. In this context, elevating the visibility of risks and introduction of a risk perspective will assume special significance. The Chief Risk officer will find his feet and shall even be dictating terms. The complexities of the marketplace will demand the best risk practices. Companies of tomorrow will be differentiated by the risk management practices they adopt. The quality of risk management practices will be the ultimate insurance to save yourself and India’s wonder years.
Posted by sunandoroy at May 27, 2007 07:41 PM
It is true that Mis-governance and the natural corrolary of it - the corruption- shall continue to be the biggest Risk that the nation will have to take heads on in its march towards 2020- when BRICS is expected to emerge as Global Powers.
In the financial Sector, there is a skewed picture of Financial Sector preparedness to counter the emrging challenges on the Risk Management Front. On one side we have Foreign banks and new Private Sector banks who have developed a strong risk competence and are able to leverage their technology platforms and HR competence since, they do not suffer from legacy data and HR issues.On the other side of the spectrum we have Public sector banks and some old private sector banks where data issues and lack of Real Risk Competence in the HR capital seriuosly limit the efficacy of their Risk management initiatives. This is more so when for any Strong Management Buy in you need to project Risk management as a value driver rather than just an another compliance issue.
Posted by: jumsheed at June 15, 2007 08:30 AM
Posted by: gold at July 20, 2007 06:52 PM
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