‘In­dia is in Good Spot Com­pared to Other Economies’

The Economic Times - - Economy -

Jitendra Sharma, prin­ci­pal, leader — fi­nan­cial ser­vices, KPMG US, spoke to Sachin Dave in an in­ter­view about liq­uid­ity and risks fac­ing emerg­ing mar­kets. Edited ex­cerpts:

If we look at liq­uid­ity and debt lev­els of govern­ments, do you think that these could be risky for the global fi­nan­cial sys­tem? The global fi­nan­cial sys­tems are def­i­nitely on the mend. The ob­jec­tives the cen­tral banks set out to achieve — to over­cap­i­talise the sys­tem and (en­sure) there is suf­fi­cient liq­uid­ity— I think they have ac­com­plished by and large. There are, how­ever, some un­in­tended con­se­quences. When you have a well-cap­i­talised sys­tem and there is a tremen­dous amount of liq­uid­ity, its abil­ity to in­no­vate and en­sure that it is cre­at­ing fi­nan­cial ser­vices, which are rel­e­vant to the con­sumer, is some­what ham­pered. The fi­nan­cial sys­tem it­self is quite liq­uid and the reg­u­lated fi­nan­cial sys­tem is quite liq­uid. Cen­tral banks have made sure that the liq­uid­ity in the banking sys­tem is de­ployed in a spe­cific way. One of the un­in­tended con­se­quences of that is liq­uid­ity in the cap­i­tal mar­kets has de­creased. So if you look at what’s hap­pen­ing in stock mar­kets or bond mar­kets, you see tremen­dous volatil­ity. So the liq­uid­ity that was sup­posed to be in­vested in stock mar­kets or se­cu­ri­ties is no more avail­able. Govern­ments don’t want the liq­uid­ity that was there in the banking sys­tem to be de­ployed in cap­i­tal mar­kets.

So now in some cases, hedge funds have to step in. This liq­uid­ity is a dif­fer­ent type of liq­uid­ity than pro­vided ear­lier. The money is there much more on an op­por­tunis­tic ba­sis. While one may think that liq­uid­ity may come in, it may not stick around for a long time.

So if you de­fine risk as volatil­ity, risk has gone up be­cause of the kind of liq­uid­ity that is find­ing its way in the mar­kets is not mar­ket mak­ing. This liq­uid­ity is more op­por­tunis­tic.

Do you see an im­pact on emerg­ing economies? There is an im­pact as all mar­kets are in­ter­con­nected. You will see a gen­eral in­crease in volatil­ity in the cap­i­tal mar­kets.

Cur­rently, what are the big­gest risks to the In­dian econ­omy? In­dia is com­par­a­tively in a good spot com­pared to other emerg­ing economies. You have got a pretty young pop­u­la­tion, you have got in­no­va­tion hap­pen­ing and there are a lot of good things hap­pen­ing in In­dia. The gov­ern­ment is putting it­self in the right di­rec­tion. The risk that comes with this is that In­dia needs long-term sus­tain­able cap­i­tal. And to at­tract long-term sus­tain­able cap­i­tal you need fun­da­men­tal im­prove­ments in ease of do­ing busi­ness, im­prove­ment in governance and trans­parency. There should be a lev­elplay­ing field for every­body, but I see that some sec­tors are still pro­tected.

What are the big­gest risks for com­pa­nies cur­rently? If you are in a multi­na­tional en­vi­ron­ment, you are deal­ing with the changes in the cur­rency lev­els that might be chang­ing the eco­nomics of the busi­ness. You are also po­ten­tially chang­ing the dy­nam­ics in the mar­ket it­self with re­spect to the cus­tomer. So when you look at it from the fi­nan­cial ser­vices lens, how the cus­tomer is be­hav­ing is chang­ing dra­mat­i­cally. So there are risk fac­tors and there are busi­ness fac­tors, both are in­ter­twined. There are new com­peti­tors who did not ex­ist ear­lier. Tech­nol­ogy is chang­ing the busi­ness in dra­matic and dif­fer­ent ways. It is chang­ing the way a com­pany re­lates to a con­sumer and the way in­fra­struc­ture com­po­nent is used in the in­sti­tu­tion it­self. So tech­nol­ogy is chang­ing the prod­uct it­self and also the way you would de­liver the prod­uct whether you are in a busi­ness-to­busi­ness or busi­ness-to-con­sumer en­vi­ron­ment.

Is risk con­sult­ing mov­ing to­ward big data and soft­ware? Big data is the core com­po­nent of this. So when ev­ery­thing is get­ting digi­tised, the amount of data that is com­ing in is tremen­dous. So how do you ex­tract the sig­nals com­ing out of the vol­ume of data? The fun­da­men­tal tenets of risk anal­y­sis have not changed but the data avail­able to en­able that has ex­ploded. So if you were to an­a­lyse 20 ter­abytes of data, you need a big data plan and make de­ci­sions on top of that.

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