‘India is in Good Spot Compared to Other Economies’
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.