2007 likely to bring more risks, rewards

EXIM MATTERS

What does the New Year hold for Indian exporters and importers? With peak rate of customs duties expected to come down to 10 per cent, the economy will be more integrated with the world economy. With calibrated moves towards capital account convertibility, the exporters and importers can expect greater freedom to decide what they want to do with their money. This will not only mean greater opportunities but also greater risks.

The world trade is more likely to grow at double digits, with Europe somewhat compensating for the slowdown in the United States, and other regions continuing their robust performance. In the coming years, the developing countries are more likely to grow twice as fast as the developed countries and offer greater market access. As it is, Brazil, China, India, Malaysia, Mexico and Thailand have all posted double-digit growth in exports. Even Africa has staked its claim to a bigger share of the world trade by posting export growth in excess of 25 per cent in each of the past three years. The developing countries have also become privileged destinations for foreign direct investment (FDI), both as an export platform for multinational companies, and because they represent the fastest-growing market segments. What this means for Indian exporters is that greater prospects await those who invest in exploring the markets in the developing countries.

Even if oil prices soften a bit in the coming year, the commodity prices are likely to remain high, because of continued demand in the developing economies. This could push up the need for more working capital. Businesses that are embarking on creation of fresh capacities should be careful enough to tie up long-term resources to finance their long-term uses. They may be able to source long-term funds cheaper as the oil rich countries might have enough liquidity and surpluses to lend.

Money is likely to be costlier. Many banks have already raised their prime lending rates. The past few years' economic growth has been fuelled by abundant liquidity and lower interest rates. If fears of overheating and inflation result in further tightening of money supply and higher interest rates, the funding options will have to reviewed.

The Indian rupee is more likely to appreciate against the US dollar, despite the high current account deficit. Exporters have to look at other currencies for invoicing to make sure that they protect their export realisations in Indian rupees. They will also have to manage their foreign exchange exposures better. So the growing opportunities would also call for better management of risks. Businesses that shy away from taking risks in the markets of developing countries are more likely to stagnate. However, not all businesses that take risks are likely to succeed. Those businesses that put in place robust risk management systems while seeking risks are more likely to succeed.

Businesses that take risks but do not adopt a structured approach to managing risks are more likely to end up in grief. Risk management has evolved into a refined state where it concerns management of financial assets and liabilities but managing business risks is still in its infancy, at least in India. No doubt, everyone manages risks in one way or the other but one sees more of intuitive efforts. The future calls for a structured approach to taking and managing all business risks.

email : tncr@sify.com