When at the turn of this century our great grandchildren look back, possibly the annus horribilis, 2008 would be more of a defining point for the 21st century, than 1929 was for the 20th century.
It is difficult to predict what world order will emerge from this churning, but for a student of history it is certain that going forward the world would be a different place.
While definitely we have not yet come to a eureka moment where one can confidently predict that the Indian economy and the Indian currency would be one of the strongest in the world in the 21st century, there is ground for guarded optimism.
A very strong financial sector; strong fundamentals; a youthful nation and an economy substantially fuelled by internal consumption and capital formation. These are the foundations we are destined to build on.
At this critical point, the two things that can trip us are unjustified expectations and short-sighted leadership. I intend focusing on the former today.
We must realise there would be short-term issues this year; some of us would be affected more than others. If we anticipate and prepare for some of these issues, we can ride the gusts of wind and not rush headlong into a stampede arising from unfulfilled and unrealistic expectations. What are some of these issues?
The sources and costs of finance would be under stress and long-neglected covenants, dismissed as fine print earlier would receive greater scrutiny and could be leveraged by leaders.
Companies would have to test their compliances with financial/operational targets they had held out for. Industries hit by global recession would face sales slowdown and would have to challenge inventory obsolescence.
They would have to revisit plans for augmenting working capital; counter party risks in the form of impacted debtors may surface in balance sheets of entities in the form of receivable write-offs and stretched debtor turnover days.
Commodity, fuel and interest cost increases would lead to rise in cost of sales and compress margins. Due to this, analysts and companies would need to revisit cash flows, forecasts and performances. Resultantly, there would be a consequential impact on impairment of tangibles and intangibles. Due to contraction in demand, idle capacity costs would get charged-off, hence impacting revenues.
Suppliers and purchasers may invoke liquidated damages or delayed payment related contractual terms which in the past may have been waived. Further, the impact of maturing derivative contracts on some balance sheets would need to be closely watched. In addition, there could be short-term reduction in margins, profitability, capital expenditure, bonuses, rate in growth of salaries, stagnation in property values and consequent second-hand contraction of demand. That said it is important to realise that there is no reason for panic, while there is cause to be realistic.
This year would be quite unlike previous years. Therefore, it would be unfair for investors or the market place to get impatient and measure growth rates or results in comparison with the immediate past periods. The media would also have to factor these expectations and be more subdued in its reporting. We have to set the right tone of our expectations, only then will India be able to stand up and display to the world the resilience, maturity and depth of the Indian market. This has already been displayed by our financial sector and we must follow suit.
If we do this, we would have successfully passed the first test on our way to become leaders of the new world. The second test that of moving beyond the bane of short-sighted leadership would require involving leaders across the political spectrum and obtaining agreement on certain common economic premises and ways of achieving them and arriving at a bi-partisan agenda, elevating this above the cut and thrust of politics.
That would in short require the emergence of an economist Gandhi — a subject beyond the modest ambitions and length of today’s column.
The views expressed herein are the personal views of the author and do not necessarily represent the views of Ernst & Young Global or any of its member firms
