Thisarticle discusses the key risks that may be faced by Indian financialinstitutions, households, and the economy in 2018 and beyond. These risks are identifiedas macroeconomic risks, climate change risks, cyberattacks, protectionistapproach risks, and regional conflict risks. Though there is a general electionin 2019 that may have some pro-people announcements by the government, this isnot taken as a risk. The key risks that are coming out are from climate changeand other factors forcing the economy to grow at a slower rate thananticipated. There could be some risks to the Indian job market due to aprotectionist approach adopted by some of the developed countries. One of thekey emerging risks is the explosion of the digital world without adequateprotection. Regional conflict is a continuous risk for the country.

 Macroeconomic Risks TheIndian economy is expected to witness cyclical growth recovery, with real GDPgrowth likely to accelerate from 6.4% this year to 7.5% in 2018 and further to7.

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7% in 2019. The expected increase in GDP growth rate will not be withoutchallenges coming from the agriculture sector, which is largely dependent onmonsoon. The Indian economy is expecting a slash in the interest rate, which iskept stagnant for the last two quarters of 2017 with fluctuating inflation. Themuch-awaited reduction in the interest rate by the central bank has kept thereal-estate sector on the hook. The central bank’s fifth bi-monthly review forthe current fiscal in December kept the repo rate unchanged at 6% and reverserepo at 5.75%.

The inflation predicted by the International Monetary Fund forthe year 2018 is 4.9%. Therisk is that the actual inflation may turn out to be higher than the expected rateof 4.9%; higher inflation will not help the central bank in its endeavor toreduce the interest rate to fuel growth. If this is the case, the flow of moneyfrom the household sector to financial institutions and the stock market may faceroadblocks impacting the overall growth of the economy. This is a possiblescenario and not at the very extreme end of the spectrum. Oneof the key areas of concern for Indian banks is high non-performing assets.

Though the Moody’s Investors Service awarded a positive outlook to India’financial institutions, there is a piling-up of non-performing assets (NPAs)that threatens to hinder growth and jeopardize the health of both state-ownedas well as private banks. As it stands, stressed assets held by Indian banksamount to around $150 million. This position may further worsen due to the introductionof risk-based capital where banks may require additional capital to maintainits solvency.

 TheFinancial Resolution and Deposit Insurance (FRDI) Bill is the latest attempt bythe government to address bad loans of banks. The bill is aimed at using the moneyof the depositors of a bank in case of an eventuality where the bank has to beliquidated. The draft bill is pending with the Standing Committee ofParliament. The impact of such a bill could be far-reaching on how do people inIndia keep their savings. Toa certain extent, the performance of the stock market in India during 2018 maydepend on the foreign inflow of money. This depends on tightening of the USmonetary policy that may hurt portfolio inflows into India. A recent post bythe International Monetary Fund on tightening of the monetary policy may reduceportfolio flows to emerging markets by about $70 billion over the next twoyears. During 2017, India attracted $7.

7 billion global capital into itsfinancial markets. Such external unprecedented events may impact the mutualfund business and unit-linked business in the insurance sector as they aremarket linked. Climate ChangeRisk Oneof the greatest risks to India is a change in the climate that may have bothdirect and indirect impacts. The direct impact comes from the loss of lives andproperty, while the indirect impact comes from an adverse effect onagriculture, economic growth, resources, etc. During the last couple of years,some parts of the country have observed excessive rain and unprecedented hotweather both during summer and less cool winters.

A recent study published bythe Massachusetts Institute of Technology (MIT) states that if climate changecontinues like this, a large part of South Asia may be too hot to survive in bythe end of this century. Global warming may also adversely impact Indian riverssuch as the Ganges, which provide essential water for agriculture. The otherimpacts of global warming are reduction in snow, rising sea level, changes inacidity of the sea, extent of drought, stronger tropical weather, and increasedfrequency of heavy and extreme rainfall.  Thecurrent climate change may adversely impact the country’s efforts towardseconomic development, as on one hand, the country needs energy for economicdevelopment which is largely taken through coal and fossil fuel, and on theother hand, the country has to cut carbon emission.

On an aggregate level,Asian countries are among the major emitters of greenhouse gases. The consequencesof a change in the climate will be severe for India. During 2016, a recordnumber of deaths was reported due to extreme weather, suffering a loss of morethan USD 21 billion, which was almost 1% of the GDP. The study from reinsurancecompany Munich Re’s NatCatSERVICE and socioeconomic data prepared by IMFindicated evidence of linkage between global warming and extreme El Nino effectimpacting monsoon in India. The IMF study also indicated that corresponding toa 1-degree Centigrade increase in temperature, the per capita output wasexpected to fall by 1.33%. In contrast, in developed countries, such impact isnegligible.

The overall impact on China’s growth is also negligible. On theother hand, the increase in temperature in Russia, Norway, and Canada isexpected to improve growth. Theimpact of global warming on India’s economic growth could be multifold. Thefirst adverse impact could be on Indian agriculture, either due to excessiverain or excessive heat, or both likely to kill the food grain growth.

If due toglobal warming, monsoon dries up, there will be a shortage of food, which willdirectly increase inflation and have an overall impact on economic development.This will thwart the government’s efforts in bringing down the interest rate toboost economic development. Such increase in the interest rate will adverselyaffect the real-estate market, mutual fund, and insurance business. This willfurther dry up funds to the stock market. These are the plausible stress scenariosthat may happen, given the current change in the climate. It has been witnessedin the past that our economy has shown less resilience towards extreme weather,with a few days of excessive rain or extreme heat or very cold conditionscrippling lives. Extreme weather conditions are likely to bring additionalexpenditure on the government to restore the normalcy in lives. The sea isgetting more acidic due to excess of carbon emission damaging coral reefs,slated to be a lifeline for aqua lives raising sea temperature.

 In2018 and beyond, there is a greater risk of damage to the Indian economy fromextreme climate than anything else. Cyber andDigitalization Risk Withan increase in digitalization and focus on online transactions, there is anincreasing risk of cyberattacks and increase in digital fraud. In fact, theentire world is sitting on the time bomb of digital explosion.

Ever since theransomware attack on the global market, Indian companies are getting cautious,looking for a cover from the cyberattack. Though Indian general insurancecompanies are busy in manufacturing such insurance products which on one hand isan opportunity for business growth, simultaneously, there is a greater risk ofloss of valuable data. The mushrooming of the digital world in every nook andcorner of the country has helped increasing penetration of online transactions;this has also increased the risk of high-profile digital fraud. The news of theleakage of data is not new in the newsroom. On one hand, there are many advantages of the digital world; however,this is an untested market in comparison to the paper world. A serious globaleffort is required towards securing the world from total hijack.

 Protectionist Approach RiskThere is an emerging risk from the protectionist approach taken by somedeveloped countries to the job market of the Indian workforce. This is anemerging risk for India and a close watch on this situation is needed. Intoday’s world, much of the Indian workforce income is dependent on thedeveloped market either directly or indirectly through back office jobs. In thelast two decades, the Indian population has turned global. The world hasextracted this benefit in their respective home countries.

However, with thewestern economy slowing down, there is pressure on their job market and somecountries have already started taking a view of the “country first” approach.If this approach continues, there could be a serious threat to the job marketin India, which may have a ripple effect on the Indian financial system,similar to the 2008 economic crisis. If India does not develop its own capacityof increasing production to engage the workforce, this risk of job erosion willalways be there.Regional Risk India’sgeographical location presents ongoing risks of regional conflict; any increasein border tension may precipitate border clashes, which may have adverse impactson economic development. The political establishment in the country is matureto handle regional conflicts; however, it is always uncertain given tensionwith China during 2017. Along with the border, terrorism is another threat tothe country that may seriously disrupt peace and growth.Summary Therisk to economic growth is from an increase in inflation during 2018 from theexpected rate of 4.9% which will not help RBI in its effort to reduce theinterest rate to fuel growth.

This can have an adverse impact on the overallgrowth rate of GDP. Inthe banking sector, the country is passing through the worst phase ofNon-Performing assets in their balance sheet. This has also been highlighted bymany international agencies in the form of warnings from NPAs. Though the governmentis making efforts to address this risk by the introduction of the FRDI bill, thebill may further cause possible confusion to depositors who risk losing theirsavings.

If the bill is passed by the parliament in its current shape andimplemented, the extent of help that it may render is a question. In somecountries, such efforts have not been successful. Theperformance of the stock market in India during 2018 may get impacted due totightening of the US monetary policy that may hurt portfolio inflows intoIndia. Globalwarming and the resulting climate change are serious threats to the growth ofthe Indian economy. Due to the limited resilience of the economy, extremeweather conditions may disrupt the country’s effort to grow at around 7%.  Digitalizationhas taken over the paper world giving ease of operation on the click of abutton; however, it has been witnessed during 2017 that this digital world isnot free from attacks.

With many of the world’s operations dependent on softfiles, this presents the risk of collapse of the world in one click. Moreover,this new world is not time-tested.  In the coming time, Indiamay face serious risks to its job market due to the protectionist approachtaken by some of the developed markets.

Regional conflict and terrorism arerisks the country continues to live with.