This
article discusses the key risks that may be faced by Indian financial
institutions, households, and the economy in 2018 and beyond. These risks are identified
as macroeconomic risks, climate change risks, cyberattacks, protectionist
approach risks, and regional conflict risks. Though there is a general election
in 2019 that may have some pro-people announcements by the government, this is
not taken as a risk. The key risks that are coming out are from climate change
and other factors forcing the economy to grow at a slower rate than
anticipated. There could be some risks to the Indian job market due to a
protectionist approach adopted by some of the developed countries. One of the
key emerging risks is the explosion of the digital world without adequate
protection. Regional conflict is a continuous risk for the country.

 

Macroeconomic Risks

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The
Indian economy is expected to witness cyclical growth recovery, with real GDP
growth likely to accelerate from 6.4% this year to 7.5% in 2018 and further to
7.7% in 2019. The expected increase in GDP growth rate will not be without
challenges coming from the agriculture sector, which is largely dependent on
monsoon. The Indian economy is expecting a slash in the interest rate, which is
kept stagnant for the last two quarters of 2017 with fluctuating inflation. The
much-awaited reduction in the interest rate by the central bank has kept the
real-estate sector on the hook. The central bank’s fifth bi-monthly review for
the current fiscal in December kept the repo rate unchanged at 6% and reverse
repo at 5.75%. The inflation predicted by the International Monetary Fund for
the year 2018 is 4.9%.

 

The
risk is that the actual inflation may turn out to be higher than the expected rate
of 4.9%; higher inflation will not help the central bank in its endeavor to
reduce the interest rate to fuel growth. If this is the case, the flow of money
from the household sector to financial institutions and the stock market may face
roadblocks impacting the overall growth of the economy. This is a possible
scenario and not at the very extreme end of the spectrum.

 

One
of 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-owned
as well as private banks. As it stands, stressed assets held by Indian banks
amount to around $150 million. This position may further worsen due to the introduction
of risk-based capital where banks may require additional capital to maintain
its solvency.

 

The
Financial Resolution and Deposit Insurance (FRDI) Bill is the latest attempt by
the government to address bad loans of banks. The bill is aimed at using the money
of the depositors of a bank in case of an eventuality where the bank has to be
liquidated. The draft bill is pending with the Standing Committee of
Parliament. The impact of such a bill could be far-reaching on how do people in
India keep their savings.

 

To
a certain extent, the performance of the stock market in India during 2018 may
depend on the foreign inflow of money. This depends on tightening of the US
monetary policy that may hurt portfolio inflows into India. A recent post by
the International Monetary Fund on tightening of the monetary policy may reduce
portfolio flows to emerging markets by about $70 billion over the next two
years. During 2017, India attracted $7.7 billion global capital into its
financial markets. Such external unprecedented events may impact the mutual
fund business and unit-linked business in the insurance sector as they are
market linked.

 

Climate Change
Risk

 

One
of the greatest risks to India is a change in the climate that may have both
direct and indirect impacts. The direct impact comes from the loss of lives and
property, while the indirect impact comes from an adverse effect on
agriculture, economic growth, resources, etc. During the last couple of years,
some parts of the country have observed excessive rain and unprecedented hot
weather both during summer and less cool winters. A recent study published by
the Massachusetts Institute of Technology (MIT) states that if climate change
continues like this, a large part of South Asia may be too hot to survive in by
the end of this century. Global warming may also adversely impact Indian rivers
such as the Ganges, which provide essential water for agriculture. The other
impacts of global warming are reduction in snow, rising sea level, changes in
acidity of the sea, extent of drought, stronger tropical weather, and increased
frequency of heavy and extreme rainfall.

 

The
current climate change may adversely impact the country’s efforts towards
economic development, as on one hand, the country needs energy for economic
development which is largely taken through coal and fossil fuel, and on the
other hand, the country has to cut carbon emission. On an aggregate level,
Asian countries are among the major emitters of greenhouse gases. The consequences
of a change in the climate will be severe for India. During 2016, a record
number of deaths was reported due to extreme weather, suffering a loss of more
than USD 21 billion, which was almost 1% of the GDP. The study from reinsurance
company Munich Re’s NatCatSERVICE and socioeconomic data prepared by IMF
indicated evidence of linkage between global warming and extreme El Nino effect
impacting monsoon in India. The IMF study also indicated that corresponding to
a 1-degree Centigrade increase in temperature, the per capita output was
expected to fall by 1.33%. In contrast, in developed countries, such impact is
negligible. The overall impact on China’s growth is also negligible. On the
other hand, the increase in temperature in Russia, Norway, and Canada is
expected to improve growth.

 

The
impact of global warming on India’s economic growth could be multifold. The
first adverse impact could be on Indian agriculture, either due to excessive
rain or excessive heat, or both likely to kill the food grain growth. If due to
global warming, monsoon dries up, there will be a shortage of food, which will
directly increase inflation and have an overall impact on economic development.
This will thwart the government’s efforts in bringing down the interest rate to
boost economic development. Such increase in the interest rate will adversely
affect the real-estate market, mutual fund, and insurance business. This will
further dry up funds to the stock market. These are the plausible stress scenarios
that may happen, given the current change in the climate. It has been witnessed
in 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 conditions
crippling lives. Extreme weather conditions are likely to bring additional
expenditure on the government to restore the normalcy in lives. The sea is
getting more acidic due to excess of carbon emission damaging coral reefs,
slated to be a lifeline for aqua lives raising sea temperature.

 

In
2018 and beyond, there is a greater risk of damage to the Indian economy from
extreme climate than anything else.

 

Cyber and
Digitalization Risk

 

With
an increase in digitalization and focus on online transactions, there is an
increasing risk of cyberattacks and increase in digital fraud. In fact, the
entire world is sitting on the time bomb of digital explosion. Ever since the
ransomware attack on the global market, Indian companies are getting cautious,
looking for a cover from the cyberattack. Though Indian general insurance
companies are busy in manufacturing such insurance products which on one hand is
an opportunity for business growth, simultaneously, there is a greater risk of
loss of valuable data. The mushrooming of the digital world in every nook and
corner of the country has helped increasing penetration of online transactions;
this has also increased the risk of high-profile digital fraud. The news of the
leakage 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 global
effort is required towards securing the world from total hijack.

 

Protectionist Approach Risk

There is an emerging risk from the protectionist approach taken by some
developed countries to the job market of the Indian workforce. This is an
emerging risk for India and a close watch on this situation is needed. In
today’s world, much of the Indian workforce income is dependent on the
developed market either directly or indirectly through back office jobs. In the
last two decades, the Indian population has turned global. The world has
extracted this benefit in their respective home countries. However, with the
western economy slowing down, there is pressure on their job market and some
countries have already started taking a view of the “country first” approach.
If this approach continues, there could be a serious threat to the job market
in 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 capacity
of increasing production to engage the workforce, this risk of job erosion will
always be there.

Regional Risk

 

India’s
geographical location presents ongoing risks of regional conflict; any increase
in border tension may precipitate border clashes, which may have adverse impacts
on economic development. The political establishment in the country is mature
to handle regional conflicts; however, it is always uncertain given tension
with China during 2017. Along with the border, terrorism is another threat to
the country that may seriously disrupt peace and growth.

Summary

 

The
risk to economic growth is from an increase in inflation during 2018 from the
expected rate of 4.9% which will not help RBI in its effort to reduce the
interest rate to fuel growth. This can have an adverse impact on the overall
growth rate of GDP.

 

In
the banking sector, the country is passing through the worst phase of
Non-Performing assets in their balance sheet. This has also been highlighted by
many international agencies in the form of warnings from NPAs. Though the government
is making efforts to address this risk by the introduction of the FRDI bill, the
bill may further cause possible confusion to depositors who risk losing their
savings. If the bill is passed by the parliament in its current shape and
implemented, the extent of help that it may render is a question. In some
countries, such efforts have not been successful.

 

The
performance of the stock market in India during 2018 may get impacted due to
tightening of the US monetary policy that may hurt portfolio inflows into
India.

 

Global
warming and the resulting climate change are serious threats to the growth of
the Indian economy. Due to the limited resilience of the economy, extreme
weather conditions may disrupt the country’s effort to grow at around 7%.

 

Digitalization
has taken over the paper world giving ease of operation on the click of a
button; however, it has been witnessed during 2017 that this digital world is
not free from attacks. With many of the world’s operations dependent on soft
files, this presents the risk of collapse of the world in one click. Moreover,
this new world is not time-tested.

 

In the coming time, India
may face serious risks to its job market due to the protectionist approach
taken by some of the developed markets. Regional conflict and terrorism are
risks the country continues to live with.