Chanakya’ of modern times, CK Prahalad, avowedly says “I want India to lead...” Even while advocating moral leadership, collective will and commitment to change to deal with deep-rooted corruption and divisive politics, he proclaims India to be the safest country to invest. ET caught up with the management guru in Chennai, where he was one among the 13 global Indians to be honoured at the Pravasi Bharatiya Divas, January 7-10, 2009.
Your perspective on global financial crisis
I see it in three parts: What should India’s response be to this crisis? How does it change the economic landscape? How can India leverage this inflection point to its advantage?
The crisis has demonstrated the interconnectedness of nations. The US may have had a big hand in precipitating the crisis, but it cannot solve it in isolation. India must recognise that it is an integral part of the emerging global system.
However, its position is unique, considering it is not plagued with subprime loans, toxic paper or off-balance sheet transactions. India is not as exposed to export-led growth. Neither does it suffer from zero growth as in most of Europe and Japan. Global perspective and local solutions is the way to go.
Flow of risk capital is also impacted. FIIs pulled back $18 billion from India in the last few months to shore up their positions. The Diaspora must perceive this as a good time to invest in India, one of the world’s safest markets.
The slowdown in the US and Europe impacts global supply chains and patterns of employment and labour mobility. Some sectors such as auto component exports or textiles will be adversely affected in India. But no sector so affected can critically derail India’s economic system.
How exactly will the crisis impact on India?
India cannot politically afford a slowdown in domestic growth. Instead of policies oriented towards managing inflation, they must be tweaked to fuel domestic growth. Sales of two-wheelers, cars, trucks and other durable products have been hit.
So, growth strategies must make products available at affordable prices and affordable credit (low interest). But, how do we convert available liquidity into affordable credit as a way of fuelling growth?
Non-banking financial institutions make access to affordable credit easy. This year, with agriculture growth set to be positive,our overall growth can be pegged at 7.5%-8%. Growth-oriented investments and infrastructure investments can change the figure substantially.
Infrastructure projects would trigger all-round employment and so would the demand for cement and steel. Governmental actions must repose public trust in the system and restore market stability. Banks must start to lend. People must start to shop. Public confidence that creates demand is critical to a speedy recovery.
What can India learn from the crisis?
Though India is in a unique position, it can learn a lot now as the world needs a regulatory system that allows innovation but not permissiveness. A locally customised global governance model is imperative. India can play a critical role in influencing the development of the new governance structure.
Secondly, separate globalisation, the role of markets, regulatory framework, enforcement of regulations, managerial incentives such as compensation, and the moral fibre of managers.
Finally, all support structures such as rating agencies, SEC rules, external auditors and boards must function transparently to restore trust. As the financial system has become extremely global, complex, volatile and interdependent, we must go beyond mathematical models such as value at risk (VaR) to a deeper understanding of their underlying assumptions. We have to move from understanding trends to understanding discontinuities.
You have written reams on discontinuities even before they manifested in what we see today. How to deal with discontinuities in the current context?
Discontinuities demand a different approach to managing. If poorly understood, they can lead to extreme volatility. We see this in the market today. Volatility of markets is seen by the wide fluctuations in the Dow, Nasdaq and in all the principal markets globally. Significant areas where volatility comes to the fore include financial services, commodity prices, consumer confidence, public policy, leadership and institutional roles.
Major institutions are defaulting, looking for bailouts or partners to merge with and venerable institutions are surprised by the underlying risks in their portfolios. While the mortgage crisis is obvious, an impending credit card crisis is not so.
If oil went from $ 65 to $145 and back to $45 in one year, similar changes happened in the prices of palm oil, iron ore, steel etc. These dramatically alter the underlying economics of various industries. The current price of crude is very advantageous to India as it reduces import bill. A million-plus jobs have been lost just in the US in the last six months, triggering job anxiety and India’s textile story is not too different either.
The US, Europe, Russia, Japan, China and other major global players have seen waffling public policy. The cost of the bail-out and the philosophy behind it is changing constantly— a case of “profits are private; problems are public”.
Relative roles of institutions seem to change and shift continuously. Administrative changes in the US, India going to polls in May 2009, weak government in Japan, autocratic and unpredictable rule in Russia and European leadership shifting between UK, France and Germany are pointers to volatility. Other indicators are emerging demands for clean energy, inclusive growth, terrorism, global health crisis, immigration, genocide...
How to manage volatility of this magnitude?
Volatility can be managed only with agility—the ability to quickly respond. Traditional approach to planning is less likely to succeed. A clear strategic vision backed by proper allocation of priorities and resources and a tactical facility.
Call it clarity and consensus around long-term goals married with a capacity to execute. India must seize this moment and use this inflection point to move forward rapidly. This crisis is too precious to waste.