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Unprecedented uncertainty awaits India Inc

There has never been a peace time for Indian companies. They face periodic challenges. Most often, it is slowdown in demand. At other times, it is supply side disruptions. The recent pandemic ensured that they faced both simultaneously. India Inc has managed to tackle this double whammy well.

In fact, it has emerged stronger after the second Covid wave by cutting costs and embracing digital technologies to make their operations efficient.

It has repaid debts and de-leveraged its balance sheet. According to a CRISIL study, the debt to EBIDTA ratio of 700 large companies is today at 2011 levels.

As the world leaves behind another forgettable year, the business outlook for 2022 looks quite positive. Exports are booming and Indian companies are well poised to take advantage of the China+1 strategy of global players, if early orders are any indication. Domestic demand is also reviving and in many sectors, it has reached pre-pandemic levels. Capacity utilisation has risen sharply and many companies have even announced expansion plans. Supply chain problems have eased a bit. Under the circumstances, company managements should ideally be relieved going into the new year. Are they?

Today, a combination of global factors has thrown up so much of uncertainty forcing CEOs to wonder what will happen next and how they should prepare for it. Any amount of scenario planning may not help this time. The year 2022 could outfox even the best companies that pride themselves to be adept in not only surviving but thriving in a VUCA world.

Omicron variant: Even as the world hoped that the worst of Covid pandemic is behind it, a new variant emerged. What is known about Omicron so far is that it highly transmissible and spreads many times faster than the Delta variant.

It has already become the dominant variant in the UK and the US. Fortunately, there have been no surge in hospitalisation or deaths from this mutant so far but experts warn that the last word has not been said on its intensity yet. Some countries have begun to tighten the restrictions to curb its spread.

Will it slow global economic growth. Will it worsen the supply chain problems? How will commodity prices behave? What effect will it have on Indian exports which are buoyant after a very long time?

Will Omicron, which has found its way into India as well, be debilitating in its effect or be as ineffective as the alpha and beta variants? Will the fear of another wave force people to postpone spending? Such a move will hurt economic revival.

Inflation: More than prices in India, CEOs are worried about the rising inflation in the US. This is because actions by Federal Reserve (Fed) could have significant ramifications here. Fed has signalled that it will increase interest rates next year. If that happens foreign portfolio investors (FPIs) could start pulling their investments out of India and redeploy them in the US. Will that cause the stock market to crash?

During the 2013 taper tantrum, foreign investors pulled out $11 billion from the Indian markets. There is a view that with the entry of retail investors in large scale, the FPI influence over the market is not as big as in 2013. Is it the case?

If the secondary market collapses, will it also kill the flourishing primary market? If such a case, corporates’ ability to raise equity either to de-leverage their balance sheet or fund expansion will be impaired? Should CEOs rush in to raise equity now?

Rupee: Large-scale outflow from FPIs and lower inflow will put enormous pressure and weaken the rupee. During the 2013 taper tantrum, the rupee lost 10 per cent of its value.

While a weaker rupee will help exporters, imports will become costly and could fuel inflation. What will the RBI’s response be? It can increase rates to maintain the interest rate differential and stem the outflow from foreign investors to an extent.

This will come in the way of economic revival in India as it will increase borrowing costs. The other option is for the RBI to use the massive forex reserves ($600 billion-plus) to shore up the rupee when it comes under pressure. But such a move will have other implications. It will inject liquidity into the system and boost inflation. What will the RBI do? What will be the rupee’s value next year?

China factor: High debt levels of companies in China, especially in the real estate sector, threatens its financial system. The government is clamping down on the property sector. Can it prevent the financial system from collapsing? If it collapses, will there be a contagion that will spill on to the global markets?

The Chinese government’s moves to shake up its real estate sector which contributes to 30 per cent of its GDP will cause Chinese economy to slow down. How much will the slowdown be? Will it pull down global growth significantly?

Experts say that world growth is now de-coupled from that of China’s and its slowdown, unlike in the past, may not affect the world much. Is it so? What effect will a China slowdown have on commodity prices?

Any hard landing will throw the world into chaos as China is still the world’s factory.

Geo-politics: Risks from geo-politics have never been so high. Russia has piled up troops on its border with Ukraine. An attack is imminent believe some governments. Russian President Vladimir Putin has laid out some impossible conditions to pull back the troops. Some say that it is a mere posturing by Putin while others say that it is his historic mission to annex Ukraine.

If the crisis escalates, the US and the EU will impose heavy sanctions which will hurt Indian businesses dependent on the Russian market. Also, how will oil prices behave if Russia is kept out of the market? China-Taiwan tension is another issue that could go out of hand.

It is not easy for a CEO to be prepared for these eventualities. The uncertainties that 2022 is throwing up is unprecedented and will test a business leaders’ crisis management skills comprehensively.

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