Vijay Kumar Gaba

 The toughest job in the present day environment is risk management. Of course, it has never been an easy job; but when we consider the proportion of moving parts, fragility of systems, disregard for conventions, total lack of mutual trust and disillusionment with the status quo, managing risk appears the toughest job. I can now appreciate the risk managers’ plight during the first half of 20^th century; when similar conditions were prevailing.

To illustrate my point, let me highlight the following instances which may not appear ominous to a common man, but could give cold sweat to risk managers.

• Interest rates have risen in most parts of the world in the past one year. In many cases the rise in rates has been rather steep, especially the developed economies. Most of these economies were struggling with deflation pressures for the better part of the past two decades. Obviously the rates were low (close to zero and negative in many cases). Many businesses were built assuming this to be a lasting phenomenon; or at least many investors valued businesses assuming this to be a lasting phenomenon. The pandemic however annulled this assumption. It now appears that we shall not have near zero rates for longer, even if inflationary pressures ease in the next couple of years. A large number of the businesses built on “lower for longer” assumptions are facing existential risk.

How would a risk manager handle this risk? If an investor changes the assumption of “lower for longer”, the basic case for investment in such ventures may collapse. An exodus that may thus result would only result in immediate collapse of such a venture. If the management guides change in assumptions about finance cost, cash losses and poor visibility of fresh capital, the valuations will collapse anyways.

·         The news flow in the past few days includes the following headlines:

1. “Iran fires missiles at Kurdish militias in eastern Iraq” (see here). This was to follow up 73 ballistic missiles fired by Iran in September 2022 (see here).
2. “Texas to send military armored personnel carriers to the border to escalate enforcement. The move comes days after Texas Gov. Greg Abbott invoked an 'invasion' clause to step up border enforcement.” This is part of the border reinforcement in the past 2 decades in which billions of dollars have been spent. State funding for border security has grown from $110 million in 2008-2009 to nearly $3 billion for the 2022-2023 budget cycle. (see here)
3. “Ukraine nuclear plant shelled, U.N. warns: 'You're playing with fire!” (see here)
4. “South hits back as North Korea fires most missiles in a day.” (see here)

Besides, news flow on Sino-Indian border tensions and China’s aggressive posturing on Taiwan has been consistent. A risk manager who is aware of the energy crisis of the 1970s; has been struggling to manage the fall outs of Russian invasion of Ukraine; and is aware of hardliners winning elections in Italy, Israel, Brazil etc. would find it hard to ignore these geopolitical threats.

• “Mumbai sees temperature dip, IMD issues cold wave warning for parts of Maharashtra.” (see here) This could be a worrying signal for risk managers worrying about inflation; supply of grapes, onions, pomegranates; public health etc.

Besides, in the mountains it started snowing earlier this year. Late rains have ensured late sowing for Rabi crops. If winter sets in early and nascent crops are hit by frost, we may have poor Rabi yield.

• I recently met with a company which earns substantial revenue from UN tenders. The management highlighted the substantial cut in funding of the UN as a key risk to their operations. They did not mind discussing the probability of the UN becoming redundant or even getting dissolved in the next 10-12 years.

The point I am trying to make is that in the present times investors should better avoid overconfidence in any investment idea. The black swans could emerge in flocks from nowhere. It is therefore a good idea to keep portfolios well diversified and liquid. Exposure to exotic, unproven, experimental, innovative, expensively valued businesses must be kept to bare minimum – ideally not more than what you could easily afford to write down fully.

 Over past couple of weeks, I had exciting interactions with some professionals from the IT capital (Bengaluru), Pharma Capital (Hyderabad), Engineering capital (Chennai), Financial Capital (Mumbai) and political capital (Delhi) of India. From these interactions I learned that a definite new paradigm is emerging in Indian commercial space. The following are some key take away from my interactions:

1.    Traditionally, a majority of Indian entrepreneurs have not aimed for global scale in their businesses. Despite a rich history in the areas like culinary and textile, few businesses of global recognitions and scale could be created in these areas. However, now the first generation entrepreneurs have materially widened their vision. Many of them are now working on business ideas with global markets and scale in sight. No eye now widens on the mention billion dollar figures.

2.    The skills in Artificial Intelligence are becoming common place. In late 1990s Indian youth acquired skills in basic programing and coding of computer programs. This helped them crossing ocean in hoards and make a good career. A similar phenomenon is developing in artificial intelligence skills. The difference however is that unlike 1990s, now a large proportion of the young professionals want to become entrepreneur of independent professionals. They are not looking just good salary. I am sure a few of them would certainly be able to repeat the fables of Bill Gates, Jack Ma, Jeff Bezos et. al.

3.    The best part is that there is a strong start up ecosystem already in place. There are numerous investors who are willing to risk money on a good idea. Not many are looking at government for support. In fact, if I were to take my sample as representative, the only support neo entrepreneurs are seeking from the government is (i) less interference; and (ii) supportive tax structure.

4.    A lot of people of Indian origin, who are settled abroad are positive on Indian skills and entrepreneurship. They are helping the new ideas with financial and technical support. Many of them appear to be keen to have substantial exposure to Indian startup ecosystem.

5.    Though, the visibility of startups in technology enabled financial services (FinTech), retail, food delivery, and gaming is highest, some amazing developments are happening in the area of agriculture technologies, space technology, engineering design, water management, logistics management, pharmaceutical research and healthcare.

After this round of discussions, I am even more convinced that we have already entered into a business and economic paradigm. I believe that over next couple of decades, maximum value creation shall happen in businesses with technology leadership. Intellectual property shall derive significantly higher premium over conventional property. “Services” will continue to be key driver of economy rather than “Goods”; notwithstanding the government’s focus on manufacturing and construction.

On the negative side, the pace of elimination of smaller businesses, which cannot invest in technology and are not equipped to become ancillary of a large business, will continue to accelerate. The inequalities shall rise on multiple levels – economic, skills, access and opportunity.