Risk Management has long been acknowledged as a robust scientific tool to make an impact analysis of the possible downward or upward risks facing the entity in the short, medium and long term and suggest probable strategies to cope with them or to get the maximum benefit out of them. The ERM (Enterprise Risk Management) is generally worked out in a bottom-up approach — meaning, the consensus view (may be the majority view) of the employees on the risks are taken into account beginning with identification of probable solutions to each risk facing the company.
The other aspect of it is top-driven. Till a few years back the top-driven approach was generally followed till Sebi guidelines made it mandatory for all the corporates (listed companies) to install a functional ERM in place within a definite time period.
To what extent ERM policy initiatives have been actually implemented and more pertinently what level of importance has been given to the identified risks and possible solutions thereof is a subject better left to the analysts. But the need for ERM in all the enterprises was predominant and it is now believed that there is a strong connectivity between the perceived risks for an enterprise, be it in steel, with that for the economy.
Thus a risk analysis for the country as a whole makes an interesting practice. RBI in its annual report, 2014-15, has identified lack of adequate public investment as one of the major risks challenging the economic performance of the country on a sustainable high-growth trajectory. Public investment has been persistently coming down from FY11 to FY15 and the declining private investment would be pushed up once stranded investment in stalled projects are retrieved. It is reported that stalled project investment worth around 7% of GDP and 247 in number, topped by Railways (86) and Power (70) and followed by Road (34), Petroleum(29), Coal (14) and Urban Development (11) have been accorded major emphasis and by March’15 around 76 of them would be activated.
As regards resources available for investment, an amount of Rs 1185.75 bn has been transferred to the government by RBI (net income of RBI statutorily get transferred) in the last two fiscals. In addition, the reserve balances in contingency reserve and asset development reserve which stands at Rs 2433.75 bn may also be used partially for investment purposes.
Although, it is heartening to note that the capital expenditure of the government in the first half of FY16 has grown by 25% over last year, much more needs to be invested in infrastructure, energy, irrigation with both public and private sectors chipping in mining, roads, ports, railways, real estates, supply chain management, defence and warehouses.
This brings us to the core risk facing the economy which is subdued demand growth in manufacturing. Bank’s credit growth to the commercial sector has been sluggish and falling from 21.3% in FY 11 to 9.1% in FY15. The high cost of capital may have a role to play in restricting credit, but this alone cannot wish away the slow growth in industry. The manufacturing sector came down from 9% in FY 11 to 2.3% in FY15. The mining and electricity sectors clocked a growth of 1.5% and 8.4% respectively in FY 15 with the capital goods and consumer durable sectors ending the year with 6.4% and (-) 12.6 % growth. The August performance of the industry showing mining, electricity, manufacturing and total industry clocking 3.8%, 5.6%, 6.9% and 6.4% growth rates respectively signal a beginning of the turnaround in domestic market which would indeed encourage investment. A sustainable phase of this scenario must facilitate adequate investment for the industry.
The fall out of restructuring of Chinese economy, the flight of FIIs in anticipation of rise in interest rate in USA, the crisis in the Middle East, Turkey, Brazil, Japan and Euro zone are some of the other external risks facing a globalised Indian market which would require a detailed analysis of a prudential blend of monetary, fiscal and trade policy measures.
The author is DG, Institute of Steel Growth and Development. The views expressed are personal