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Home / India News / 2007 / February / February 6, 2007
Emerging Economies Set to Give the World Economy its Biggest Boost Since the Industrial Revolution... - Dr. J.J. Irani Addresses CII CFO Summit 2007

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Emerging Economies Set to Give the World Economy its Biggest Boost Since the Industrial Revolution... - Dr. J.J. Irani Addresses CII CFO Summit 2007

Mumbai, Maharashtra, India

A very good morning to all of you! It is indeed a pleasure to be here today. And after getting an idea about what the day is going to be like...am sure I should say that its indeed an informative day ahead. I would like to thank CII for this opportunity.

The concept of globalisation and its impact on key sectors in the economy ...is a much spoken about issue. But I think, we really need to plunge deeper...this perhaps will help us unearth some new tools which we could use to strengthen our financial sector in the global village.

I am reminded of the prediction in the survey of the world economy carried out by The Economist sometime in the later months of 2006. It predicted that ...I quote "the emerging economies are set to give the world economy its biggest boost since the industrial revolution. A greater integration into the global system of production and trade, supported by buoyant capital flows, is driving a widening wedge between the emerging and the developed countries in terms of growth rates. Already accounting for more than half of the world GDP, in purchasing power parity terms, they will raise their share to two-thirds of the global output in 20 years' time. It took 50 years for Britain and America to double real income in the 19th century when they were industrialising; China is achieving the same feat in nine years! Over the next decade, almost a billion new consumers will enter the global marketplace, providing an enduring stimulus to economic activity across the world."

Well friends there's something striking here...in the next decade there is going to be an influx of consumers that has been predicted. This is then the apposite time for the Indian financial markets to entice this new influx. After all, we shouldn't forget that a sound financial system is essential for an economy to achieve a high and stable rate of growth.

The financial sector reforms in India has in the past, enjoyed many important successes. The equity spot and derivatives market is enjoying a sophisticated market design, widespread retail participation, and resilient liquidity. In these respects, other developing countries seek to emulate India. The banking system is having a low proportion of distressed assets, when compared with some other Asian countries. At the same time, India's financial system has many glaring shortcomings.

These shortcomings could be in the form of a variety of institutional deficiencies, too little private risk bearing capacity in the economy etc. Because risk is concentrated in the wrong places, incentives of key players are distorted, and economic outcomes are sub-optimal. As competition in the industrial sector increases, and as Indian firms move from being asset based to becoming knowledge based, they will have to increasingly obtain finance from arm's length markets. Firms and institutions will need a greater equity cushion because of greater risk they will face. Similarly, as margins become tighter and old monopolies lapse, it will be harder for investors to stay confident about the safety of their investments. They will need more information. Markets can help in generating information, and providing incentives for agents to generate information.

With a greater frequency of failures likely, there will be need to recognize failing firms and to take resources away from them quickly before they are dissipated.

Financial development contributes to growth in either a supply-leading or a demand-following sequence; that is, either the financial sector development creates the conditions for growth or the growth generates demand for the financial services. It is important to recognise that the financial sector in India is no longer a constraint on growth and its strength and resilience are acknowledged, though improvements need to take place. On the other hand, without the real sector development in terms of the physical infrastructure and improvement in supply elasticities, the financial sector can even misallocate resources, potentially generate bubbles and possibly amplify the risks. Hence, public policy may have a crucial role to play in ensuring a balanced reform in both the real and the financial sectors. The criticality for the policy makers is not only to ensure that there are no financial sector constraints on the real sector activity but also to assure that the financial sector reforms have complementarity with the pace and process of reform in the real sector in India.

Ladies and Gentlemen, it is common knowledge that the existing international financial architecture is not adequate to prevent or mitigate the domestic and external effects of financial crisis, particularly in large economies like China and India. Then we need to undertake appropriate measures to strengthen the financial architecture of the economy.

The far-reaching changes in the Indian economy since liberalization in the early 1990s have had a deep impact on the Indian financial sector. The financial sector has gone through a complex and sometimes even painful process of restructuring, capitalising on new opportunities as well as responding to new challenges.

During the last decade, there has been a broadening and deepening of Indian financial markets. Several new instruments and products have been introduced. Existing sectors have been opened to new private players. This has given a strong impetus to the development and modernization of the financial sector. New players have adopted international best practices and modern technology to offer a more sophisticated range of financial services to corporate and retail customers.

Clearly friends I see a marked improvement in the range of financial services and service providers available to Indian customers. The entry of new players has led to even existing players upgrading their product offerings and distribution channels. The liberalisation and globalisation of the Indian economy led to a process of restructuring and consolidation across several sectors of the economy. Several units that were set up in a protectionist environment became unviable in the new paradigm of competition in the global market place. Volatility in global commodity prices has a major impact on Indian companies.

If we simply track our performance, since the post 1991 period, we have made considerable progress. Our macroeconomic fundamentals have improved and external vulnerability has been sharply reduced. Reforms in the financial sector have appropriately addressed the pre-1991 weaknesses in the sector and improved its competitive strength domestically as well as globally.

Today individual players need to adopt proactive competitive strategies that will enable them to capture the emerging opportunities. Exposure to global practices has made the Indian customer more discerning and demanding. There has been a clear shift towards those entities that are able to offer products and services in the most innovative and cost efficient manner.

The financial sector has and continues to adopt itself to customer-centric business focus. It has also created value for its shareholders as well as its customers, competing for the capital necessary to fund growth as well as for customer market share. This indeed will be the challenge in the coming years.

When a financial sector runs amok, it can wreak serious damage. Hence, financial sector stability is a desired goal in its own right. India has had a long tradition of financial institution building. Development of the Indian financial system is premised on the conviction that financial development makes fundamental contributions to economic growth. A well architectured financial system mitigates and diversifies risks but a badly designed system can lead to magnification of risks.

The challenge to policy makers therefore is to build a financial system that assists in risk mitigation. It is well recognized by now, especially after the Asian crisis, that a multi-institutional financial structure mitigates the risk to the financial system. The Indian experience vindicates this stance. Banks, DFIs, and capital markets have co-existed from the post-independence era; only that the character of these institutions has changed depending on the evolutionary stage of the economy. In this context, development of a domestic debt market becomes important.

The motivation for development of a debt market can arise from different reasons viz., to develop corporate debt market, overall financial market development, existence of a dominant G-sec market (like in India), part of pension reform etc. Globalization can be a driving force in this regard. In a simplistic sense, as market opens up and forex reserves accumulate, the need for sterilization itself would motivate development of financial markets.

In brevity of this the CFO plays a vital role and elaborating some of the expectations of CEOs from their CFO role are as follows:

1. Emerging role

The role of the CFO has emerged, as a response to the growing interest in accessing capital markets. Today they are even expected to know all about the business and its customers, the industry and competitive issues, in addition to mastering the necessary finance and regulatory matters. Accounting has given way to broad business strategy. The CFO role has gained in importance because of technology and institutional investors' demands.

2. Fundamental duty should not be overlooked

With the growth of the CFO's role, however, came unintended consequences. Some attribute the recent spate of accounting scandals - the Enrons, Adelphias, WorldComs and others - to finance chiefs who forgot their primary role as the company's moral conscience, and to say, "No!"

The CFO role, as it should be, is to give clear, objective advice to the CEO on any number of internal, investment and strategic issues.

3. Expectation from a CFO

-- Communicate with the investors through Management Discussion and Analysis (MD&A) and transparent disclosures
-- Manage expectation of the investor community and other stakeholders
-- Catalyst in internal control framework
-- Evolve a culture where awareness of governance is drilled deep into the organisations DNA
-- Anticipate Change

4. CFO's needs

-- Uniform governance and financial reporting structure
-- Uniform framework to manage Enterprise Wide Risks
-- Legislation to provide breathing space
Friends, I believe this summit would address all our concerns about the financial sector and help us equip ourselves to perform better. I wish the Summit all success.

And wish you all the very best.

Thank you.

Sharmistha Sengupta, Confederation of Indian Industry, +91 9819056640 sharmistha.sengupta@ciionline.org

Source: Confederation of Indian Industry (Business Wire India)

Press release presented here is sourced from the Source mentioned above and is provided on as-is basis. Please contact the Company / Source directly for any further information in regard to this release. This website will be unable to assist you in regard to the accuracy or correctness of information in this release.

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