The Hindu Business Line : R. Anand, Partner — Global Tax Advisory Services, Ernst & Young; S.A. Engineering College, Chennai

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R. Anand, Partner — Global Tax Advisory Services, Ernst & Young; S.A. Engineering College, Chennai

Global lessons: Mr R. Anand, Partner — Global Tax Advisory Services, Ernst & Young, addressing students of the S.A. Engineering College in Chennai.

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Chennai, Nov. 17 Companies should reinvent themselves, redraw their business models and identify their strengths. These are some of the lessons that can be learnt from the financial crisis, said Mr R. Anand, Partner — Global Tax Advisory Services, Ernst & Young.

He was addressing students of the S.A. Engineering College here as part of a BL Club lecture presented by Indian Overseas Bank. He spoke to the students about the origins of the financial crisis in the US, its global impact, and the lessons that we can learn from this watershed event.

According to him, the country’s financial system was largely insulated from the impact of the crisis, thanks to the checks and balances in the system which have come as a blessing in disguise. However, as part of an integrated global economy, India would suffer an impact — whether it would be manageable or otherwise remained to be seen.

He questioned the students about possible steps that financial players should take in the prevailing conditions. “Should we think of consolidation?” he queried. He answered himself, saying that while earlier consolidation was about growth and reach, in the current context companies may consider consolidation to become more efficient in the event of a slowdown.

Learning curve

The current crisis would also become part of the learning curve for companies. It was difficult to say how long it will take for them to recover from the impact of the crisis. He pointed out that companies would feel the pinch in their third and fourth-quarter results.

In the financial industry, mutual funds were witnessing redemptions and funds were moving into fixed deposits held in banks. The equity markets and real estate were also going through a downward curve, he said. On the positive side, he said the northward curve was bound to happen.

Summing up, he said, this was a global issue that has had an effect on India. But the country was not severely affected. As far as jobs were concerned, each industry would feel the pressure of recruitment though it would vary from industry to industry.

He pointed out that 55 per cent of the workforce was in the agricultural sector, which was fairly insulated from the crisis though it may feel the impact of inflation. Manufacturing has to grow with the agricultural sector. The services sector may see recruitment tapering off and the results in March 2009 may not be great, he said.

He described the crisis as the second major one since the Depression of 1929. Though the world was witness to the dotcom bubble in 2000, it recovered well from its impact. The current crisis, he said, was a watershed as it had spread to major parts of the world.

Crisis trigger

The crisis was triggered by the sub-prime crisis in the US, which was a debt-driven crisis. The US economy has been propelled by its potential to leverage debt, but if the lending goes bad as in the current crisis, the system takes a huge hit. This happens when either the borrower defaults on payments or when the underlying cover, in this case real estate, loses value.

Further, since the receivables on some of the loan portfolios were sold in the securitisation process, the moment default happened at one point of the chain, it escalated, he said.

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