2021 Top Risks: The Prolonged Impact of COVID-19 and Readjustment of US-China Relations Continue to Bring Unpredictability for Businesses in India.
India’s fragmented recovery from the COVID-19 pandemic, the re-evaluation of its relationship with China following a short-term stabilisation of the US-China relationship, climate change and its effect on international investment and trade policies, and cyber threats and data nationalism are among the top five risks that businesses face in 2021, according to Control Risks, the specialist global risk consultancy. Control Risks made this assessment at the launch of RiskMap, its annual political and security risk forecast for business leaders and policymakers across the world, published today.
Underpinning these, the danger of missing the rebound in a year of multi-speed recovery is a top business risk in the coming year. “While businesses will continue to face considerable disruption from the COVID-19 pandemic, we believe that there are real and exciting opportunities for many companies in 2021,” says Control Risks’ Global CEO, Nick Allan.
Businesses will face challenges stemming from uneven vaccine roll-outs, tensions between countries and within them, global leaders who lack a global mind-set, and a fragmented exit from the pandemic.
However, companies that can accurately monitor developments, identify trends and show flexibility in adapting their operations will benefit from a projected surge in demand. In India, opportunities abound despite the challenges, with sectors such as renewable energy, manufacturing, logistics, fintech and ecommerce leading the way.
The global Top 5 risks in 2021 – and their implications for businesses in India
- A world with long COVID
2021 will be a year of uneven recovery as vaccine roll-outs create a world of haves and have-nots, with some pockets of lingering COVID at the bottom of the pecking order. Competition will be intense both between and within nations. State budgets will creak under the weight of new debt, putting the economies of some countries under strain and forcing others into prolonged austerity. The relationships between state and business and between society and business will be critical for companies. If 2021 does not mark the end of the pandemic, it will be the year that determines what is left when the worst is over.
India: Companies used to experiencing growth in the past decade will need to proceed with caution, as the Indian economy is expected to experience uneven and fragile recovery in 2021. Constrained demand, restricted travel and heightened regulatory scrutiny will challenge growing digital adoption, accelerated infrastructure investments and sustained welfare spending. Ultimately, the prolonged impact of COVID-19 and potential delays associated with the logistics of rolling out the vaccine to 1.3bn people will increase the risks for investors and make it even more critical for businesses to map their stakeholders and scenarios. Lower-than-expected capital investments and potential supply-chain disruptions will also result in counterparties invoking force majeure to exit or renegotiate contracts. Such attempts are likely to result in a rise in disputes and intensify litigation risks in the coming months.
- US-China: Stabilisation without normalisation
While one should see superficial stabilisation in the US-China relationship in 2021, the two countries will continue clashing over the current range of issues. Both are keen to reset their ties and to focus on domestic problems, and one can expect resumed cooperation on issues such as climate change. China is in its own “critical historical moment” and its domestic challenges outweigh external imperatives. If a Biden administration focuses on issues such as human rights and tries to coordinate multilateral pressure on China, this will clash with Beijing’s core interests. Retaliation could follow and the cycle of escalation resume.
India: Notwithstanding the shadow of the US-China relationship, one can expect India to re-evaluate its relationship with Beijing following the worst border tensions in four decades last year. As China increasingly takes centrestage, such re-assessment and the accompanying policy choices regarding foreign policy and national security issues, as well as those in the business, economic and investment domains will have significant impact on the ability of Chinese capital and technology to participate in India’s economy.
Meanwhile, expect New Delhi to resume bilateral trade negotiations with its strategically-aligned partners, such as the UK, the EU and the US, mindful of China’s intentions to create “trade bubbles”. This will create opportunities for businesses in these countries, especially those hoping to reduce exposure to Chinese supply chains. Modi’s desire to bolster India’s ability to participate in global supply chains will see greater production-linked incentives given to companies that want to set up manufacturing units across various sectors.
- Go green or go bust
Given that the relationship between businesses and climate change is likely to reach an inflection point in 2021, organisations can ill afford not to take a stance. As the effects of climate change worsen, several nations have made net zero pledges, and all members of the G7 are likely to commit to a carbon neutrality timetable. The incoming Biden administration has pledged to re-join the Paris Climate Agreement from day one. First-mover governments will link international investment and trade policy to action on climate change. Laggards will need to consider a future in which intransigence erodes competitiveness and shrinks export markets. Where governments lag, businesses, investors and activists will set the pace.
India: Foreign companies wishing to invest in India will increasingly have to reconcile stricter environmental regulatory standards, particularly those of the EU (Green New Deal) and the US under a Biden administration, with the dilution of environmental standards and reporting norms in India, as the Modi government eases onerous compliance rules to attract foreign investment. However, companies that fail to conduct proper environmental due diligence or pursue the most stringent standards could be exposed to heightened reputational risks due to negative media and public scrutiny, as well as operational risks stemming from protests from local communities in which they operate.
Biden’s election, Washington’s anticipated re-entry into the Paris Climate Agreement and the UK playing host to COP26 will all bring climate change to the forefront of global negotiations and make sustainable investment in clean energy a global focus. This will benefit India, where investments in the renewable energy sector far outstripped those in thermal coal for the first time in 2018.
- Digital acceleration hits emerging threats
Rapid adoption of new technology will continue in 2021, increasing connectivity and exposure, while rushed procurement will heighten risks. Regulatory risks, including sanctions and bans on procuring foreign technology, will increase in 2021. Emerging data regulations will act as another blow to the ideal of a unified global market. Ideological and practical blocks are emerging rapidly. However, the challenges for business will be opportunities for cyber threat actors, which will capitalise on increased connectivity and hasty solution adoption. In 2021 companies will have to balance the drive for technological innovation with security, integrity and resilience challenges.
India: The government’s recognition of data as a strategic asset will drive new personal and non-personal data regulations, which will redefine the way businesses in India capture, store, transmit and use data. A new data protection regulator, along with divergence in centre/state jurisdictions on data management and the consolidation of social media as a key social and political influencer, will lead to greater scrutiny and reputational challenges for businesses. At the same time, a digitally empowered and dispersed population will continue to adopt fintech, edtech, mobile gaming and other ecommerce platforms to transact and engage. The growing ubiquity of India’s Unified Payment Interface (UPI) – now averaging 2.2bn transactions every month – will contribute to greater digitisation of India’s brick and mortar firms in 2021 and lay the foundation for the growth of India’s digital economy.
- Missing the rebound
2021 will see strong GDP growth in multiple markets, the roll-out of vaccines and a world hungry to start living again. While progress will be faltering, an uplift is imminent – do not miss the rebound. If 2020 was about corporate survival, 2021 is the time to focus on opportunity. Through innovation, rapid technology adoption and streamlining, some firms have emerged stronger from COVID-19, while their weaker competitors have fallen by the wayside. Companies that turn the efficiency gains of 2020 into productivity gains, continue to accurately assess trends and show flexibility in adapting their operations will benefit from the coming surge in demand.
India: Opportunities in core sectors, such as infrastructure (including renewable energy), manufacturing, logistics and agriculture will be further fuelled by the growing interest in technology-enabled segments, such as edtech, fintech, mobile gaming and ecommerce. However, amid these massive opportunities, companies will have to respond to issues, such as India’s evolving regulatory environment around data privacy, medical research, financial markets and many other sectors; heightened policy and security uncertainty driven by activism and unrest; insecurity about the vaccine, public-health measures and infection control affecting sentiment; risk of defaults and bankruptcy caused by the lack of comprehensive banking reform and policy shift towards promotion of domestic national champions. These shifts in business models, policy and regulatory focus, demand landscape and supply chain constraints will demand higher levels of preparedness – and are bound to present opportunities to diligent investors.
Amit Narayan, Partner and Head of South Asia at Control Risks, summarises: “For 30 years, India has almost exclusively been about companies and investors finding the business upside. In 2019 and 2020, that changed. In 2021 business success will be driven by conscious stakeholder engagement, pre-emptive management of risks, co-opting partners and employees into decision-making as well as authentically engaging with customers. Managing these downside risks requires nuance and good judgement – which starts with leaders understanding the issues and concerns that could keep their companies from achieving their desired business outcomes in India.”
