'The India growth story is more compelling now' : Roach
Stephen Roach, Asia chairman, Morgan Stanley
He believes it is in India’s favour that the recent growth has been achieved without much support by way of government stimulus. He is convinced
Stephen Roach that the India story today is more compelling than ever before. Morgan Stanley Asia chairman Stephen Roach sees India’s growth averaging between 7.5% and 8.5%, but cautions that it can’t afford to be complacent. In an interview with ET , he says that if the government is once again unable to push through meaningful reforms it will be a major disappointment.
The raging debate among central banks is the timing of unwinding of stimulus. What is the kind of headroom that central banks have?
When the world went into a crisis and there was extremely deep recession, central banks around the world were unanimous in declaring it an emergency and slashed policy rates to record lows in efforts to avoid a catastrophic outcome. It is, however, incumbent upon them to normalise interest rates as soon as they are convinced that the emergency is over. Where you get into this grey area is their conviction that the emergency is truly over. We just got a positive number from the US in the third quarter. So, does that mean the US is fine or is it just a temporary ‘pop’ in the number. These are tough decisions the Federal Reserve will have to make and other central banks around the world will have to make as well. But it is very clear to me that as soon as there is conviction, there should be a significant increase in policy rates. The failure to do just that is what set the stage for the asset bubbles in the crisis over the 2002-07 period.
The Reserve Bank of India has signalled unwinding of monetary stimulus. Will it be at the cost of growth?
The growth sacrifice is a critical issue for central banks. You certainly don’t want to move too aggressively. But, on the other hand, if you have asset bubbles creating artificial growth and that growth creates a lot of debt and savings imbalances, it is worth sacrificing. You don’t launch unusually accommodative monetary policies to create artificially excessive growth. Ultimately, the alternative is what we have just been through. is a disaster compared to a modest sacrifice of economic growth during periods of economic excess. So, I think, RBI has done an outstanding job over the past 10 years.
Most S&P 500 companies have seen a drop in revenues. Home sales have also dropped for September. What does this say about the health of the US economy?
It’s still a very fragile economic climate and signs of recovery are tentative at best. So, a positive 3.5% GDP growth for the third quarter in the US was mostly on account of temporary impetus from inventories, from stimulus measures like the cash or clunkers, which boosted automobile sales during a brief period of time. But with consumers still under terrible pressure because of high unemployment, record debt and low saving, it’s going to be very difficult to sustain a strong and vigorous recovery.
What is the kind of recovery you expect, U, V, W?
I am suspicious of these alphabets. I think, it’s going to be a weak recovery. In a weak recovery, it’s a recovery that is going to be fragile and it is a recovery that doesn’t have much of a cushion if something bad happens. Say there is a shock, oil prices spike up or something else. When you have a weak recovery and get hit with a shock, you can have a relapse or a renewed downturn or a double dip. The main message is it is going to take long to sustain a more vigorous recovery. During that period of time, there remains a period of vulnerability which can’t be taken lightly. This is in context to the developed world and its impact on the global economy which will have ramifications for Asia.
Are FIIs on the same wave length as regards emerging markets or are they more bullish on India as is evident by the inflows?
Emerging markets are up 90% from their March lows. It’s been a spectacular increase and has attracted a lot of interest from global investors all over the world. There is a view that this part of the world is permanently decoupled from anything that can happen elsewhere in the global economy. This is personified by China with a 8% growth target. But the jury is out on that one. I am personally bullish on developing Asia, but only on the condition that it makes the transition to balanced growth.
Where do you see India’s GDP growth one year down the line? Are there any concerns.
India is a very balanced economy. The India story today is more compelling than ever before. It was not hit hard by the crisis, it continues to draw support from a micro story and FDI and infrastructure — still a major constraint — are moving up from the bottom. The political equation is now much more constructive for reforms. So, I am positive of India’s growth story and see the growth story average between 7.5% and 8.5% over the next two years. However, you can’t afford to be complacent. India has issues. If this government is once again unable to push through meaningful reforms then it will be a major disappointment. If there is a correction in emerging markets’ equities, given India’s large current account deficit, that could create some funding problems which have interest rate and currency implications. If the government doesn’t deliver on providing support to infrastructure, it could unravel what has been together up to now.
Do you see the inflows being sustained?
That’s a tough question. Most investors are very enthusiastic about emerging markets and their performance over the past seven months validates that. Should there be more bumps on the road which effect economic growth and emerging market exports once again start to contract raising questions about recovery, it could scare investors away.
It’s going to take a lot of work on the part of all emerging market economies to justify such inflows on a long term basis.
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