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'The real surprise in Asia could be India'

June 04, 2009 11:34 IST

India could actually outperform the Asia region by a margin, says Morgan Stanley's Asia Chairman Stephen S Roach in an interaction with the media.

Amid optimism surrounding an economic recovery, do you think the worst is over for the global economy?

In my observation of the post-crisis world, it is premature to conclude that the worst is over. There are three reasons why I strongly feel there could be an anaemic outcome. For one, the crisis itself is not even half over. By the time this crisis ends, over $4 trillion of toxic assets will have been written down by financial institutions globally. Secondly, this is an unusually synchronous recession.

In earlier recessions, about half the world economies were contracting and half were rising, so that when the rate of contraction moderated, the balance swung pretty sharply.

This time, as of mid-2009, 75 per cent of the economies are contracting and so the balance between contraction and expansion is skewed towards weakness. This will limit the upside.

The world's biggest and most dynamic consumes, the American consumer, is finished. In the next three-five years, the growth of consumption is not going to be higher than 1.5 per cent, a dramatic slowdown from the pre-bubble days.

It is ironic that the US, which accounts for 4.5 per cent of the world's population, consumed $10 trillion last year, while India and China, which account for 30 per cent of the world's population, consumed only $2 trillion.

Amid all the talks surrounding a recovery, I would like to say that the world is contracting. Probably the rate of decline is not as steep as it was.

Things are looking quite hopeful in India with a new government in place. What is your take on the India story?

In general, I have been much more optimistic on prospects for China than India.

For the first time, I am optimistic on prospects for India than for China and the reason is that India has made good improvements in macro developments, especially in its higher savings rate, increased FDI and a modest improvement in infrastructure's share of the GDP.

India has got a large collection of world-class companies, extraordinary entrepreneurs, well-developed markets and an educated workforce that will act in its favour. What's been missing between this micro and macro is political impetus to reforms. The recent election changes the prospects for reforms.

It is my hope that the Congress government will be much more active in pushing reforms on a number of fronts and will be much less harrowed by coalition politics. At the same time, China faces strategic challenges for the first time in many years.

It has pushed its export-driven model too far, making it too dependent on external climate. India's story has come out very nicely. Wouldn't it be ironic that when the world has completely embraced the Chinese miracle, the real surprise in Asia could be India?

What is your view of the dollar as a reserve currency? There have been talks about Asian and other economies willing to challenge that. Do you see that happening?

I think the dollar will maintain its role as a reserve currency for a long time, because it involves enormous amount of inertia in shifting from one currency to another. The dollar has a numerator's role in driving global trade transactions and accounts for a 33rd of the world's official forex reserves in nations round the world.

The outlook for dollar is weak mainly because the US will maintain a huge current account deficit. It is a completely stretched imagination to even think about a currency being floated by BRIC economies.

What are your expectations from the new government to boost the investment cycle?

The country has a massive budget deficit. Now, with a new government in place, it can be much more efficient on deficit reduction. Probably, it would be a better idea to avoid another fiscal stimulus with such a huge deficit.

It is also vulnerable to external capital inflows. Increased infrastructure spending is required to lead India into the next phase of development. Disinvestment is important for deficit reduction. I would like to see government doing that actively.

The government and politicians need to take this initiative. And I can see that there is hope rather than iron-clad assurance behind my optimism. India could actually outperform the Asia region by a margin.

Do you think this rally in the stock markets is sustainable?

I don't think this rally is justified. The green shoots of recovery will turn brown this summer. Markets are pricing a V-shaped recovery, which is probably not going to happen. Markets will correct sooner rather than later.

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