Morgan Stanley's Stephen Roach says China has a lot of discretion to use fiscal or monetary policy to temper the impacts of the slowdown whereas India has many problems. Current account deficit, weak currency and high inflation come in the way of easing the monetary policy. A high government deficit restrains the use of fiscal policy.
India is the only country in Asia with a current account deficit. "You are heavily depended on capital inflows to finance your external shortfall…and right now with equity investors around the world are very nervous…their ability to track foreign capital to fund your current account deficit is a serious question," Roach said in an interview to NDTV Profit from Davos in Switzerland.
Roach also criticised the Indian government's move to ask public sector enterprises to increase spending to kick start the economy.
"I don't think any government should be in the business to micromanage business or corporate behaviour. I think companies will invest and spend if they are confident about demand prospect for their markets. The last thing we need are a bunch of bureaucrats who are trying to orchestrate industrial policy and force companies to do things for a better judgement," he said.
Speaking about the global economy, Roach said that there is still a 25 per cent probability of a disorderly breakup of Euro, which was still a significant high number.
He said that the US economy will bounce back only when consumption picks up. Roach termed the US President's announcements on outsourcing as "crass" and said, "If we look at the global world... and there are labor pools, technologies and offshore productive platforms that make survival for American companies all the more important in this environment and through sands in the gears of that process I think it will be a huge mistake."
Here is the complete transcript of Stephen Roach’s (non-executive chairman, Morgan Stanley, Asia) interview with NDTV’s Prashant Nair.
Prashant: Hello and welcome. We are coming to you from the NDTV's studio in Davos where the World Economic Forum 2012 is being held. With me is a very special guest, Stephen Roach, Chairman at Morgan Stanley Asia and Professor at Yale. Thanks very much for your time.
Stephen: Pleasure to be with you.
Prashant: In the recent report you said that India has a greater risk than China. We all talk about hard landing for China. But you say India is the one we should watch out for. Why is that?
Stephen: Well, China has a lot of discretion to use fiscal or monetary policy to temper the impacts of the slowdown, which so far has been very limited for China. India just doesn't have the room to adjust its fiscal and monetary policy. India is the only country in Asia with a current account deficit. Its currency has been in a free fall and there is a inflation problem and very difficult to ease monetary policy in that environment. India’s consolidated budget deficit is 9% of GDP…in China the number is 2%...so, it’s very difficult to use a fiscal policy to stimulate. Both economies are slowing. Actually India has slowed more sharply recently than china. so I think fears of hard landing in china are over blown but I think optimism in India right now is I think is overstretched.
Prashant: What happened to that argument that India is a domestic growth economy? It’s a consumption driven economy.
Stephen: Well I think India in some respect is better balanced than the Chinese economy. But with the current account deficit you are heavily dependent on capital inflows to finance your external shortfall. And this environment right now… With equity investors around the world are very nervous. Their ability to track foreign capital to fund your current account deficit is a serious question.
Prashant: I mean People on the other side of the argument point out that the Reserve bank of India has got $300 billion of forex reserves. So that’s healthy. That covers the short term external debt…
Stephen: China has got $3 trillion so if we are making comparisons who it would be…a central bank with $3 trillion or a central bank with $300 billion?
Prashant: But relative to the debt that we owe to external debt...
Stephen: I get that. I think there is a lot of positive about India but the current account deficit, budget deficit, the inflation problem, the free fall in currency…really doing to hamstring the ability of authorities to deal with what could be and thus far has not been a severe global shock. So trying to figure out economic vulnerability is always a business of probabilities and right now the policy options of the authorities in India I think are worrisome and limited.
Prashant: The basic premise of that argument is that the government needs to act for India to kick start growth again. This is not a normal slowdown out of which we will pull ourselves up. I mean we will go back to 8 % plus kind of growth rate. The government needs to act right now and you are saying that the hands of government are tight looking at the fiscal and monetary situation. Is that you are saying?
Stephen: I am saying that growth slowdown is driven by a external shock and that is the case in India. Public policy usually steps in to temporarily fill the void. The options are your fiscal and monetary authorities in India to do that are surprisingly limited.
Prashant: There is a lot of talk in India recently that Government asking public sector enterprises to go out and spend cash that they have got on their books. Don't sit on tonnes of money. Go spend it. And there is a talk for revival especially in the infrastructure segment of the economy. So you are saying we should take that with a pinch of salt or…
Stephen: I don't think any government should be in the business to micromanage business or corporate behaviour. I think companies will invest and spend if they are confident about demand prospect for their markets. It’s true in India its true in China, its true in United States, its true in Europe. And the last thing we need are a bunch of bureaucrats who are trying to orchestrate industrial policy and force companies to do things for a better judgement.
Prashant: So India is in a slowdown phase how long do you think it’s going to last. What’s your own assessment?
Stephen: It’s hard to say I think it will probably last minimum through the middle of this year or it could last a little longer. Again the fundamentals for India in terms of saving gradually increase with the foreign direct investment relative to trends 5 or 10 years ago…even the pickup in infrastructure along with your solid micro fundamentals. Well run companies, stable market and corporate governance institutions leave me very confident |about the long term prospect about India. It’s more than short term that I am worries about right now.
Prashant: So middle of 2012 we shall start to see change...
Stephen: I would say that the risk is the downturn globally and its impacts in India would process through the better part of this year.
Prashant: And if you were to put probabilities to that happening I mean what would those be? I mean things getting worse globally effecting India and other emerging markets…
Stephen: The big wild card for the global economy is the hot topic of debate right now in Davos would be disorderly breakup of the European monetary union. I would put most of 25% probability in that and therefore 75% of the chance is that it doesn't happen because of the political will to maintain the monetary union. 25% is a little higher than what I would like and I think there is a reason to worry is the lack of explicit commitment to the fiscal union. The bank liquidity injection and the expansion of EFSF are worrisome in that regard.
Prashant: You know you always hear that the cost of a break up is just too high. So we can't let that happen. Just talk about that for a bit. What are we looking at we do get to a point where the region breaks up?
Stephen: Well I think the scenario that you hear the most is one country...one of the weaker economies...I pick Greece just puts its hand up that enough is enough. We can't take the pain of austerity and the lack of flexibility that giving up our own currency has provided and they exit. What happens is then is that the market will focus on the next candidate and I am not going to take names as they create speculations in themself. But there are a number of weak southern economies that could be the next potential premature exit and then there would be a cascading selloff across euro land sovereigns and corporate bond market. The European economy will go into a steep recession. The IMF put some numbers yesterday- 4% drop in euro land GDP this year. That would be devastating blow for Europe and the broader global economy. So a disorderly breakup is not to be allowed to happen in any circumstances.
Prashant: Is there something like an orderly break up?
Stephen: Well i don't think so. I think like one of these preprogrammed bankruptcies if a country leaves Euro zone I think it will set in motion a series of cascading forces that will call the membership of the nation a serious question.
Prashant: And you would put 25% of probability of that happening and you say that the number is too high for your liking?
Stephen: Yeah look again 75% chance is there that it doesn't happen. That’s a pretty big probability but I would like the number to be higher.
Prashant: And that’s the biggest risk that we are facing as we head into 2012?
Stephen: You can always come with a long list. But for the broader global economy I think integrity of the EMU, the risk to the European economy is the single greatest risk globally to be concerned about.
Prashant: Where do you stand? What’s your own view how this pans out through 2012? What’s your base case scenario?
Stephen: My view is that the European authorities just continue to move glacially on a road to fiscal union in shoring up the banks. These are very difficult plans to implement and design and they continue to move slower than the markets would like. There would be continuous pressure upon European sovereign debt market.
Prashant: But eventually they do get to a point where this fiscal consolidation and...
Stephen: One hopes so. You hope to finally get to that point but it doesn't feel like right now.
Prashant: Okay let’s get to US for a bit. There is a lot of data point suggesting that the economy started to pick up. A) Do you believe that and B) What about jobs? Are there enough jobs being added back?
Stephen: I think the best I can say about the US economy is that we have bottomed but we haven't moved up appreciably from the bottom. The sector that continuously to hold the US back the most is the personal consumption. 71% of the US GDP has grown 0.4 % in the 15 quarters beginning the first quarter of 2008. Without more vibrant consumer demands all the jobs programs in the world including the one articulated by president Barrack Obama last night during the US congress will not work. Businesses will only hire if they are encouraged about the prospects for demands in the market. Why would they hire if they think that the demand is not going to be there.
Prashant: How do you see policies being shaped and implemented, I was talking to a head of a large IT company in India about the talk of dis-incentivizing companies who take jobs offshore. Is that the way to go?
Stephen: That’s crass political pasturing by the president. He believes that he can micromanage the job creation process by being explicit in offering incentives for higher and domestically dis-incentivizing for hiring offshore. So if we look at the global world. And there are labor pools, technologies and offshore productive platforms that make survival for American companies all the more important in this environment and through sands in the gears of that process I think it will be a huge mistake.
Prashant: But you say it’s posturing. It won’t get implemented into laws?
Stephen: You never say never. I hope not. And maybe I am speaking of a lot of conviction than out of realization of what exactly could happen in the congress. The congress is very hostile to globalization, to trade in china, to the offshoring of the American workers. They haven't come with anything meaningful to fix it. But they have come with a lot of critical comments
Prashant: As investor where do you see opportunities? Pick reason you may start with India but broadly what is this mean for all the investors as we head into the year?
Stephen: Look I am a senior executive of wall s I cannot give you investment advice but I could say that for many Asian markets especially China the security prices have been beaten down very low levels in anticipation of much weaker outcome. Out of this very difficult year for emerging markets as of 2011 there may be some opportunities.
Prashant: Specifically India... I am not asking you to talk about companies…just broad themes that you think?
Stephen: I would be more optimistic for the stock markets in China than India.
Prashant: Your view in terms of investment activity in India? You still not convinced?
Stephen: I think India still have got some heavy work ahead of it on dealing with the slowdown in a policy constrained environment.
Prashant: Thanks very much sir.
Stephen: Thank you very much.
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