Mumbai: Stephen Roach has for long been an ardent admirer of China’s manufacturing and export-driven success story, but the chairman of Morgan Stanley Asia said on Wednesday that he is now more bullish on India.
However, Roach continues to paint a gloomy picture for the world economy. “All those green shoots will turn brown this summer,” he said, referring to the belief that the global economy is showing signs of rejuvenation.
“For the first time in a dozen years, I am more optimistic about the prospects of India than China,” he said at a press conference during the firm’s India Summit 2009.
However, Roach warned that India will take some time to reclaim its recent growth highs: “It is premature to conclude that India can grow at 8%. It will happen, but not in the next two years.”
Bullish on India: Stephen Roach, chairman of Morgan Stanley Asia. Adam Berry / Bloomberg
He added that India has improved its macroeconomic fundamentals through higher savings, foreign direct investment (FDI) flow and a small improvement on infrastructure spending as a share on the country’s gross domestic product (GDP).
“What was missing into the interplay between micro and macro is the political impetus. The recent election has changed the impetus for reforms,” he noted, adding that absent political resistance, the new Congress-led government will now be able to push its economic reform process.
China, on the other hand, has pushed its export-oriented model too far, and now faces a major strategic challenge, Roach conceded. “It is ironic that India has come up very nicely at a time when the world has fallen in love with the China story,” he said.
Yet, India faces challenges in the shape of a massive government budget deficit and poor infrastructure, he said. Given the political mandate the Congress party has, it has the chance to reduce the deficit through disinvestment of state-owned firms, which will also introduce competition and efficiency.
The deficit could also mean less scope for a stimulus package in the July budget.
Instead of preparing for a new stimulus package, the government should emphasize channelizing existing spending and should arrange for private funds.
“India has to move. The government and politicians need to seize the moment,” he said.
India’s fiscal deficit for fiscal 2010 is expected to be 6.5-7% of GDP, according to Arvind Virmani, chief economic adviser to the finance ministry. The government, in its interim budget in February, had said it expects the deficit to be around 5.5% of the GDP.
India is also in a better position than the rest of Asia because of its lower dependence on exports. “It is to India’s credit that it is getting more resilient than the consensus estimate,” Roach said. India’s GDP grew at 5.8% in the fourth quarter against the consensus estimate of 5%.
According to Morgan Stanley estimates, India would grow at 5.5-6.5% this year.