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India is ahead of most emerging markets: Stephen Roach, Non-Executive Chairman, Asia, Morgan Stanley
July, 18th 2011

Any executive representing an investment bank always makes politically correct statements. But there's one who speaks what he thinks (and also gives unadulterated analysis) -Stephen Roach, non-executive chairman, Asia, Morgan Stanley . Probably his economics background, and not just deal-making, helps. In an interview with Gayatri Nayak and MC Govardhana Rangan, Roach speaks about the headwinds that India and China are facing, to the faltering global economic recovery. Edited excerpts:

What is your advice to Indian policymakers to keep India an attractive market for global investors who are beginning to worry about high inflation and possible fiscal slippage?

My advice to India would be that the fiscal and monetary stimulus that was so very appropriate in 2008-2009 are over. Inflation is growing in the economy, they are not appropriate in the post-crisis rebound and the sooner you get back to the more difficult fiscal monetary situation the better it is for the economic development of India. RBI is focusing on controlling inflation.

India has had negative real interest rates for quite some time. What needs to be done when economic growth is also slowing?

The RBI has been self-restrained in raising real interest rates to reduce inflation. The monetary policy was relaxed. It is too early to understand the full implications of monetary policy actions. Right now, there is probably a need for monetary tightening by 50 to 100 basis points over the next six to nine months. But RBI will also have to assess the growth stance.

India has a huge fiscal deficit, while China has a huge fiscal surplus. Is it fair to compare India and China?

I agree with that. We do not want to face China and India with the same gloves. They have different macro-economic structures, different cyclical systems, different financial market developments. The record of China in the last thirty years is very important. They funded growth with high savings. India's savings have improved in the last six to seven years. India has a high rate of savings. But high deficits undermine the overall increase in savings.

Given the high inflation rate, do you see an impact on savings?

Well, it could. In a high inflation environment, you could expect individuals to save less and spend more. So there is certainly a risk that India would face.

Emerging markets have been a kind of destination for global investors for almost a decade now. Now that inflation is getting out of control and growth assumptions may not play out as expected. How do you see emerging markets in this backdrop?

I think the big challenge for emerging markets (India is a lot different in the basic emerging markets) is how they are going to deal with a period of sluggish growth in developed economies. Over the next three to five years, the growth is going to be surprisingly weak in the United States, Europe and Japan. What does this mean for these developing economies? The real pressure will be to focus on internal demand than external demand. India is actually ahead of most emerging markets, China is not.

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