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Consumer story will drive Indian markets forward: Morgan Stanley
August, 19th 2011

In an interview with ET Now, Manoj Pradhan, Emerging Market Economist, Morgan Stanley, shares his views current market scenario. Excerpts:

ET Now: Why would you cut global GDP forecast to 3.9 levels in 2011 and 3.8 for 2012 from the earlier 4.2 and 4.5 respectively?

Manoj Pradhan: We feel the balance of risk has gone towards weaker growth. Now what we have seen is tougher conditions from markets. We have also seen policies that have not been very supportive of growth, fiscal austerity in Europe, tightening of monetary policy and in the US as well, the looming end to the incentive might actually be a fiscal drag on growth at this point in time. Central banks also do not have very much room to use. They could be innovative if they wanted to ease and at the same time, emerging markets are doing very well. They are in much better position than they have been in the past but they are not immune to shocks from developed markets. So, we believe overall that paints a slightly weaker picture for global growth this year and a weaker one definitely for 2012.

ET Now: I read your report yesterday and you have used the word recession rather loosely, why do you think global economies once again could hit a double dip?

Manoj Pradhan: The balance or risk still suggests that they will grow. It will be weak growth. The drag is coming on them from 2 sides from policy as I said and markets are creating this negative feedback loop that we talked about where weaker markets beget economic conditions. But overall, there will be some stimulus from policy. We believe the federal reserve will cut interest rates on excess reserves down to zero sometime this year and the ECB will probably respond with rate cut sometime earlier this year and this easing will support growth. Overall, the economies though are in better shape than they have been. So, they are not prone to downward growth as much as they were and when they were very unbalanced back in 2008.

ET Now: A lot of comparisons are being drawn to 2008. Do you think any plausible recession scenario in 2011-2012 should be shallower than what we saw in 2008 or 2009?

Manoj Pradhan: Yes, that is definitely the case. These economies are not as unbalanced as they were before. If you look at the US economy and you have seen that savings have gone up, corporates have very good cash positions. You do not see the kind of imbalances that would have crashed or imploded when growth went south and therefore we think that the shallow recession is on the way.

The second thing that is very different from 2008 is that the preceding period for that recession was very tight monetary policy, that is not what we have now. We do have fiscal austerity in some cases but it is not severe in the larger economies.

ET Now: Why do you believe that emerging market policymakers are likely to cushion domestic growth but a drastic policy stimulus is unlikely?

Manoj Pradhan: They have already done that in 2008. They had a huge surge as far as policy stimulus was concerned. In the case of China, they had a credit surge, in the case of India, they had fiscal policy and monetary policy almost everywhere was taken down to levels that were expansionary by historical standards. What is different this time is that the developed markets themselves are not as unbalanced.

That takes away some of the risk. The second is that the tail risks of deflation and possibly moving into depression are not around which means that emerging markets do not have to provide the added insurance through policy stimulus that they would have to back then. However, if needed, they will probably deliver some kind of easing that will be enough to support growth in their domestic economies.

ET Now: For how long do you think policymakers, particularly in India and China will have to deal with the trailing inflation stress and therefore rate hikes as well?

Manoj Pradhan: The inflation story looks like it is under control. You do have a few factors that will help them in that process. No 1 is if the global growth story works out the way we have described it, that will definitely be a suppressing factor as far as inflation is concerned. Second, there are very strong base effects which are statistical in nature but that will still take the pressure off policymakers because the inflation headline numbers will start to move downwards. They have already successfully managed to slow down their global economies through a policy tightening move that has lasted about 6 months since the end of last year and that has helped domestic inflation come down. The combination of these 3 will mean that inflation will be under control relatively soon or sooner rather than later at least.

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