Indian economy is ‘moving into a sweet spot’

HONG KONG: “I’m a big bull on India,” says. “I think it’s really moving into a sweet spot.”

Coming from a man who, during his stint as the investment bank’s global chief economist, was christened the “perennial bear” for his generally grim outlook on economies, that is high praise indeed. And in his estimation, it’s well earned.

In response to questions from DNA Money in Hong Kong on Wednesday, Roach elaborated on what he likes about the Indian economy, what he expects from Budget 2008, and what the downside risks are. Excerpts:

Expectations of Budget 2008.
I don’t see the budget as being the decisive factor in shaping the outlook for the Indian economy — unless there is a major surprise on tax policy or infrastructure policy. I believe this budget will not have major proposals on any of those fronts. It will be the last budget presented prior to what’s likely to be an election of the Indian government, so I think there will be an inclination to be relatively conservative in the approach that the finance minister takes.

Proposals he’d like to see to signal that reforms are on course.
I’ve seen enough over the past five years to believe that reforms are on course. I think the budget gets a lot of attention but it’s really what’s going on in the private economy in terms of infrastructure and FDI (foreign direct investment), that I think is emblematic of the reforms and the new approach of the Indian government.

His outlook on the Indian economy.
I’m a big bull on India… What’s happening there is that good ‘micro’ - in terms of having a large collection of world-class companies - and good ‘macro’ - in terms of savings, infrastructure and foreign direct investment - are coming together nicely. And unless there’s a political screw-up - which happens sometimes - the micro and macro will work well…

It also helps that India has a relatively limited external sector, and even though it’s not completely decoupled, it’s more resilient than a lot of other countries. The biggest economic risk is that India continues to be dependent on externally-led portfolio equity inflows, and any major correction would turn negative.

On whether the correction in the equity market has run its course.
Asian markets are down, depending on the market you pick, maybe 20-30% from their recent peak. But the broader Asian markets are still up 15-20% over a year ago - in some cases, more.

I don’t think Asian equity markets have discounted the full extent of the risk (of a recession) in the US and the impact that the US risk could have on Asia. That process is becoming more realistic — it’s started to get factored into equity markets - but there’s probably some more to go in terms of cyclical correction, particularly since a lot of things are based on hopes and dreams of a ‘decoupling’ (from the US slowdown), which I don’t think will happen.

Once the relative valuation disparity gets addressed, I think there will be better value, which will make these markets more attractive. But I don’t think we’re done with it yet; there’s more room for cyclical correction in the markets.

On how bleak things look in the US.
I think the US is in recession now, and it will be ongoing for most of the year.
The credit crisis, which started in the subprime mortgages market, is spreading into asset-backed securities: residential mortgage-acked securities, asset-backed commercial paper… who knows where it will go next?

But in terms of impact, we know that it affects the ability of individuals — and quite possibly corporations — to have access to leverage, and to the extent that America’s recovery was based on open-ended access to credit, this will impede the forces of economic expansion in the US, and contribute to the recession, which now appears to be underway.

On whether a US recession now is good for China, given its inability to slow down its economy.
Recessions are not good for anyone. Sure, China needs much slower growth to deal with inflation and excessive liquidity, but I don’t think China should count on America to deliver this slowdown. Chinese authorities have been trying to slow down the economy through monetary tightening, and thus far that has not worked…

China sets policy with an aim to deal with its own problems, and it has a very high inflation rate right now. That’s a source of concern, and the government has indicated that it is worried about the build-up of inflationary expectations. That’s what’s driving the tightening campaign… If the global downturn turns really bad, and it causes Chinese authorities to revise their outlook for inflation they will probably announce a change in policy…