At a time when the Indian equity markets are facing a crisis of confidence, Morgan Stanley has come out with a report that reiterates India's inherent economic strengths. The report titled 'New Tigers of Asia' states that India, along with China holds the key to the future of the world's economy. The authors, executive director and India economist of JM Morgan Stanley, Chetan Ahya and managing director of Morgan Stanley, Andy Xie discuss the report.
Excerpts from an interview given to CNBC-TV18:
Can you state briefly what is the argument in this report?
Ahya: We are highlighting the long-term growth story for India and China and this is something we had done two years back as well - trying to compare two economies. Having said that, in this report, we are trying to focus more on the challenges.
We think both the countries are at a critical juncture and they need to take certain difficult steps right now, to ensure that the strong growth momentum that they have seen recently, continues into future as well.
Essentially, the focus of the report in that sense is on the challenges that the two countries are facing.
Do you think in the second round of the power policy reforms or infrastructure or roadway reforms, India's success is more assured even politically?
Ahya: I think there is definitely a change in the mindset of the policymakers and we see a lot of improvement in the infrastructure spending already. But let me put these numbers in perspective - for India, from yesterday there is a change but where it needs to be is a big gap.
China has spent $65 billion on roads last year. India is planning to spend $38 billion by 2012 from now on. There is just no comparison; I think there is a huge gap between the two. Even in other sectors, there is a similar trend.
If one looks at total spending of infrastructure in China, it is about $200 billion in 2005 and India has spent $28 billion. So the gap is just too huge for us to be in this slow mode of change.
Do you see this infrastructure problem getting solved in India?
Andy Xie: I think the money involved right now isn't an issue. The issue is political. I think India has a complicated system compared to China. China is very much dominated by the government.
It takes longer for India to get things done. I think if the government does come up with a big programme, the money is readily available around the world. India's future is so bright and they would fund something that is so productive. I think a lot of people would be eager to do that.
What kind of growth rates can you predict, given that infrastructure constraints are going to be there for a couple of years?
We're forecasting 6.5-7 per cent over the next two years and that is compared to 8 per cent we have seen recently. So we are seeing moderation on account of capacity constraints and this is a decent growth. But it is different from where the market expectations are.
If one meets policymakers in Delhi, everybody is saying 8 per cent is a given, let's target 10 per cent and we are probably going to see desolation down to 6.5-7 per cent. So, there is going to be a big expectation shock from that perspective.
Isn't the surplus it is generating internally enough, to ensure that the infrastructure growth will be better than it ever was in India?
Andy Xie: I agree that infrastructure has been growing better than before. We also see private sector companies being very entrepreneurial in overcoming these problems. For example, software-outsourcing companies were able to identify locations, which still have some infrastructure surplus capacities, and they would move their offices there for expansions.
If other companies also keep doing that, at some point, one has to worry that there is no infrastructure left for them to expand, so they have to slow down. So this is something that we worry about.
How do you see the future panning out? Do you think that the asset bubble is about to break when the world realizes that this is a 6.5% economy and not an 8% economy?
Andy Xie: I think India's situation is related to global liquidity. India's own story is important but at the same time, the liquidity factor is also very important. That depends very much on the inflation that is rocking the US. My hunch is that inflation is picking up in the US as well as around the world. That could basically cause liquidity to dry up, which I think would have a substantial effect on India.
Salient features of the report
- Path for progress: India and China have followed different roads to progress. China has followed a manufacturing-led path to progress, while India has chosen a service-based developmental model.
- In the report, Andy Xie says that India needs to fix its infrastructure problem by mobilising capital and streaming development processes. He also says that a challenge to India's growth is the bursting of its asset bubble. In particular, the enormous rise in stock and property prices.
Three steps to accelerate the India growth story:
- Bring a new law to acquire land that can speed up infrastructure projects.
- Set up SEZs along the coastline, where land disputes are least likely to occur.
- Sell state-owned assets to jumpstart the infrastructure story.
Chetan Ahya says that India and China have grown because of the demographics, reform and globalisation or as he calls it the 'DRG factor'.
India and China together account for 40% of the world's working population.
Similarities in the kind of challenges that both countries face. China at the moment is better equipped to handle the challenges than India. However, India needs a "strong supply response" to its problems, while China needs a "stronger demand response."
Poverty and inequality challenges. Both India and China have not performed well in the human development measure. While both have been beneficiaries of the fruits of globalisation that has not resulted in alleviating poverty and inequality.
- India's challenges: infrastructure, large fiscal deficit, low FDI.
- China faces a huge challenge on the currency front.
- China's share in global exports is six times that of India's share.
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