Wednesday, May 22, 2013

Nouriel Roubini : Five Growth triggers for Indian Economy

Confident About India's Growth Model : Roubini

ET takes a look at five economic aspects of India that Roubini spoke on, the challenges that the country faces and the solution to its structural problems.
India versus China:
Speaking to ET he said, "India has a significant trade imbalance with China in goods especially and that demand can become a problem. India cannot afford to have an early demise of its manufacturing. The risk is that cheap and good quality Chinese goods are going to crowd out Indian manufactured sector."
IT revolution:
He said that India has used the export of Information Technology services to increase trade with many countries. "Absorption and innovation of new technologies play an important role in growth of economy. The digital revolution implies that new technologies can be transferred much faster from country to country," Roubini said.
Since global growth in services can only grow, India, said Prof Roubini, could have a long-term advantage, with services like IT services, financial services, medical or vocational services becoming more tradable. For this, India, he advised, needs to invest in human capital and skills to make sure it keeps its competitive advantage.
Roubini marked out that innovations in IT will boost productivity and will help the global economy. Web 2.0, Web 3.0, cloud computing, automation and social media will help in raising productivity.
Indian recovery:
"Recovery of growth in India driven by easier monetary policy that has occurred in the last few months and the fall in the commodity prices is going to reduce gradually inflation. In a way, it is going to boost purchasing power and allow further monetary easing by the Reserve Bank," Roubini said.
However, Roubini highlighted the negative aspects of global growth slowdown stating, "China is slowing down, advanced economies are slowing down and while India is not just dependent on trade as China is. The global economic climate affects confidence. So India already starts from a situation where growth has been disappointing last year and global growth was supposed to accelerate. If instead of accelerating it slows down further in China, in US, in Europe, that on net is going to be a negative on Indian growth," he said.
"Structural reforms and liberalisation that have occurred in India in last few years have happened at a slower than optimal and desirable pace." "That is one of the reasons why economic growth in India for last couple of years has been disappointing. The government is trying to jumpstart some reforms," he acknowledged.
But, he highlighted that India will have general elections next year. "This implies political and policy uncertainty, it might also imply that in a coalition government, it is going to be harder to accelerate policy reforms that have resistance among some social and political groups," he said.
"The pace of liberalisation until the election is going to be only modest at best and that implies that potential growth is now going to be accelerating significantly and that political and policy uncertainty, regulatory uncertainty, taxation uncertainty is not ideal for the business climate and is going to keep private investment in real capital spending slower growing than would otherwise be," he added.
RBI rate cuts:
As the world looks more and more unpredictable, India should cut interest rates. "There may be room for soft policies...In my view, in the next 12 months, there may be room for another 50 basis points cut."
Over the next 12 months, he expected the Reserve Bank of India to continue with its soft monetary policy and cut key policy rates by another half a percentage points. Given India's high current account deficit, which could widen with rate cuts and due to the central bank's growth-versus-inflation dilemma, Prof Roubini feels weakening global economy and softer commodity prices could counter a possible threat of rate cuts weakening the currency and feeding inflation.
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