India, China to benefit from foreign investments

Written by Rachana Khanzode | Hemang Palan | Updated: Jun 25 2009, 05:42am hrs
Martin wolf
Despite all the talk of green shoots emanating from different countries, the global economy will bounce back to its earlier high growth trajectory only by the second half of the next decade said The Financial Times, UK, associate editor and chief economics commentator Martin Wolf. In an exclusive interview with Rachana Khanzode and Hemang Palan, he spoke at length on global economy, highlighting the risk factors attached with the Indian banks proposed global expansion plans. Excerpts:

We have been hearing about some signs of recovery in the global economy. Is this a true recovery Has the US government taken enough steps to stabilise the economy

The fact is that nobody knows if this is the real recovery. But definitely, the rate of decline is slow and most people feel that may be in the last quarter of this year we might see some improvements. The policies taken up by the Fed have been reasonably effective. It has stabilised the balance sheets of banks. They are too cautious about the banking system and have freezed the expansion of bank but still there are a lot of bad debts in the system. The big mistake they have done is they did not take enough steps to restructure the financial system and restructuring of the debts. There could have been many steps that could have been taken and were not taken. This is going to hamper the growth

So when do we finally see the global economy reviving

The global economy might revive to 2% of GDP growth by the next year and a realistic growth of 4-6% is very unlikely. And the 2% growth isnt the real recovery from the growth levels of 8-10%. The federal spending is expected to be double of the government revenue and once the spending decreases and taxes increase, we might not see similar growth levels and that will not be the real recovery. The fiscal deficit of the US is expected to be 12 to 13% of the GDP. I do not see the real recovery to the initial levels, coming from the private sector, before second half of the next decade.

Would emerging economies like India and China witness influx of foreign funds in the years to come

Since economy is expected to remain weak over a period of time, the emerging markets like India and China would benefit from foreign investments. India is a large domestic market and stands a good chance of rapid growth in future. However, quantum of foreign investments in India would largely depend upon governmental policies framed on FDIs. Sectors in India like retail, infrastructure, pharmaceuticals, research and certain manufacturing industries appeal a lot to foreign investors.

Are Indian banks poised to take a leadership position on the global front

The Indian banks, although are robust, lack a capital base to compete with any reputed international player that currently has $2 trillion worth balance sheet size in the global banking space. It would be very dangerous and catastrophic for any Indian bank to attain such a size in the prevailing economic scenario. I would strongly recommend against it. When banks expand massively overseas, it doesnt matter where they come from, they loose a fortune. Operating in unknown markets is a risky proposition for banks. Managing banking risks in unfamiliar markets by hiring locals in the foreign territories is not a good idea as these people may not have loyalties to the banks due to culture clashes.

Do we see more fiscal stimulus packages coming out

Besides India and China who might bring in some stimulus packages next year, I do not see other developed countries coming out with additional stimulus packages to the already committed ones. Even during the G-20 summit, most of the stimulus packages where decided before the meeting and there were hardly any new packages. So, besides US, many developed countries might not come out with additional stimulus, over and above the already committed.