Structural reforms may not be easy but India has got to do enough to restore investor confidence, says Alastair Newton, managing director/senior political analyst, Nomura International Plc. He tells Ankit Doshi that there is a need for policy actions by the Indian government as business activities are facing formidable challenges. Excerpts:
Indian economy is facing a lot of challenges.
Investor sentiment towards India is not good at the moment. Sadly, India has managed to attract the wrong sort of headlines for the last year and a half ranging from the telecom auction scandal to power cuts few weeks ago. However, it does not mean that it is going to continue to be the case. Investor sentiment towards India was very good as recently as two years ago and we could see a reversal of that setback quite easily within the next two years. A lot depends on the outcome of the next general elections.
…and what solutions are needed to overcome these challenges? What should the government do?
Indian politics has become much more fractured although Congress beat all expectations including the Congress Party leaders themselves in the previous general elections. The fact is now it is dependent upon a number of coalition partners. We saw with the attempt to liberalise the retail sector towards the end of last year, how difficult it can be to push through reforms. Structural reform is not easy in any country and this is not something particular to India. But what markets want to see is a government that is capable of pushing through necessary structural reforms in the face of vested interests. A lot of attention has been given to corruption over the last year-and-a-half because of the 2G scandal. Corruption is a bad thing of course, there is no doubt about that as it causes economic distortion. More focus on reforming the retail sector or investments in infrastructure and power supply would be a big step forward. One way or the other, the government has got to do enough to restore the confidence of investors that India is definitely back on track and heading in the right direction. And I don?t mean foreign investors, but Indian investors too.
What economic and geopolitical risks should be closely watched for 2013?
One, the fiscal cliff in the US. Two, the situation in Eurozone is still going to be with us. Three, Iran is going to be a problem and the closer it gets to nuclear weapons, the more likely it is ready to strike military, which would bring the threat to crude oil prices and world economy. Four, the hard landing of China?s economy. There are some serious, non-systematic issues like Pakistan and North Korea, which could become systemic if they get more serious.
For how long could we see this trend of emerging markets outperforming developed economies to continue?
Well, it has to do with the S-curve of development. Economies slow as they mature?that is a historical fact. And it is inevitable that growth will slow and it is right that growth should slow (for instance in China). Over the next 10 years, if China tries to grow at 12-14%, we are going to get major overheating. So over time as these economies mature, inevitably growth will rightly slow but we should be careful about confusing short-term economic developments with long-term economic trends.
Assuming there is another crisis in the future, what would happen to oil prices?
Brent crude oil is roughly at $110 per barrel. I think we need to be really cautious about oil prices. It was at $128 per barrels four months ago, it was $90 a month ago. Global economic situation has not improved since Brent crude oil prices were at $90. So why is it at $110 a barrel today? It is because of perceived geopolitical risks rising out of Syria and Iran. Personally, I think markets are over estimating the geopolitical risks in the Middle East at the moment as regards to oil supply. Markets are focused on Iran and Syria and over estimating the risk in the short-to-medium term around those two countries. So I would say that oil is already at a high price than it should be so, presumably it is going to take some sort of an economic shock to get market?s attention away from perceived geopolitical risks and back to economic fundamentals.
Would it be right to say that every financial crisis has been bigger than the previous?
No, it wouldn?t. If you take the Great Depression into account or even if you look at the most recent history, I would argue very strongly that the aftermath of the Russian default in August 1998 was potentially much severe than the dot com bubble-bust in 2000-01. In 1998, we were on the brink of going over the edge until the markets were persuaded in late October to back off their attacks on the Brazilian currency board. The Brazilian currency board did eventually break three months later, but the G7 had managed to restore market conditions. But if Brazil had gone off until the end of October, I think we would have been looking at a very serious global impact indeed that would be much more serious than the dot com bubble even if you combine dot com bubble with the impact of 9/11. So I don?t think that financial crises have been serious than the previous ones, what I do think though, is given the increasing degree of interconnectivity of economies and markets, there is an increasing tendency for a financial crisis in one part of the global economy to have reverberations more widely throughout the global economy.
So what is the most concerning factor? Repeat of the US economic slowdown, Eurozone sovereign default, hard landing of Chinese economy?
The most dangerous risk out there, at the moment, is clearly the Eurozone. It is just not Greece. Spain is a huge problem and Italy is potentially a huge problem too because it is too big to bailout. But let?s not forget the US fiscal cliff at the end of the year. Will the US go over the fiscal cliff? Not clear at the moment at this stage and much will depend on the outcome of the US elections in all probability. The US has the habit of going all the way to the wire and then putting back at the last minute and hopefully that will be the way things would be this time around. But if the US does go off the fiscal cliff, you are looking at a fiscal hit to the US economy of roughly $600 billion, which account for around 3.0-3.5% of the US GDP and clearly that is going to have an impact on the global economy as well. Having said all that, I am not concerned about China cooling-off at the moment.