Resilience in Indian economy to help attract more inflows

?Money for nothing is no good? says Geoff Lewis, vice-president, head of investment services at JP Morgan Asset Management. He feels positive real interest rates in the Indian economy is salubrious if it could encourage investments. In an exclusive interview with Chirag Madia and Muthukumar K, he said zero interest rate scenario in developed economies was more worrisome and toxic to the capitalistic system.

What?s your outlook for the Indian economy ?

I think it has demonstrated greater resilience which should help actually attract foreign inflows. We are seeing a cautious and sensible policy from most emerging central banks including India. They have recognised that its economic situations are different and are responding accordingly.

Could higher interest rates in India affect the capex investments?

In a sense, it is a positive, since positive real interest rates actually guarantees that investments go where its needed. Its a decent hurdle, which acts as a test and you don?t invest unless you think you are going to meet that cost. What is more problematic is the situation in US and the European economy where they are near zero interest rates. In that sense, money is free(there). To my mind, zero interest rates are toxic to the capitalistic system, money for nothing is no good.

Inflationary trends are worrisome for India and other emerging economies ?

Over the longer term, you don?t see such high inflation. India also has received decent rains, so food prices has probably peaked-out. In fact, I see pick-up in inflation in emerging markets as a sign of economic recovery.

When would the European economies be out of the woods? Is UK now on an austerity drive ?

UK?s economic performance has been a little-bit better than expected. They have also gone for largest fiscal retrenchment. UK deficit is actually larger than that of Greece. They are doing the right thing by cutting the fiscal support now, while there is still reasonable degree of global activity. They also have the benefit of having a standalone currency (sterling), which they can depreciate, if need be, to sustain activity. Having said there have been too much expenditure in the good years and what this current government has inherited is a bigger mess than Barack Obama inherited from George Bush. They now have to cut the fiscal deficit.

Could lesser spending delay UK?s economic recovery ?

UK doesn?t have a choice. Historically, the economy recovery has been led by exports and currency depreciation. Sweden and Finland pulled out of the banking crises through exports. While Greece and Portugal don?t have the leeway of a single currency (to depreciate), UK is lucky.

There is quite a lot of debate on what is happening in Europe. A normal sectoral analysis shows that after any boom or recession in the European economy follows the US with a lag of two-three quarters. For instance, such patterns were visible in the inventory and GDP growth figures.

Germany, interestingly, is doing well. It supplies capital goods and machinery for China?s factories. While recessionary trends in southern Europe will take cut growth figures, it is not likely to sustain. If Germany grows by 3% this year, EC must grow by 1.5%. I think it is clear that we have moved to a situation in the European Union where Germany now calls the shots, as they are the most productive and efficient economy.

What about the US economy ? Unemployment numbers continue to remain higher and recent GDP figures were also disappointing.

We believe that for US economy, it would be a sub-trend recovery and its likely to post 2.5% growth next year with little possibility of an immediate double-dip. The US corporates are sitting on over $ 2 trillion cash. What will trigger them to invest ? Renewed confidence that US consumers are going to buy more than now.

How do you see the story for China ?

China has 12-15% wage rate hikes in most years. This time there?s lot of publicity. As regards its economy, there are instances of soft landing with the shift in priority towards mass housing and housing for rents. The latter is a major initiative from the government to help people who can?t afford to buy homes. This is helping create new jobs.