Roubini believes the tightening of monetary policy by the RBI to fight inflation, along with some modest fiscal consolidation, is going to help
Nouriel Roubini, CEO, Roubini Macro Associates, LLC, and Professor Emeritus (2021-present), Stern School of Management, New York University, examines the global economic picture and explains why he is optimistic about the Indian economy in an exclusive interview with ET Insights.
Edited excerpts
The RBI, the Reserve Bank of India, is of the opinion that the GDP of India will prove well while inflation will look to ease soon. What is your view of the developing scenario?
I would agree overall with the RBI. I would say, however, that growth this year will be somehow slower in India than it was last year, for a variety of reasons. Last year, there was a pickup in growth. Given that there’s been a contraction of growth during COVID-19 globally, growth is going to be slower this year in India than last year. That can weaken external demand, and as far as domestic demand is concerned, the best strength is economic growth.
The tightening of monetary policy by the RBI to fight inflation, along with some modest fiscal consolidation, is going to help. This year could be closer to 6% than the 7% that was in 2022.
Globally, there is a poly crisis happening. How prevalent is it in the Asian sub-region?
Well, some of the mega threats I called mega threats; other people called them the poly crisis; and some other people call it the confluence of calamity as to do with a variety of economic and non-economic threats. Economic ones include inflation, the risk of recession.
Circulation high debt ratio that with rising interest rates maybe to debt prices, backlash against globalisation to the beginning of the globalisation in Asia, things are slightly different. Inflation is still a problem in some parts of Asia, certainly in India.
There will be a slowdown in economic growth, how much of a slowdown in economic growth will occur in Asia?
This year depends on the current war, on what happens to commodity prices, on how much inflation is going to persist, and on how much the central banks will have to tighten further the monetary policies. How much pressure will be determined by the value of the US dollar. All this is contributing to a growth slowdown, not a recession. There are no systemically important emerging markets that pose a risk to the financial crisis. The IMF and the World Bank identify 60 countries with low or middle incomes that are fragile and in need of restructuring their debts; they do not include any of the major key emerging markets. For example, we know that Sri Lanka is in a severe debt crisis, among other ones.
Gradual deglobalization, vulcanization of global supply chains, fragmentation of the global economy—the divisions, both economic and geopolitical, are going to slow down growth from exports and integration of trade. And since the Asian region of the world is based on dynamic global growth and export growth slowdown of global growth. But India, which has something of an impact on its own, is going to remain the fastest growing region of the world within Asia.
So, when it comes to fragility, India has been shining or rising in recent years, and it is moving forward. So, what is your take on it?
I am positive about India. I believe India has the potential to become one of the world’s key economies and countries. In the next few decades, it will have the largest population in the world and is still growing young and dynamic. That’s a source of economic growth. Its per capita income is only one-quarter that of China, as the process of economic catch up implies.
You have the right policy. Strong economic growth for decades to come, at least 7% with either 14 or more than that, and even geopolitical and geoeconomic. And of course, India is a key global power, initially in Asia and then globally. Many positive things have happened here in, in India, the build-up of a physical infrastructure, Of structure, human and physical and digital as well. Having an internal market that is integrated through the GST and the monetization reforms, investing in education and in people, Having their comparative advantage in IT technology and technology overall.
One of the challenges of India is that while the new economy is very dynamic and competitive, there are lots of medium-sized firms that are competing, fintech in general, e-commerce, and so on in some of the traditional economy. The experience we’ve had with Indonesia, Japan, and Korea is that in the initial stages of industrialization, maybe having large conglomerates and national champions can help, but these conglomerates are not necessarily the most innovative.
They hamper the entrance of new companies and startups in the various sectors, and they might restrict it.
And all this combination of factors implies that total factor productivity growth may be negatively affected by the existence of large oligopolistic conglomerates. You want to have creative destruction; you want to have the new entry of domestic and foreign competitors; and you want to have competition and dynamism rather than crony capitalism.
That’s a downside risk that India will have to address.
Are you confident in India’s shining story?
Certainly, I am very positive about India, but India must do many reforms. There are some macro reforms that have to do with controlling inflation, reducing the budget deficit, and reducing the stock of public debt while reducing the twin fiscal and current account deficits. So then there are the structural ones that are in competition.
Of course, good work has been done over the last decade to reduce the financial imbalances in the banking system, the corporate sector. Because balance sheet problems have been reduced.
Reducing the role of large oligopolies and national champions in the economy rather than increasing it and making in India is a good policy, but with two caveats: you must create products that are needed to export led growth. They cannot be products that are only for the domestic market that succeed through import substitution.
And two, the comparative advantage of India is not in traditional, low value-added labour-intensive manufacturing; it is more in technology—I would say iPhones rather than tractors and some of the recent ones.
Policies have been emphasising sectors that are maybe labour intensive, but those are not necessarily the ones in which the country has a comparative advantage over China. India needs to enter into partnerships like the Transpacific Partnership, that actually might be appealing to India, so more opening up to trade of goods and services without restrictions due to protectionism, more globalisation, and more financial inclusion. It’s the way that India will grow.
The conversation with Nouriel Roubini took place at the 7th edition of The Economic Times, Global Business Summit 2023
