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Friday, 12 June 2009

Stephen Roach:This is an unusually synchronous recession

While the eyes of the world rest on China as the world arguably moves towards a recovery, India could be the surprise package from Asia.

Stephen Roach, chairman of Morgan Stanley Asia, said India's rise would be based on its higher savings rate, foreign direct investment and the share of infrastructure as part of its GDP. But the difference would be the power at the centre. "What had been lacking is the political impetus towards reforms. The recent election has changed this scenario," he said.

Other Asian countries face the problem of a dependence on exports; that is not true of India. This is true of China as well, which has previously dwarfed India's economic progress with its own model based on exports.

Now China faces major challenges as it has pushed its model too far, feels Roach, leaving it too dependant on the external climate. "For the first time, I am more positive on India as compared to China."
As India is more balanced, it could result in the country outperforming at the margin to the rest of the region, suggested Roach.

The global economy, though, still has to recover from the problems of the current crises. There could still be some toxic debt that needs to be flushed out of the system. Also, the majority of global economies have shrunk in this crisis, compared to previous ones, which might hinder recovery.

This is an unusually synchronous recession for the global economies, Roach said. Usually, in a global recession, half the world's economies contract while the other half is rising. So when the rate of contraction moderates, the balance swings pretty sharply towards expansion.

"This time, as of mid-2009, 75% of the world's economies are contracting and so the balance between contraction and expansion is skewed towards weakness. That will limit the upside for the world economy."

Due to these reasons, the current global rally in equity is not justified based on fundamentals, said the economist. The recovery being priced in is a V-shaped recovery which is unlikely. The markets have run ahead of themselves and should correct, Roach said. "The green shoots will turn brown this summer."

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