Roach Sees China Better Placed Than India to Withstand Slowdown

January 12, 2012, 1:33 AM EST By Michael Heath

Jan. 12 (Bloomberg) -- China has scope to loosen fiscal and monetary policy, making it better placed than India to weather a global economic slowdown, said Stephen Roach, non-executive chairman of Morgan Stanley Asia.

China is bringing inflation under control and has a small budget deficit, Roach said in an interview today with Bloomberg Television. In contrast, India has a currency under pressure, an “inflation problem” and a large fiscal shortfall, he said.

India’s “got its hands tied: It can’t cut interest rates because of the inflation and currency issues, and it’s got no leeway to increase its budget deficit,” Roach said. “India is in a much tougher place right now than China in the midst of this weaker global economy.”

Roach’s views differ from those yesterday of Nouriel Roubini, the co-founder and chairman of Roubini Global Economics LLC who called China’s growth model “challenged” and said India is “positioned well.” The two developing economies account for more than a third of the world’s population.

The International Monetary Fund is preparing a “substantial” cut to global economic projections that in September showed China and India leading the world’s recovery this year.

Prime Minister Manmohan Singh’s efforts to bolster the Indian economy have been hampered by corruption scandals, inflation and the decision last month to stall the easing of foreign investment rules in multibrand retail.

Indian Inflation

Indian central bank Deputy Governor Subir Gokarn said last week the Reserve Bank is “very concerned” about the impact on inflation from the rupee, Asia’s worst-performing currency in the past year after sliding 13 percent.

Roubini said yesterday that China’s growth model “is now challenged” because the U.S. can no longer be the consumer of first and last resort. “Unless China changes its growth model there’s even a risk of a hard landing in the next couple of years,” he said

“In relative terms, India is actually positioned well,” Roubini said in an interview with Bloomberg UTV in New Delhi. At the same time, the pace of “structural reforms” in India has been “mediocre” and unless India pushes ahead with those changes, economic growth in “absolute terms” will “disappoint,” he said.

India’s economy expanded 6.9 percent in the third quarter of 2011 and the Reserve Bank paused rates last month after a record 13 increases since mid-March 2010, as the benchmark gauge of inflation dropped to a one-year low of 9.11 percent in November.

China’s Growth

Roach said today that China is “very serious about engineering a shift” from an investment- and export-led economy to consumer-driven growth.

“You’ll be pleasantly surprised at the progress they make in building out a consumer-led growth model,” he said. “I’m of the view that we can look for positive surprises from China not negative surprises.”

The IMF is scheduled to release revised global projections on Jan. 24. Olivier Blanchard, the Washington-based fund’s chief economist, said in a Bloomberg Television interview last week that with European growth “very close to zero at this point,” there would be a “substantial” cut to the most recent 2012 global expansion estimate of 4 percent.

--With assistance from Susan Li in Hong Kong. Editor: Brendan Murray, Sunil Jagtiani

To contact the reporter on this story: Michael Heath in Sydney at mheath1@bloomberg.net

To contact the editor responsible for this story: Brendan Murray at brmurray@bloomberg.net

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