Forbes India: Exclusive interview with Stephen Roach

LIGHTHOUSE MAN: Morgan Stanley Asia Chairman Roach holds up his book, titled The Next Asia.

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Stephen Roach, chief economist, Morgan Stanley, has been warning the world for years about the impending financial crisis. In his new book, The Next Asia, he outlines the opportunities and the challenges for Asian countries for them to effect a change of guard. He spoke to Forbes India's Shishir Prasad about, among other things, why he has started liking India as an investment destination.

Is the world out of the recessionary woods as yet, especially the US?

No, we are not out of the woods as yet. I see many dangers still ahead of us. I am not willing to “greenlight” the recovery. I don’t foresee any economic mega trend or technology trends that can create the consumer demand in the US. Lay-offs are still taking place and I haven’t seen any jumpstarts to the GDP.

You are a huge China fan. But of late you have started liking India. Why?

The case for India has become better in the last six months for one reason: The surprising and encouraging result of the elections. It lays out the possibility of politically driven reforms gathering speed. Then there is the micro-economic story of India which is about high-quality entrepreneurship. When you combine this with the macroeconomic fact of India’s savings rate [about 36 per cent] increasing dramatically, then the story begins to look very good. And it is not that I have turned negative on China. That economy is going through a phase where it will have to face up to some new challenges while India is doing fine for itself. And I don’t think it is either/or. In my view it is India and China and not India versus China.

In the post-recessionary phase, how did China’s macro-managers fare against India’s entrepreneurs? And how did the Chinese consumers fare vis-a-vis Indian consumers?

I think China’s macro-management is its strength. They need to recycle some of that strength into developing their domestic story. It is apparent now that China’s principal export markets are weak and they need to increase their internal private consumption.

The strategy that China has pursued till now [export-led] has inherent limits.

India’s success is in its entrepreneurs but it has to develop a macro-foundation, especially enabling infrastructure. In the last three-four years, the one thing that has changed for the better for India has been its savings rate. It is still less than that of China.

China’s structure of economy is such that only 35 per cent is consumption-led while India’s is about 53 per cent. So China’s economy is much more unbalanced and India’s is better from that point of view. This is China’s wake up call.

At the moment China does not seem to be showing the urgency but I think over the next one year they will come to appreciate this and try and modify their approach from being purely export-led.