'BPOs are strategic partners to MNCs'

Morgan Stanley MD warns of lower commodity prices.

Stephen Roach, Chief Global Economist and Managing Director, Morgan Stanley, believes that "India's IT enabled sector is not just about global labour cost arbitrage, but Indian companies have now become strategic partners with world-class multinationals." That's the good news.

The bad news is that he believes that the slowdown in China could lead to a sharp correction in commodity prices, and that would hurt all countries that export to China. On the other hand, he pointed out that slower growth in China could lead to lower oil prices, which would help India.

In an exclusive interview with Business Standard in Mumbai, Roach said  his visit to India had far exceeded his expectations and that he was very impressed with the "great world-class companies in India", and the "critical mass that has been attained in the IT-enabled services sector.

The economist said the strengths of Indian IT services companies lay in integration "" in "working strategically to customise integration, not just in Bangalore, but in locations across the world". "That's the kind of partnership that globalisation is all about," he said.

Roach also said the attraction of Indian IT-enabled services companies was that they were able to solve complex problems and execute solutions flawlessly, while  at the same time keeping costs very low.

Roach said that low costs were just the initial attraction or "step one in the engagement process" which thereafter  developed all the way into "strategic synergy."

While agreeing that no country could rely on one sector alone and that India would require growth in both services and manufacturing, Roach pointed out that India's success in services provided it with a "big win right now", and enabled the country to buy time as it comes to grips with its infrastructure constraints.

Roach, who had spent weeks in China, Japan and Korea before coming to India, said that there was plenty of complementarity between India and China, with India being ahead in services and China in manufacturing.

However, Roach was concerned about the growth of protectionism in the US, pointing out that the US had always done well when it had open markets.

Earlier, speaking at a press conference, Roach was pessimistic about the outlook for global equity and bond markets, pointing out that the imbalances in the world economy, such as the twin deficits in the US, would lead to substantial rebalancing. He said that this rebalancing would come  about through a fall in the value of the dollar and higher interest rates in the US.

On emerging markets, Roach said that risk spreads on some of the riskiest assets have narrowed too much, and that these spreads are likely to rise.