Sanjeev Sanyal, senior regional economist (Asia), Deutsche Bank AG
Sputtering economies and plunging financial markets have turned the outlook bleak for many countries across the world. It had been feared that the financial health of the Asian region, especially, would deteriorate rapidly. Not an unusual thought, considering that exports to the US can easily be credited as the economy-driver for many parts of this region. But recent strong exports and a moderate revival in domestic demand are kindling hopes that all may not be lost for Asia just yet. More interestingly, some economists believe that China, Korea, and even India will be well-placed to pull through these tough times better than most. Sanjeev Sanyal, senior regional economist (Asia), Deutsche Bank AG, is one such believer and he tells us why.
After all the talk about the worst drought in a decade, what kind of growth do you expect for the Indian economy?
The drought situation appears to have somewhat eased after the revival of the monsoon rains in August. Nonetheless, the agricultural sector has suffered from the dry spell. We have, therefore, lowered our GDP growth forecast for this calendar year to 5.3 per cent. The industrial sector was witnessing a gradual revival in recent months and we expect the pace of growth to accelerate into the next year. The revival in monsoon rains should help the rabi crop. We also expect the services sector to maintain robust growth. So, it is possible that the GDP growth could exceed 6.5 per cent in 2003.
What is the outlook for the Asian region?
Asian region has been enjoying a strong revival since the second quarter. Despite the pessimism over demand in developed countries (especially the US), most Asian countries have been enjoying high export growth in recent months. In addition, a few countries are also enjoying a revival in domestic consumption demand. The growth impetus is the strongest in China and Korea, but others will also improve on their 2001 performance. China and Korea will do particularly well this year and next. China should be able to achieve a 7.7 per cent increase in GDP in 2002, while the Korean economy is likely to expand by 6.5 per cent. Both countries are currently enjoying strong exports and domestic demand. Even Thailand appears to be enjoying an improvement in domestic demand. Interestingly, Singapore may witness a structural shift away from electronics to pharmaceuticals/ chemicals. The evidence is still tentative, but this shift would fundamentally change Singapore's economic dynamics.
Which countries are looking good as investment destinations right now? Where does India stand?
Overall, we like Korea as an investment destination. The country has indeed reformed its economy since the Asian crisis. China is also attractive in some specific areas, especially for foreign direct investments. However, there are some serious transparency and resource allocation issues that need to be resolved. We are also closely watching the structural transformation of the Singapore economy. The longer-term shift could throw up some very interesting investment opportunities in the next few years for both direct and portfolio investors.
I am not as pessimistic about India as many other commentators. Reforms have indeed been slow, but the economy is now benefiting from the cumulative impact of a decade of gradual change. In my view, the tradable sector of the economy has been enjoying productivity gains that are not fully reflected in the macro-economic numbers.
Does the emergence of China as a strong manufacturing destination change the equation for India in any way?
The emergence of China as a manufacturing powerhouse certainly provides an aggressive source of competition to the Indian industrial sector. However, there is no need to be overwhelmed by this phenomenon. Firstly, China also presents an opportunity as a destination for Indian products. Secondly, note that a decade of import liberalisation has improved, rather than worsened, India's trade balance. This means that some Indian producers are increasingly capable of competing both at home and abroad with foreign-made products.
How dependent is Asia on the US market?
Most of Asia remains vulnerable to the US economic cycle, with the possible exception of India, China and Korea. This is not surprising since these countries are small, open economies. Intra-regional trade is often put forward as a source of resilience but you also have to note that much of this intra-regional trade is in "components", that eventually feed into products sold in the US.
While we recognise that the US economic cycle is a source of risk, the US will still manage positive growth in the second half of 2002, followed by a gradual acceleration in 2003. This is worse than what had been earlier anticipated, but still not as pessimistic as many other commentators. Also, we need to understand that even moderate growth in the United States is good enough to support high rates of growth in Asia, given the low levels of inventory.
How good or bad is the fact that India is not dependent on the outside world for growth?
During a global downturn, it is probably a temporary advantage to have an in ward-looking economy. However, the experience of four decades of import substitution should have dispelled any doubts about the long-term costs of being inward-looking. I believe the pressure to compete is essential for economic performance.
The country still has a long way to go in order to reach global standards, but progress depends critically on the willingness to accept foreign capital, competition and technology.
We have had an industrial slowdown for two years. What can we do to reverse this?
The latest data suggests that the industrial sector is experiencing a tentative cyclical revival, despite the uncertainty over rural demand. As I mentioned earlier, the sector will gradually gather momentum over the next few quarters. However, in order to sustain long-term industrial expansion, the government must force through structural reforms ranging from labour laws to power distribution.
How has India fared in its decade of liberalisation? Going forward, what will be crucial for economic growth?
Reforms have been slow, but the cumulative change over the decade is still quite large. There is micro-level evidence that efficiency and product quality have improved. Unfortunately, we do not have enough data to accurately measure these changes at the macro level.
Looking forward, the government must focus on two issues: achieving fiscal sustainability and improving resource allocation. Privatisation is only a small step towards improving the efficient use of resources. Bankruptcy/ foreclosure laws and related reforms in the financial/ judicial systems are absolutely crucial. The government is already trying to introduce these changes. If these reforms are successfully implemented, they will be the most important achievement of the liberalisation process since 1991. Remember that the Asian crisis was the direct result of misallocation of capital by a faulty banking system.
