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  • : Investing: Listen to the experts! (Part II)
  • OUTLOOK ARENA  >>   VIEWS ON NEWS >>  APRIL 20, 2004

    Investing: Listen to the experts! (Part II)

    Pfn: The global economy seems to be coming off a trough with both the US and Japanese economies on seemingly sustainable recoveries. How do you see the global economy performing over the next couple of years? Which of the larger countries do you think could surprise (on the upside as well as downside)?

    Mr. Mulji : I think the top line global growth would depend on the nerve of the Chinese and Indian bureaucracy and politician. What is clear about India and China is that there is a great underlying demand, which you cannot say about any other country except for a large number of places in Africa.

    What can stop India and China from really reflecting this potential? And the answer is if only the bureaucracy and politician lose their nerve. There are certain things which could make them lose their nerve. If they feel too much of the growth is due to deficit financing. But then there is always a problem to know which is the right kind of growth.

    I see no reason for the global economy to slow down unless the Chinese lose their nerve. It is quite possible that the Chinese will lose their nerve because they themselves are rather scared of the rates of growth there are growing at. But I do hope that India will be the next one to pick it up.

    Mr. Mecklai : Global growth does appear to be picking up; however, I feel that the huge overhang of consumer, corporate and government debt in the U.S. will act as a drag. Thus, I believe that U.S. growth will begin to slow down again certainly by the 3rd quarter of this year, just in time to terrorize Mr. Bush's election prospects. Europe seems on a slow and steady path, which I think will be sustained. Japan looks set for continued improving growth.

    There could be a threat to growth if/when there is another eruption of sadness in the Middle East.

    Mr. Dayal : I think if you look back at what happened in the summer of 2002 the people were scared because of the unemployment rate in the US was picking up. To follow that in 2003 there was the SARS crisis in South East Asia and there was a huge fear factor. I think people were too pessimistic about the global economy. Despite the concerns of increasing unemployment, SARS and the Iraq invasion of 2003 the economy has bounced back, because all economies tend to work in a cycle. And the global economy is nothing else but a part of this global cycle. The economies worldwide did bounce back.

    People are getting maybe a bit too optimistic about the future. I am a little more concerned because I think interest rates will have to rise in the US primarily. Interest rates have already risen in England, Australia, Netherlands and I think they will also pick up in America, Japan, India and the rest of the world. And when interest rates rise, in my view, the global economic cycle will begin to taper off.

    There is another problem with the global economy right now. There is excess capacity in the world. So if you want new capacity addition by companies, then there is a need to have the global economy keep on growing. But if you got the view that interest rates will rise, then global economy will stall, and hence the new capex by companies will not take place, and therefore job creation will also fall. And consumer spending wall and hence we will go back down in a cycle.

    In my view we will have stagflation, which is inflation along with stagnation in the economy, like in the early 1980s. The world has not seen stagflation for 20 years. So this generation of policymakers around the world may not know how to deal with this scenario.

    Pfn:In your opinion, which will be the top 3 economies in terms of posting economic growth (given that there is political and social stability) over the next 10 years. Please share with us the reason you picked each of these economies.

    Mr. Mulji : I think that is a fairly easy answer to give. Growth rates are obviously going to be higher in India and China as compared to anywhere else because the demand in greater in India and China. And once you have got an exchange rate which reasonably equates your Rupee price to your foreign exchange price there is no reason why these countries should be differentiated. They would be just as Italy or Japan or Ethiopia or other countries. But with a very considerable demand.

    Mr. Mecklai : India, China and, probably, one of the Asian tigers

    In the case of India and China, the domestic markets have just started coming into their own. With steady appreciation of the currencies over the next decade and, particularly in India's case, a further improvement in cost efficiency (as infrastructure is improved) suggests that we will see sustained strong economic growth. China does have the threat of some social instability, but they seem to have a magic formula to manage it.

    I believe that all of Asia will benefit from the continuing growth in these two giants and, likely as not, we will see the boom across the region.

    Mr. Dayal : Probably because I know them a little better, I would say the US, India and I would hazard a guess about China vs. Russia. I think China is everyone's favourite today. Russia is more resource based because of oil, the natural gas etc. And probably if one expects stagflation, then commodities would perform better. I would therefore prefer Russia over China. Knowing that Russia has been through some sort of political upheaval, China has not yet seen any political upheaval, not that it may, so probably I would say my picks are the US, India and Russia.

    Pfn:The Indian economy, as some would say, is 'shining'. What is your take on the Indian economy when it comes to its present state and its future prospects?

    Mr. Mulji : India is shining in contrast to what happened to it in the past. I have not the slightest doubt that the one single move, which may seem rather small that Dr. Manmohan (Singh) made, or was made to make, of effectively aligning exchange rate to the rest of the world was the opening of every opportunity for this country. And I think it has since been slowed down in 1997 only because the Indian authorities lost their nerve. But five years later they have adjusted - interest rates are down to reasonable levels, exchange rate is free, you can exchange as much as you like back and forth. And one just hopes that there will be nothing that will push India back to its restrictive outlook. I see no reason for this to come up. But it is always when you see no reason, that something odd pops up suddenly.

    Mr. Mecklai : As mentioned earlier, I believe that India will be the leader in world growth in the future. First off, our infrastructure is abysmal but improving - as this process continues and, hopefully, gathers pace, our productivity will explode higher. Secondly, Indians have been exporting capital over the past 50 years; this process has started to reverse and, with world investment opportunities likely to be muted over the next several years (since US interest rates will have to remain low to coddle the heavily indebted economy), accelerate. Thirdly, the BPO boom will become recognized for what it really is - not the shifting of jobs to low cost economies, but the shifting of jobs to more cost efficient economies. And as we get more cost efficient, look out!

    Mr. Dayal: I think the reforms that began with Rajiv Gandhi in the 1980s, and then by Narasimha Rao and the Manmohan Singh budget of 1991 have led to where we are. So while the recent government may take credit for the recent performance, the foundation stone for the same was laid about 20 years back.

    India is doing very well. But at the same time I keep on reminding myself that there are segments like rural India, urban India, the wealthy India, the not so wealthy India and India shining is probably true for urban India but may not be for rural India as yet. So there could be a spill over effect. For rural India to shine you got to have job creation, education and spending on infrastructure. When you build roads, canals, dams etc, rural India prospers as it enables the transfer of goods to out to the cities where prices are higher. All of that will happen in the next stage of reforms.

    India is looking good. Currently relatively to the US Dollar the whole world is looking good.

  • Investing: Listen to the experts! Part III

  • Investing: Listen to the experts! Part I

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