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India should cut interest rates, take on Chinese goods: Roubini

As the world looks more and more unpredictable, India should cut interest rates and figure out a way to compete with China.

, ET Bureau|
Apr 25, 2013, 04.15 AM IST
MUMBAI: As the world looks more and more unpredictable, India should cut interest rates and figure out a way to compete with China, which is inundating Indian markets with cheap goods, according to NourielRoubini, one of Wall Street's most closely followed economists, famous for his prediction of the 2008 global financial meltdown. While lowering rates could be a short-term prescription to get out of the slowdown rut, in the medium term, India should not let manufacturing to die in the face of buoyant growth in services, he felt. "There may be room for soft policies...In my view, in the next 12 months, there may be room for another 50 basis points cut."

The New York University professor, who has earned the sobriquet Dr Doom for his bearish views, came across as comparatively bullish on India, even though he stuck to his view that a slowdown in China and BRIC markets could be "more than just a global scare" and "we may have a problem a few months down the line".

Roubini, whose views are sought after by monetary authorities and finance ministers across the world, is currently on a short visit to India. Speaking to ET after addressing a seminar in Mumbai on Wednesday, he said, "India has a significant trade imbalance with China in goods especially and that demand can become a problem. India cannot afford to have an early demise of its manufacturing. The risk is that cheap and good quality Chinese goods are going to crowd out Indian manufactured sector."

Roubini thinks the Chinese growth model is not sustainable. He has no doubts that India stands at a point of advantage when it comes to exports of services, even over economies like China and European countries, and the sector has further growth potential. Since global growth in services can only grow, India, said Prof Roubini, could have a long-term advantage, with services like IT services, financial services, medical or vocational services becoming more tradable. For this, India, he advised, needs to invest in human capital and skills to make sure it keeps its competitive advantage.

But he added in the same breath that "structural issues on the manufacturing side need to be immediately addressed, to address steep trade imbalance in imports of goods with China".

Over the next 12 months, he expected the Reserve Bank of India to continue with its soft monetary policy and cut key policy rates by another half a percentage points. Given India's high current account deficit, which could widen with rate cuts and due to the central bank's growth-versus-inflation dilemma, Prof Roubini feels weakening global economy and softer commodity prices could counter a possible threat of rate cuts weakening the currency and feeding inflation.

Even though the pace of reforms is slower than "what is optimally desirable", he lauded New Delhi's fiscal consolidation efforts. "The fiscal deficit, while large, is kept under control, and, therefore, given all the political constraints, things are at least moving in the right direction."

Roubini noted that while there has been a global economic recovery since the middle of 2009, the recovery in advanced countries has been anaemic and sub-par. Some are even facing an outright double-dip recession. "So, economic growth in the advanced economies remains fragile at best and now there has been some amount of softness in some of the major emerging markets."

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