Stephen Roach needs to be taken with a pinch of salt. He is as "Wall St Establishment", the 1%
, as it gets. These guys have made big bets on China while they have essentially been kept out of India.
With the current impasse about keeping US retailers out, you will see a lot more of such articles critical of India from the establishment. And if the retail bill passes the few billions of FDI which it brings in will be seen as the panacea for the Indian economy, with the same fat cats all gung-ho about India vs China.
And was not too long ago labelled as the "Alan Greenspan of China" due to his faith in debt fueled economic growth in China and the CPCs ability to manage the economy.http://blogs.wsj.com/economics/2010/07/ ... -of-china/
A current-account or a "funding crisis" is primarily a liquidity issue. When India faced a funding crisis in 1998 after PK-II, she was able to mop up billions in weeks from overseas Indians. And if and when there is a fallout in Europe, trust the Central Bankers all over the world to open the liquidity spigots like there is no tomorrow.
A weaker INR is good for Indian exporters, and local industry and will also force more investment in energy efficient infrastructure. There are already murmers of devaluing the Yuan since being tied to the USD has meant that it has effectively appreciated against everyone. There is going to be short-term pain here for sure though.
A bad-debt cycle on the other hand is a secular change. While Roach acknowledges the effect of bubble collapse in the hot property market, he dismisses its consequences because its percentage of the total investment is low (10% of the overall economy, which he translates to 1% lower GDP). While he acknowledges that fixed investment at 50% of the GDP is unprecedented, he fails to talk about is whether the debt used to finance that investment ever be recovered, or whether that fixed investment too will go down.
There is massive over-investment in many aspects of the Chinese economy primarily related to the infrastructure; this is going to have a deflationary impact as all that excess capacity is bought into use. And this time around, the export engine, will have a significantly harder time filling up this gap.
Rapid urbanization is (15-20 million a year) is being touted as the redeeming factor but no one talks about the buying power of these new urban residents. The purchasing power of these new city-dwellers is often an order of magnitude lower than the neo-rich. OTOH, the cash-flow projections used to finance the projects is much higher, and unlikely to be sustained by the paying power of the new urbanites. That mis-match between what has been spent to develop the infrastucture (cost increased due to a weaker Yuan) and what can be recovered is the crux of the matter.
The good thing for China, and the rest of the world is that the debt owned by quasi-state entities can be rolled over and glossed over for a long long time. The pain can be spread over decades. So I do agree with him that the risk of a "hard landing" is perhaps overblown. It is going to be a slow glide down.
The big challenge to India of course is political. She has a lame-duck central government which has lost its credibility with almost everybody and they are now desperate to pamper their core constituency with NAC inspired sops like NREGA/Food subsidy/Saffron Terror bills. The loyalties of the ruling clan is uncertain, and the amount of graft in the system is immense.
On the other hand, with the role of state being minimal, state governments can continue to follow policies which encourage growth, and drive development. Whether it is Bihar where the voters finally got sick of the vote-bank politics, or Gujarat where dynamic leadership is paving the way, there are clear pockets illustrating what is feasible if there is a will.
We clearly are living in interesting times. Hope the New Year is peaceful and lead to better lives for the billions living in China and India.