Among a handful of economists who predicted the global credit crisis, Nouriel Roubini, a professor of economics at New York University's Stern School of Business, was in New Delhi to deliver the Lala Lakshmipat Singhania centennial lecture. He took time off to speak to Hindustan Times on a range of issues from how India survived the credit crisis to the risk that lie ahead. Excerpts:
Why do you think India survived the crisis?
Many things, its not just India rather a number of other emerging markets such as China. The market economic fundamentals of most emerging markets are stronger, potential growth is higher and you didn't have the same amount of debt and leverage in products, households, financial institutions, corporations that the advanced economies had. You also did not have a large housing or commercial real estate bubble. Financial institutions were more liquid and better capitalised, more supervised and regulated than those of the advanced economies. So, a number of characteristics on the macro-financial and policy wise made emerging market economies more resilient than advanced economies.
Within emerging markets, where does India stand?
One of the benefit of India is that India relies less on exports as a source of economic growth and there is a larger domestic demand. Also, for instance, in China consumption is only 36% of GDP while in India consumption is almost two-thirds of GDP. Also for the future I am quite bullish about India's condition of continuing economic reforms because China will have a bigger challenge to deal with the fact that US cannot continue to be the consumer of first and last resort, spending more than its income and running a larger current account deficit, and China being
the producer of first and last resort spending less than its income and running a large current account surplus. On the contrary. India is less likely to be affected by shocks that affect the advanced economies through trade channels to the emerging economies.
Is the future optimistic?
Yes, the opportunities are that India can maintain high economic growth and increase it to surpass the that of China.
Any road bumps on the way?
To achieve that it needs to increase the productive capacity of the economy. There needs to be structural reforms as also there is need to make sure that inflation is under control.
Like controlling capital inflows from advanced economies?
Yes, India also has to deal with massive inflow of capital in the country which on one side is positive but needs to be managed well and also avoid over-heating, excessive credit and asset bubbles because these could become really dangerous. So, these are some policy challenges to continue to have successful economic growth, accelerate it and maintain low inflation and avoid excesses in the financial system.
Do you see an asset bubble right now in India?
Not yet. There is no asset bubble in sight right now.
Can India and China really lead global economic growth?
Well, their share of global GDP is low but rising. Their share of global economic growth is somehow larger. I don't think India and China can be the only engines of global economic growth. We still need to sustainable economic growth in US, Europe and Japan but certainly India and China can help themselves and help emerging Asia and other commodity producers around the world.
There were a lot of economists who could not predict the sub prime, yet only you got it right? What makes you a rockstar?
Well, the first observation I will make is that there are many economists that were learning about the signs of bubble. Oliver Rothschild wrote about the housing bubble, David Rosenberg warned about a depression, Robert Shiller cautioned about real estate…all of them gave us signals.
How is your analysis different?
What I was doing was in many ways connecting the dots. Some people were worried about housing such as Rothschild, other were worried about excesses in Wall Street, Stephen Roach was worried about the consumer leverages and each of these points were valid. And sometimes just connecting the dots makes the difference. Also I spent a good chunk of my academic career studying financial crisis.