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“The EU problem hurts China more than India”

Business & Economy, November 1, 2011

 

Frank-Jürgen Richter, The Founder Chairman of Horasis (An independent think tank headquartered in Zurich), who began the community with a mission to enable cooperation between developed and emerging markets, shares his thoughts on the slowdown in EU & inflation, and how these two issues are impacting growth of economies like China and India

The mission of Horasis is to “enact visions for a sustainable future,” especially for emerging markets. Why are emerging markets a primary focus?
In today’s world, business and government around the world function with very short-term orientation goals. We developed this idea of envisioning the future to see that such bodies understand the importance of and adopt a long-term approach. And why emerging nations as our priority? We realise that today, meetings focusing on emerging countries are actually missing. Of course, India is rising fast and so is China, but the countries who are in control are actually the old powers. These are the same mature economies that even organisations like IMF and The World Bank still focus on. This is something which is not sustainable. We want to create a platform where emerging powers meet their powerful First World counterparts. And how do we therefore help businesses? Look – a common reason why there has been an observed rise in protectionism in today’s world despite all the talk about globalisation and why so many acquisitions & JVs fail is because people still don’t know about each other’s economic & cultural system. We desire to bridge that gap, and fast.

Besides a rise in the manufacturing sector, another commonly observed phenomenon is that in India, across industries, there are consolidations happening. This is a good sign. What according to you are the strengths and weaknesses of the Indian economy?
India has a very young population and is therefore a breeding ground for entrepreneurial activities. Therefore, India’s strength is its capacity to churn out new-age entrepreneurs. But there are big weaknesses which I must point out. The first being the marked gap between business and government. Also, for the short term, India’s immediate goal should be to overcome inflation. Going ahead, inflation could hurt India’s strong growth prospects. Governance issues such as the ones that surfaced during the Commonwealth Games in 2010, corruption in the ranks and poor infrastructures still remain big issues.

Assuming that slowdown is finally back, how do you see it being different from the one we saw in 2008?
The difference between crisis 2008 and crisis 2011 is that in 2008, we saw a joint unified action by all economies which felt the impact to curb the crisis. It helped. Today, every economy is doing its own bit to save itself first, and therefore we don’t have united economies that seem to be fighting for a common cause. This is actually a very dangerous situation.

So how much do you think will the Indian economy be affected? Will it hurt India and China equally?
A decade back, India was more into exporting only software services. But the economy is learning from China fast and therefore is on its way to becoming a big manufacturer of tangible products over time. So, we have a situation where emerging nations like India and China are competing head-to-head with developed nations. And this time around, unlike it happened in 2008 – when both India and China were lucky to not be exposed to toxic US financial products – the outcome will be much different. The decoupling factor is missing and emerging economies will therefore be affected as much if there were to be a major slowdown in First World markets. India’s trade with EU would also suffer due to the crisis that has hit Greece and other debt-ridden EU nations. I think Europe will remain in crisis for at least the next two years. But the most important question is: what negative implications does this carry for economies like India and China? I would say that the impact of the slowdown in EU will be felt less in the Indian stock market and on businesses in India that those in China. Why? Because China, unlike India, is dependent heavily on exports to Europe. Similarly, if Euro’s value declines, Chinese goods will become expensive.

So when do you suggest is the right time to invest in the stock markets in India?
I think the good time for that will come soon. But I would still suggest investors to hold their horses as there is lot more consolidation that will take place. More problems will surface in Europe, which at present, appears to be staring down the barrel with the Germany and UK slowing down too!

And what your take on the inflationary pressure that threatens the growth prospects of most emerging economies, including that of the BRIC bloc?
Inflation is a major issue in all developing countries, particularly in the BRIC economies. In China and India, if you go to the market and ask around, people will tell you that even basic food items are becoming more and more expensive by the day. In the case of India typically, what we observe is that while the population is growing, agricultural output is declining. The question in its case remains – what is to be done? Many Chinese and Indian investors are therefore investing in Africa, buying lands in countries like Tanzania, Ethiopia and so on. But that is only a part of the solution, and cannot really solve the whole problem of inflation. What we really need to do therefore at the end of the day, is find a solution which will work worldwide. Countries on their own can’t solve the issues of inflation. We need bodies to try and strike agreements between the developing and developed countries which will help curb inflation.

 


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