India's not in a cyclical upturn, but has the ability to show high single-digit growth rates for a long time -Martin Feldstein, Professor Of Economics At Harvard University, WHEN Martin Feldstein, George F Baker Professor of Economics at Harvard University, declared recently that the United States has already slipped into a deep recession that could be the most serious since World War II, it shocked many observers. Especially, since Mr Feldstein also heads the National Bureau of Economic Research, an organisation that is the official arbiter of when recessions begin in the country.
But Mr Feldstein says that the impact of a possible slowdown in the US will be very limited on
countries like India and China. The expert on global business cycles also feels that India is not
just in a cyclical upturn, but has the ability to show high single-digit growth rates for very long
periods of time. Excerpts from the interview with the noted economist, who was once tipped to
succeed Alan Greenspan as the Federal Reserve governor.
What are the lessons from the housing-related credit crisis that has struck the global economy?
Rather than the low interest rates, it's the price we are paying for not being careful. (Mr Feldsteinhad earlier said that in the past instances of recessions it was the Fed policy at work unlike this time.) Everybody from borrowers, lenders, rating agencies and supervisors at banks thought that housing prices would go up forever, and hence, nobody bothered. Securitisation and derivative products only made it worse since it was impossible for house owners to negotiate, as there is nobody on the other side. After going up more than 60% from 2000 to 2006, they have only gone down 15% since this credit crisis appeared. The only danger is that if more defaults happen, prices could fall faster than the speed at which they went up.
What will be the impact of the slowdown in the US on emerging markets like India and China?
This question will have to be answered under three heads. On the trade side, a slowdown will
reduce our (the US) imports with countries that we trade with. At most, a percentage point from
the growth rates may be shaved off. In the currency market, the dollar will continue to decline on a global basis although it will be hard to say how much the dollar will decline against individual
currencies. But again, I think it will not have a substantial adverse effect on India. What is
important is what happens through financial markets and equity markets. On one hand, people
may be very nervous and stop risky instruments, as emerging markets are risky and take money home and buy bonds. Alternatively, they may want to have some money in equities outside the US because of the recession. India could benefit from such investors.
How will dollar's slide affect global economy and trade?
We have to distinguish between trade effects and asset effects for the central banks. Although
India has a trade deficit, other economies like China, Korea, Japan, Europe, the Middle East and
Russia have strong surpluses. So, they are in a better position to withstand the effect of increased competitiveness in the US.
On the central banks side, those that don't fix their exchange rates to the dollar take a loss to the
extent that the dollar is coming down and their currencies are appreciating. But the big question is what they are going to do about it, if their currencies continue to appreciate.
Your comments on perception of sovereign wealth funds and private equity funds with regulators.
The principal concern in the US is that what a sovereign wealth fund (SWF) buys could end up
giving it political power. Decision could then be influenced by political considerations rather than
commercial, especially with respect to China and Russia since they are not fully independent.
However, others like Singapore and Norway are simply looking for higher returns. But the rule
book has to be common, hence the trouble. Unlike the Europeans, however, the US is very open
to foreign investments from commercial investors.
As for India, it is a country with too many rules of foreign ownership that need to be relaxed,
and hence, it would be a pity if this discussion about SWF and private equity funds leads to
further tightening in the regulations. As for influence of private equity funds in financial markets,
a prolonged credit crisis will definitely affect it in the long term. PEs are highly-leveraged players
who would suffer if no credit is available.
What are the constraints before the Indian economy?
I am very optimistic about India's future despite its problems of low agriculture productivity,
electricity and labour reform (so many small industries actually give China the advantage). But
every year, when I go from Delhi to Neemrana Fort Palace in Rajasthan (he has been coming
every year for NBER-NCAER conferences), I find the roads are getting better and I reach faster.
Just that I am disappointed when I come to Mumbai with all its traffic.