Effective exit policy a must for Indian economy: Roach

Emergency policies introduced during the liquidity crisis and a high fiscal deficit could have damaging consequences for India and policy makers should look at an effective ‘exit strategy’, said Stephen Roach, noted economist and chairman of Morgan Stanley Asia.

“India needs to take its savings rate back to the high 30 per cent levels to face the challenges of inflation and a fast growing economy,” said Roach.

Speaking to the media in Mumbai, he said India had much more balance than many of the growing economies, thanks to its private internal consumption.

But inflation and a rising fiscal deficit were seen as major concerns for the economy. While the one-off windfall from 3G auctions could reduce the deficit number, the country needed to have a more viable strategy.

Roach reckons that a delayed exit strategy could have potential risks to core developmental plans for an emerging economy like India. A high fiscal deficit, along with a lower savings rate, would have an impact on infrastructure and manufacturing capacity.

He pointed out that when the savings rate increased, the share of corporate investment in the Indian GDP trebled in seven years — from 5 per cent in 2001 to 16 per cent in 2008. With the savings rate showing a declining trend, investment-led growth could take a setback.

He also stressed on the need to have a transparent exit strategy that would be communicated to all market participants. “Authorities have not been coming clean about exit strategies,” he said.

There should be a proper plan that should be laid out and a path for the policy rates should be made clear. He also mentioned that there should be early warning systems to gauge the efficacy of the policies being implemented.

Speaking about the euro zone crisis, he was of the opinion that the impact would not be as severe as was witnessed after the global financial crisis was unleashed in 2007 and 2008. At the same time, Asia and China are expected to feel some pain, he said.