Modi government’s clarity of action is evident in the bold reforms that are necessary to underpin India’s ambitions of global financial leadership. As India inches toward the $3-trillion GDP milestone and races past the UK in the process, the country is likely to witness more mergers and acquisitions (M&As) in the next decade, James Gorman, Morgan Stanley's chief executive officer said in an interview with The Economic Times.
Some key takeaways from the interview:
1. Strong global economy, no crisis currently
Gorman feels that the world is not in a financial crisis. The financial markets get into crisis either due to systemic problems in the banking system or in case the economy as a whole is troubled.
Gorman doesn’t worry about people giving general statements but about fundamentals heading south. He said, "You can look at the US raising rates as a negative thing because of the potential issues with the credit or you can look at it positively because the US economy is incredibly strong and if they don’t raise rates, you have the potential for an asset bubble. I think the reason is the latter".
2. Expansion in business, India's economic growth
Morgan Stanley will be expanding its businesses and invest more capital in India. On the fixed income side, there is a push by Reserve Bank of India to deepen the debt capital markets. Gorman said, "I think debt trading is something we are very good at and infrastructure finance is something we are very good at; so they are the two things that I would point you in the general direction of."
The policies put in place by Narendra Modi's government have ensured a lot of energy in the Indian economy currently. over the last 50 years, the country has had a number of starts and stops, but it has grown to a much larger economy now.
Gorman said, "It is on the cusp of becoming the fifth largest economy in the world, replacing the UK. The changes to bankruptcy laws, the opening up of more foreign direct investment, (and) efforts being made to put a much larger percentage of the population have banking account relationships...Once you are getting into the $3-trillion-level economy and getting some of the reforms in infrastructure and bringing banking to a broader population, these are huge positives for the economy and this is going to attract foreign players interested in participating in this market - some through M&A.
This is likely to create a lot of free cash flow for the Indian companies, which will be aggressive in consolidating and developing skills in this market. Gorman thinks that there will see more M&A activity over the next ten years.
3. Views on Modi government's performance
Gorman feels that the clarity of the government's action has been exciting. Decisions have been made. The clarity and willingness to make decisions, the foresight to recognize that one can through technology jump over various stages of development.
"The government brings a business mindset of getting things done inside the social fabric of ensuring that the society stays a cohesive society. Internal security has to be strong, external military presence has to be strong. India has to be respected on the global stage and is. I think they have done a really good job...Even the GST, once it’s put in place cannot be taken away. These are fundamental and long-term changes that will affect the Indian economy very positively for many years."
4. Rupee hitting record lows
Gorman does not read the move in the rupee as a reflection of economic management at all. The currency trades on account of what the US dollar is doing and not on account of what the rupee is doing currently.
"At this point, the reality is that what is going on in the US - all the potential tariff war is roiling all the emerging markets. It started with Venezuela and Turkey and is now affecting all emerging markets."
5. Trade war and its impact on interest rates
US President Donald Trump is initiating tariffs to try and redress some of the trade imbalances between the US and China. Gorman thinks that the strength of the US economy and its position in the global markets suggests that for certain industries, the playing field may not be level but in aggregate, the US economy has been a beneficiary of globalization.
The challenge for any monetary authority in any country is to balance what is the appropriate rate to ensure that an economy does not overheat. They often over-exceed and drive a country into recession.
"I think the Fed has been more patient than I would have been. I would have raised rates quicker. But evidence would say that the Fed has got it right. The US economy is continuing to grow consistently while rates have been growing." Gorman said adding that he is not concerned about rate increases. They are a natural part of an economic cycle.