‘Euro moving towards recession; slowdown in BRIC nations‘

As Mario Draghi gears up for the all important European Central Bank (ECB) meet today, Arnab Das of Roubini Global Economics said he expects the ECB to lay out specifics of the bond-buying programme. According to him, whatever steps the ECB takes would be to help the eurozone and not mitigate its woes completely.

Das also believes that the core of eurozone is heading towards a double-dip recession. The emerging markets too are slowing down, particularly the BRICs nations, he opined. Das is also optimistic about seeing 7% growth in India if policy actions pick up. India has a lot of issues to grapple with and inadequate structural reforms are affecting the country's growth, he explained. Here is the edited transcript of the interview on CNBC-TV18. Q: Let's start with the place where the epicentre for global action today is, Europe. What are your expectations from Mario Draghi given the constraints of German opposition?
A: I think he has already been somewhat constrained in the rhetoric by German opposition. The German opposition itself is somewhat mixed. There is more resistance in the Bundesbank and in a sense in the ECB Governing Council than there is on the political side of Germany at this point.
There is a kind of a good cop, bad cop thing going on. What we think will happen later this week is that Mario Draghi will put some flesh and quite a bit of good specifics around the bone that he threw the markets at the end of July and the beginning of August, when he himself specifically layout how they will do the bond purchases, probably concentrated in the short end as has already been signalled together with conditionality.
Probably various kinds of financial conditions as well so as to avoid unintended consequences, more hazard for the sovereigns that are going to participate Spain and Italy, more hazard for creditors and try to really target the issue of convertibility risk and the reversibility of the euro. We think that will help, but it won’t really solve the problem. It will mitigate the scale of the problem. Q: Are you expecting anything by way of quantitative easing in 2012 itself, if not in September by Fed?
A: Yes, we are. We have long thought that the recovery was going to be anaemic and proved to be too anaemic and that the Fed would have to respond in order to be mandate consistent. Unemployment is too high, the duration of unemployment is very long and of course, there is a looming fiscal cliff.
We don't think the US will fully cut the budget deficit as much as all elements and the expiration of various kinds of tax cuts would suggest. But there is still going to be some significant fiscal adjustment which is going to hammer growth in the United States and the rest of the world starting in 2013. Q: We have seen quite a bit of a rebound in gold. In Indian rupees it is sitting at a record high and quite a few commodities have actually done well. Is it all to do with the expected monetary loosening from the US and perhaps even from the ECB hopefully today and is the run in the likes of gold likely to continue?
A: I would say our view of it is that various different kinds of things are driving the run up in risky assets as well as in gold and other commodity prices. Risky assets' run up is more internally consistent than the run up in gold. The run up in gold is kind of a disaster trade, either a high inflation or a deflation kind of fear and this of course reflects a high inflation fear because yet another central bank is going to monetize potentially a significant amount of private or public debt in the case of the ECB.
Of course at Jackson Hole, Bernanke left the door wide open to QE3. So the gold rally at this point perhaps reflects a fear of inflation and commodities and risky assets are rising because we are heading off the fear of cascading defaults of collapse in the eurozone and the deflation that would result from that would be very bad for risky assets.
In some sense there is some logic, some method to this madness in the market. What we would say however is that these monetary actions will mitigate the pain, they won't make it go away. Fiscal deleveraging, private sector deleveraging, household deleveraging or the household cutbacks at least in eurozone will continue.
The periphery of the eurozone, depending on the countries either already in a deep recession or even in a depression and the core of the eurozone is heading into a double dip. United Kingdom where we are now is already in a double dip and a stagnation because of fiscal retrenchment and double dip looms over the United States because of the coming double dip.
We are not very bullish about risky assets, we are more bullish about gold. We think that the conditions for periodic bouts of risk aversion are still there because disaster will continue to loom over the eurozone and double dip will continue to loom over the rest of the world. Emerging markets are still slowing down. India, China, Brazil and pretty much everywhere there is a slowdown in the emerging market economy.
Even the smaller ones are slowing down relative to expectations and with limited room to really ease up significantly and stop growth, we will see more monetary easing and that will help. But it won't lead to runaway inflation anytime soon. Balance sheets are still weighed down with too much debt. There are still structural issues in developed and emerging market countries. The world is going to be growing more slowly than inflating very rapidly or deflating. So we are not gold bugs.
_PAGEBREAK_ Q: What's your take on India GDP then? GDP estimates have been scaled down. We started off a few months back, earlier in the year we were talking about 8%, then we started speaking about 7.5% and now we have come all the way down to that 5-5.5%. Despite that the Nifty and the Sensex have actually done very well and outperformed most of the other indices in Asia.
A: I think it's a very good point and I think in many economies growth performance and risky asset market performance, whether it's corporate equity or corporate bonds or bank debt, bank bonds have been performing somewhat differently than the economy itself. That of course reflects not the removal but the mitigation of the left hand tail risk, the disaster risk that Mario Draghi achieved in the beginning of August.
The Nifty and Sensex as relatively high risky asset classes have been among the main beneficiaries along with financial stocks, equity markets and commodity markets as we have discussed around the world. To a certain degree that makes a bit of sense. We would say however that the prospects for India are darkening at the margin. They are not terrible, but there are issues that India must grapple with.
Corruption, structural reforms, the revelations of various kinds of rip off by various corporations that have bought concessions or assets from the government, the extreme power failure, three quarters of billion people without electricity, biggest in history by a very long shot reflects the comeuppance of an excessively high growth rate with inadequate structural reforms and inadequate governance reforms required to sustain those high growth rates without significant bottlenecks.
Power sector is a great example because power is being rationed by quantities is India, rather than by prices because there is a kind of a fiat based system of allocating licenses and capacity than the power itself. That has to change if India is going to reach its potential and the big question not just for power, but for the high growth rate of the Indian economy in long run is whether this government or some variant of it or a new government after the next elections is really going to be able to grasp the nettle and prepare the vested interest and manage the company in the greater national interest. Q: What's your take on the Indian economy? Does it just get stuck in this 5-5.5% rut for a good bit? Is that how you will estimate equities? Is that the base economic scenario, 5-5.5%?
A: The possibility certainly exists of it going lower. There is also a hope of it going somewhat higher again. It all depends on what this government does and what the next government does. If India has to reach its potential, there has to be a lot of reforms - structural reforms, fiscal reforms and governance reforms.
If those reforms come through, actually there is no reason why India can't achieve or even exceed future Chinese growth rates. I would very much doubt whether India can sustainably get to very high single digit or even low double digit growth rates like what China managed for such a long time.
But, I certainly think it can get back up into the 7% and even higher range if there are further liberalizations and kind of market oriented reforms. That of course requires political will and courage and it requires not just a government that knows what to do, it's pretty clear that this government knows what to do, but has the political capacity to achieve it.
This is not just an Indian problem, almost everywhere in the world governments know just what to do, they don't know how to get re-elected afterwards in order to keep doing it. That's the challenge and let's hope this Prime Minister or the next one, the Congress or some party that leads an opposition group at the moment can step up to the plate and deliver the goods. Q: What is the base case for an equity investor? What will you be recommending by way of Indian equities?
A: We are still in a risk averse mode as I was saying before and so even leaving aside whatever one may have for or against India, for whatever India specific reasons and certainly leaving aside questions of nationalism, our sense is that we have seen a significant run up and we may have seen the best of the run up already.
Of course there maybe some more risk seeking after Mario Draghi's comments, after QE3, but the reality is still that we have to adjust to a lower growth path in the world, a lower growth path in the western world, Asia and certainly South Asia, India and China are not going to be spared from that. We continue to worry about episodes of risk aversion in the world and episodes of difficulty in India and so we would not be very bullish on risky assets in India for the time being even though there maybe some more run ups in them.