India projected to overtake China sustainably: Mizuho Bk

India is projected to overtake China sustainably over the next few years, says Vishnu Varathan, chief Asia economist at Mizuho Bank. However, volatility in the Indian markets will continue for the next 1-2 years, he says.

He believes India is in a sweet spot. "The external landscape - including oil price slump, Russia and Brazil are not doing well, that just leaves India and China among emerging markets and China is also struggling with structural issues and so that leaves only India," he told CNBC-TV18.Below is the verbatim transcript of Vishnu Varathan's interview with Kritika Saxena on CNBC-TV18.Q: What is your view on India, especially when compared to other emerging markets?A: I think India is in a very sweet spot for several reasons. One of it is the external landscape. We have seen oil prices slumping, which means that in the BRICS pack, Russia is not doing very well, Brazil is not doing very well, that leaves India and China, and China is struggling with structural issues as well as a host of other volatility issues, whereas India’s growth is now projected to overtake China sustainably over the next few years. So it is not a one and done deal, and that is why it is good.Secondly I think PM Modi is also setting up the very fundamental base for ‘Make in India’ and that is where the opportunity really lies and we do see that on the ground where a lot of the corporates are interested in setting up bases there. So it is really about getting the connectivity going and that would really be the big boost for India because India has still got the low hanging fruits of the industrialisation yet to be exploited.Q: The Bihar elections were of course a little bit of a dampener when it comes to the overall market sentiment. Markets have tried to recover from the jitters, but do you believe that that will play a role in dampening investor sentiment in the near to mid-term?A: To be fair I think investors would be a bit more cautious. That goes with the territory because they want to watch how the next few elections pan out and what it means for the Rajya Sabha. However, given that PM Modi was very good about it, he came out with further FDI liberalization, that shows, or at least it brings across the sense that the reforms are still underway. So it maybe a more adverse path to get to towards where we want to, particularly with the land reforms, but there are still other areas to be exploited and I think investors are not totally disheartened, especially in a relative sense. Emerging markets (EM) is not doing very well to begin with. So India is a relative bright spot.Q: Markets have of course reacted to the elections, several areas from currency to basic commodity jitters that we have been seeing. If you look at the short to medium term in the next one to two years, when do you see Indian markets stabilising? What are the levels that you think we could hit keeping in mind the macro situation with respect to the Modi government?A: In the next one to two years, we will probably see a bit of undulations. Firstly in the next six months you would probably see the rupee more likely to weaken than strengthen. However, to put that in perspective, I think many of the Asian currencies would weaken even more. Where the rupee has got relative stability is the fact that it gained from the low oil prices and also the fact that Foreign Exchange (FX) Reserves have been built up. So India’s FX reserves compared to the taper, are now almost 30 percent higher. Just as a contrast, Malaysia’s, it is about a third lower. So that is the relative positioning. India’s imports cover is also solid, over 10 months versus Malaysia struggling with six. On that basis, it would weaken, that is along with the trend, but then it is in a good position to pick up again. However, we do not see the rupee rallying too much because I think the RBI is going to take a balanced view of this and they are going to allow for some reserve accumulation and tamper the rupee appreciation, but that fits very well into the ‘Make in India’ policy.